Posted on 01/30/2013 1:04:51 PM PST by Kaslin
Dear Carrie, I'm 55 and in a position to leave my full-time job and work freelance from home. I'm trying to weigh the financial benefits vs. costs. Any tips? --A Reader
Dear Reader, When thinking about working at home, most people focus only on the pluses: no commute, flexible schedule, more personal time, little or no cost for things like transportation, wardrobe and eating out. It all sounds great. And it can be. By working freelance from your home, you'll certainly cut down on a lot of work-related expenses.
But what might you be giving up? Most full-time jobs come with a package of benefits that may far outweigh the everyday costs of going to work. And what additional expenses might you be taking on?
Working for yourself means a lot of freedom, but it also means a lot of responsibility. Many of those responsibilities are financial, so you're wise to consider them carefully before you start planning your going away party.
You are your own benefits provider
This is probably one of your biggest costs. If you've had group health insurance through your employer, you may be in for a shock at just how expensive an individual policy can be. You may be able to get health insurance through a professional organization, but chances are it will still be considerably more than you're used to paying.
Likewise, if you've been getting life insurance through work, you'll now be on your own for that as well. At 55, even the cost for a term-life policy can be significant.
And what about sick days and vacation pay? When you work for yourself, there's no one to cover for you.
You pay all Social Security and Medicare taxes
When working for a company, it's easy to forget that your employer picks up half the bill for Social Security and Medicare taxes. And we're quite used to having the other half deducted from our paycheck. But working for yourself, you pay the whole amount in the form of self-employment taxes. For 2013, that tax is 15.3 percent on earnings up to $113,700. If you earn more than that, you'll still pay a 2.9 percent Medicare tax on any additional earnings -- plus a 0.9 percent surtax on incomes over $200,000 for singles and $250,000 for married filing jointly. This can add up to quite a tax bite.
The cost of doing business can increase your bills
Insurance and taxes are probably the biggest costs, but the everyday cost of doing business can add up, too. Since you'll be working from home, you'll use more water, heat and electricity. Utility bills are bound to go up.
You'll also have to pay for office equipment, supplies and any additional computer and Internet needs. Generally, an employer has experts available to help with downed computers or malfunctioning printers. Once again, you'll have to be your own resource and foot the bill for both purchase and repairs.
Retirement savings is up to you
With no 401(k) contribution automatically deducted from your paycheck --and no employer match -- you'll have to be especially vigilant about saving for retirement.
If you do go freelance, I'd suggest looking into a couple of small business retirement plans. One is a Simplified Employee Pension Plan (SEP-IRA), which is easy to open and requires very little paperwork. A SEP lets you make fairly high annual contributions -- potentially much higher than an employer's 401(k). The maximum is 25 percent of your gross self-employment income (20 percent of net income) with a cap of $51,000 for 2013. Just note that if you decide to hire an employee, you would be responsible for contributing an equal percentage to their account.
The other is an Individual 401(k) -- either traditional or Roth. This plan requires a bit more paper work but allows even higher annual contributions - 100 percent of earnings up to $17,500, plus 20 percent of net self-employment income up to a total of $51,000. If you're 50 or older, you can contribute an additional $5,500 to a traditional 401(k) (not to a Roth), for a potential annual total of $56,500. And you can borrow against your savings.
Both plans have the same tax advantages and withdrawal rules as an IRA. And both let you vary contributions -- or skip them entirely -- according to your yearly business needs.
Plus, you can contribute to a small business plan and a traditional or Roth IRA in the same year, increasing your potential to save.
You'll need a good accountant
Understanding the costs shouldn't necessarily dissuade you from working for yourself. On the plus side, many of these expenses -- home office, health insurance premiums, even a portion of the self-employment tax -- may be tax deductible. Just be sure you have a good accountant to help you take full advantage of all the deductions allowed.
An employment change like the one you're contemplating will take discipline in terms of work and money management. But it can also be exciting and rewarding -- both personally and financially -- as long as you go into it with your eyes wide open. Best of luck.
I’m currently ‘working’ my way BACK to being my own boss. I cannot WAIT until I can make more income off of my farm again. For now, I need health insurance, and if I didn’t LOVE my current job so much and the company I work for, I’d have already done it.
I think ANYONE that has ANY marketable skills (growing food, landscaping, small-scale farming or small livestock, sewing, woodworking, windows, siding, roofing, cheese or soap making, plumbing, electrical, etc.) should be thinking SERIOUSLY about doing something on the side. I am a firm believer in multiple streams of income!
I currently have three - my day job, selling books online and the stipend I receive from my Dad’s estate for taking care of him, paying his bills, keeping him properly medicated (no easy task; stubborn old Kraut), grocery shopping, etc.
I LONG for the days when we’re all back to being a Butcher, a Baker or a Candlestick maker. Use your skills to barter with others. (I bake pies for a guy who does electrical work for me. I’ve swapped live laying hens for home-raised pork chops & roasts.) It’s a great way to keep Big Brother OUT of your pocket! :)
Left out some bigg ones:
Selling expense. About 1/3 of your time will be spent finding new work/ customers.
Collections expense. The bigger the customer, the harder it is to get paid.
You may spend more time working on the AP department than the actual work you provided. Rule of thumb, the bigger the company and the fewer letters in stock symbol the longer it will take to get paid.
Perhaps, but all your former costs, which you had to bear the complete brunt as a worker, becomes a tax writeoff when you own your own business. Many of those expenses, like telephone or heat would be constant costs anyway, employee or employer.
In that respect, you’re actually potentially saving a fair bundle over the year.
See my tag line. The ‘apocalypse’ is closer than you think! :)
Working too hard. I don’t know any self employed people that spend less than 80 hours a week working. Great if you truly love what you do, but you better have a spouse that understands, and not much interest in entertainment.
You have got to be kidding. A live laying hen is worth a whole lot more than a pork roast, surely?
The nice thing about running your own business is deciding which 80 hours a week you have to work.
The nice part about being an employee that plays his cards right to get into the right company is you can not work a minute of over time in 6 years. Really I rarely even truly hit 40 hours, working for a company where everybody has something they’d rather be doing is very liberating.
12 laying hens (raised from chicks by me) equaled 1/4 pig butchered. I was just giving an example. :)
People ask if I would go work for a large company again. In all seriousness, as a guy, I reply “The only good thing in working for a large company is that I could rest my head against the wall when I was taking a leak.”
If you are self-employed working at home, you can write off a portion of the mortgage/rent and utilities at tax time. But you still have to pay them when due, whether your clients/customers are paying you or not. In setting up one’s own business it’s best to have on hand at least a year’s living and business costs.
Ping for later
You don’t win friends with salad!
http://www.youtube.com/watch?feature=player_detailpage&v=aM6xVQwIOYQ
If it does’t work out for some reason most employers will consider self employment time as unemployment time. After 6 years of very successful self employment and 1 year of economy crash ending my self employment I found that out.
Many potential employers won't consider those who've been self-employed. Too independent for their taste.
Here's a newsflash: you're paying this already, even as an employee. It comes out of the pool of money allotted for your position.
Do you have any daughters who were taught the same? ;)
Yeah, I ran into that with one employer. So I revised my resume after I left my position with him. He confronted me, and I told him that this was the reason why.
“You aren’t willing to consider my *actual* experience as valid and pertinent to my skills and work experience. So I see no reason why I cannot change the dates of my work history, to better reflect my actual skills and experience.”
Here’s a newsflash: you’re paying this already,
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That is correct...back in the early 80’s when the Private Sector got around to providing Health Ins, they didn’t ‘like’ it as my wife was carrying the family plan (worked for US GOVT) and I opted for the cash.
So, my ‘bennies’ were a company vehicle (I didn’t ‘own’ a car or pay insurance for about 25 years- back then they didn’t ‘charge’ you because you were in the house. It was my car but my wife drove it and we only insured her.) cash for Ins and my ‘bonus’ reflected that I didn’t take vacations.
In the Asphalt end of it so summer vacations were out.
OF COURSE when Self-Employed YOU don’t get a check if the money isn’t there...same as if you are working for someone BUT at least you can ‘yell’ at the boss/owner if your check isn’t there...on your own, you are on your own.
AND no Workmens Comp, Unemployment - even though YOU pay into it if you have employees.
ALSO you can claim to be ‘your own boss’ BUT IN REALITY, the client is your boss and you are subject to the ‘whims’ of your employees....
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