Employee or Self-Employed: Which is Better?
by June Walker
A number of website visitors have asked about the advantages and disadvantages of self-employment. I assume because the questions are coming to me – a tax consultant – that they mean what are the tax pros and cons. Please consider: although taxes matter vitally once you’re in business, taxes are not, and should not be, the defining factor in your decision to go solo.
Let’s begin the analysis by dropping the gushy prose about the joys of self-realization that abound in working for yourself and about how “the real you” will bubble up from the depths when you “control your own destiny.” Instead I want to show you some of the considerations you need to face if you are thinking about going into business for yourself. And whether it is the right step for you.There are a host of factors, personal and professional, in a decision about whether to go solo.
Some of them are:
Situational: Do you have many family responsibilities? Do you have support from friends and family?
Talent: Do you have the skills to make it on your own?
Psychological: Do you have the temperament and the discipline necessary?
Financial: Do you have the money you need to get started? Or have enough saved to keep you afloat until your venture runs smoothly?
Benefits: Are employee benefits available through your spouse’s employment? Can you afford the high bills of health coverage or can you take the risk of being without it?
Legal: Do you understand and can you handle your increased liability as an independent professional?
Ownership: Do you understand the differences as to who owns your work -- the copyright or patent or recipe -- if you create your creation as an employee? As a self-employed? As a work-for-hire?
The Unknown: How prepared are you for an emergency such as getting hurt while working? A long bout with the flu? A shortage of clients? Computer crashes? Car breakdowns? A no-show babysitter?
Whether to be self-employed or work for someone else: that’s a choice that only you can make, and one with no right or wrong answer.
DISADVANTAGES OF SELF-EMPLOYMENT
All the important disadvantages of self-employment can be summed as one big piece of bad news: nobody is taking care of you. There’s no big daddy to turn to. You alone are responsible for yourself – and often for a lot of others too.
You are not paid for sick days; you must come up with the money to pay for your own health insurance; if you have a question about pensions you can’t run to the personnel office on the 6th floor to get an answer; there’s no child care subsidy. I am not saying that every employee has this kind of coverage and benefits, but I am saying that no self-employed has them.
When you work for yourself you have no boss. You are both employer and employee and in your dual role you must pay both the employee's share and the employer's share of Social Security and Medicare tax, called Self-Employment Tax.
As for your pension, every penny comes from you, whereas in many companies employers contribute to the pensions of their employees.
If you can’t work or there is no work you don’t get paid, and you can’t apply for unemployment benefits. Nor can you get Worker’s Compensation for a work-related injury.
You are truly on your own.
It sounds daunting; but most intelligent independent professionals have faced all these considerations and have decided, as I also did, that (unless you believe in reincarnation) since you only live once, being your own boss is more fulfilling and more fun!
ADVANTAGES OF SELF-EMPLOYMENT
The same thing that makes self-employment scary is what makes it attractive and adventurous. Nobody will take care of you, but instead of dwelling on that as bad news, embrace it as good news: it means you will be in charge. You will be responsible for yourself – and often for others too. No big daddy will tell you what to do, how to do it, and when to do it. Nor can he fire you. You’ll have more control of your time and your life. I’m talking practicality here, not psychobabble about women running with the coyotes or adolescent rebelliousness and your contempt for “the suits.”
Here’s what I’m talking about. Do you want to work until three in the morning all week so that you can take four days off to go skiing? You can. Do you want to start the day late so you can have breakfast with your honey? You can. If you’re not feeling great and want to work from your home in your pj’s, you can. You can fit your schedule into the schedule of the rest of your family, maybe eliminating the need for expensive or inadequate childcare. If you have a great idea, you can try it. If it doesn’t work, you are responsible for that too, but you can make changes and improve your idea without the need to play company politics with the sales department down the hall.
And with self-employment comes financial advantages. One of the less obvious advantages is the possibility of more money for the same work. Many companies have downsized (don’t you love that word?) and former employees have been fired, then engaged as independent contractors. Why do you think that has happened? Money! It saves the company a big bundle – in payroll taxes and benefits – to hire someone as a freelancer rather than as an employee. So should you work for the same fee that you would be paid as an employee? No, you shouldn’t. You should ask for more. You are costing them a lot less than would an employee. So how about splitting the difference? And if you’re engaged by someone who has never run a business or never hired anyone to work for him, maybe you’ll need to point out the financial savings to him and why he should use your services instead of those of the temp agency he’s considering.
Self-employment comes with tax advantages as well. You are in control, so in many instances …
-You have more influence over business expense deductions.
-More business expenses are actually deductible.
-You get more flexibility in how much tax you’ll pay and when you’ll pay it.
-You get to decide when to spend money to help your business grow.
-You can influence when you receive income.
-You can distribute income to family members by hiring them as employees.
-You have a wide range of pension choices.