Do you think you are ready to make that leap to full self-employment?
The profit from your part-time (up till now :-) business
is matching or exceeding your regular paycheck, so you think
it’s time to fire your boss and make do without that
paycheck. Before you take that final step to personal freedom,
make sure you truly understand what you are giving up. Your
employer paid benefits may cost you more than you realize.
For many people it will take more than $40,000 of profit
per year to replace a $40,000 annual salary.
When I talk about your employer paid benefits I’m
not referring to the “free” office supplies,
subsidized soft drinks, or even the occasional free meal
at the holiday party. The items that you need to consider
are the benefits that are going to cost you the most money.
Although if you really like soda I guess you might want
to include this too! According to a survey published by
the US Chamber of Commerce in January 2004, employer paid
benefits averaged 42% of an employees salary in 2002. That
means you need an additional 35 – 45% more than your
current salary to make up for these lost benefits.
If this number shocks you, then let’s take a look
at some of the typical benefits employers provide. Again,
based on the US Chamber of Commerce's survey medical insurance
cost approximately 15% of an employee's salary. However,
employers also cover the cost of many other forms of insurance.
They include
- Disability,
- Dental,
- Vision,
- Life,
- Unemployment,
- Long Term Care Insurance, and
- Workers Compensation
You might be thinking that you pay premiums for these products
already. Even if you do, your employer is most likely paying
the lion’s share of the cost. Not to mention that
many times the premiums you are paying are using pre-tax
dollars. This means you end up paying less in taxes because
the amount of your premium is deducted prior to calculating
your taxable income.
When you own a home-based not only are are you going to
be responsible for the full cost of all forms of insurance
using after-tax dollars, you are going to be responsible
for self-employment taxes. Self-employment taxes include
the employer paid portion of Social Security and Medicare
taxes. This means your bill for these taxes are going to
double. Instead of paying 7.65% of your income for these,
you will now pay 15.30%. And don’t forget about having
to pay estimated taxes. You will have to file and pay taxes
4 times a year now, instead of just once. Not only do your
taxes increase so do the headaches and the cost of filing!
The second highest benefit cost is your retirement benefits.
Your employer’s 401(k) match guarantees an immediate
return of up to 100% on your money, depending on how much
your company will match and how much you contribute. If
your company has a defined benefit pension plan, you are
losing a guaranteed income in retirement. You are also taking
on the additional risk because you are 100% responsible
for investing the money to replace it.
These are only a few of the largest items that make up
the 30 – 40% of your salary that will become your
responsibility when you become self-employed. Your company
might be paying for many other perks also. Some other things
you might want to consider are
company car (this includes gas and maintenance)
annual or performance bonuses
professional training or expenses (including professional
journal or society dues)
software license that let you use programs like Microsoft
Office programs on your home computer
vacation pay (that’s right, you no longer get paid
when you take days off)
All of these, and any others you might be able to think
of will needed to be included in the total cost of becoming
self-employed.
I hope you don’t think I’m trying to discourage
you from finally being able to become your own boss. I just
know that the excitement of finally making this move can
make us forget about some of the “extras” we
are receiving. You are considering a very serious change
and need to make sure that the benefits are going to outweigh
ALL of the costs.
About The Author
Kenny Herbold is a benefit plan consultant and internet
entrepreneur. To read more articles by Kenny visit
http://www.work-at-home-jobs-missouri.com. To help calculate
the real cost of leaving your job behind visit
http://www.BenefitInfoPage.com
