As the number of self-employed workers in the United States continues to rise, you would think the reality of what it’s like to work for yourself would be more openly discussed. However, as people quickly discover, there are some hidden secrets and costs lurking on the other side.
Self-Employment on the Rise
According to Freshbooks’ second annual Self-Employment Report, 27 million American employees are planning on cutting corporate ties and becoming self-employed within the next couple of years. As a result, nontraditional workers will represent 33 percent of the entire workforce – an explosive figure that’s indicative of just how much young American workers prize independence and work-life balance.
“Climbing the corporate ladder is no longer the American dream,” Freshbooks explains in its report. “Over the last few years a significant mindset shift has taken place, and with it has emerged a workforce which values flexibility over stability.”
The data shows that 43 percent of the 27 million individuals transitioning to self-employment are doing so because they want more control over their careers. Approximately 1 in 3 is choosing self-employment for financial reasons and/or family reasons.
When you look at this next wave of independent workers, many are proactively preparing for their dive into self-employment. The report shows that people are saving money or paying down debt (58 percent), learning new skills (52 percent), reaching out to potential clients (45 percent), gathering advice from other entrepreneurs (42 percent), building a personal brand online (36 percent), taking courses (26 percent), and lining up potential investors or partners (26 percent). Only 6 percent are making the leap without any significant preparation.
Addressing 4 Self-Employment Challenges
It’s good that the next wave of independent workers is taking initiative and preparing for the transition, but the reality is that nothing can fully prepare someone for this switch. Self-employment is rewarding, but it’s also challenging. If you’re one of the 27 million Americans who will be pursuing self-employment over the next couple of years, it’s imperative that you don’t get caught up in the “sexy” side of working for yourself. Being equally aware of the risks and problems will help you prepare for reality.
Most self-employed workers love what they do, but there are some hidden costs and secrets. To foster more honest dialogue on the topic, let’s shine a spotlight on some of these major challenges and offer a few practical pointers for finding success in spite of friction.
1. Taxes Are a Pain in the Rear
The average employee knows they pay taxes on their income, but they aren’t aware of how much taxes they’re paying. That’s because employers are required to withhold taxes from paychecks and employees only see the number that’s deposited in their accounts.
As a self-employed freelancer or business owner, there’s nobody to take out taxes for you. When a client pays you, 100 percent of the money goes into your bank account. The key is to set aside a fraction of this money immediately (25 to 30 percent is sufficient for most). You’ll also need to read up on estimated tax payments and how you can make these throughout the year. (If you don’t, you’ll end up with a massive tax bill come tax season.)
2. The Lack of Benefits is Hard
If you’ve been an employee for your whole career, you probably don’t realize how awesome it is to have corporate benefits. Well, as soon as you turn in your resignation and pursue full-time self-employment, it’ll hit you harder than a sock full of pennies.
Health insurance is the toughest and most pressing issue. While you can stay on COBRA insurance for at least 18 months after leaving your job, this is expensive and impractical. What you really need to do is find affordable insurance as soon as possible. (Try using an insurance search and comparison tool like Protected, which helps you compare plans. This almost always results in lower premiums and better coverage than if you request individual quotes from insurance companies.)
In terms of retirement benefits, you’ll no longer have any sort of contribution match perks. You’ll also be ineligible to contribute to a 401(k) any longer. You’ll need to open up an IRA and fund it.
3. Setting Rates Requires a Learning Curve
One of the more exciting, yet frustrating aspects of self-employment is that you get to set your own rates. Theoretically, this means you have unlimited potential and never have to work for less than you’re worth. Practically speaking, getting to that point takes time.
“After 18 months, I’m just now making a little over half of what I made while I was working full time,” self-employed web designer Madison Wetherill writes. “I’ve been in the limbo of wanting to raise my prices to be able to actually make a living but being afraid to lose potential clients. It’s a really hard spot to be in.”
As you learn how to set rates, you’ll likely experience both ends of the spectrum. You’ll miss out on clients because you overprice a project, and you’ll end up working too hard for not enough pay because you underprice a project. By keeping meticulous records, asking clients for honest feedback, and using your intuition, you’ll eventually reach a point where you’re confident in your pricing.
4. Time-Management Skills are a Must
You might think you’re pretty good at managing your time and staying on track, but you’ll quickly discover whether or not this is actually the case. As a self-employed worker, there’s nobody setting schedules, hovering over your shoulder, or holding you accountable. If you don’t learn to manage your time, you won’t last long.
Not only do you need to manage the time spent on client projects, but you can’t forget about all of the administrative tasks that are now your responsibility. This includes accounting, invoicing, marketing, customer service, etc. Make time for these tasks so that you don’t fall behind.
Is Self-Employment Right for You?
Let’s be clear about one thing: Self-employment isn’t right for everyone. While anyone can become self-employed with a little planning, some people are better off continuing to work as employees. Doing so offers a compelling level of consistency, predictability, and structure that’s hard to cultivate when you’re out on your own. If these are things you’re seeking in a career, then you’re better off staying put (and you shouldn’t feel guilty or lesser-than for doing so).
If, on the other hand, you crave control, freedom, and variability, transitioning from employee to self-employed could infuse a greater sense of meaning into your life and provide you with the situational factors you need to thrive.
Don’t make the jump into self-employment without first conducting a personal cost-benefit analysis. Nobody else can make this decision for you. Take your time and don’t rush into a decision.