How many Americans would you guess are self-employed? One out of 10? One out of five? It’s actually about one out of three. According to the Freelancers Union, 42 million people identify as independent workers, which includes freelancers as well as consultants, traditional business owners and independent contractors.
Many more Americans likely wonder if they should be in business for themselves. Self-employment may seem like a dream, but there are risks and downsides, even for successful entrepreneurs.
Since I took the leap to self-employment when I quit my job in May 2012, I’ve experienced the ups and downs firsthand. If you’ve been wondering how great self-employed life can be, check out these pros and cons:
Set your own schedule
Being able to work when you want is a huge advantage of being self-employed. You’re not forced to work 9-5 for 40+ hours a week. If you need time off, you decide when you take it.
A flexible schedule can allow you to spend more time with your kids. Whether it’s working while they’re at school or at night once they’re asleep, it’s possible to build a business to maximize time with family.
Work from home or from wherever you want
Many self-employed workers can skip long commutes, reducing the cost and stress of driving as well as saving time.
As Mr. Money Mustache points out, the cost of commuting to work is much larger than it appears. In an example, he estimates the true cost of a couple driving to work at about $125,000 and 1.3 working years in time over a 10 year period.
Not having to work from an office means you can work at home or while traveling. In my case, I can freelance from anywhere with an Internet connection, which I recently did on my monthlong trip to Thailand and France.
More control over your income
The self-employed are directly responsible for their income. While the lack of a regular paycheck might be terrifying to some, others see the opportunity to earn more.
According to a 2001 report by the Small Business Administration, the self-employed earn more than employees. Self-employed men earned about $12,000 more (in 1998 dollars) and women $2,500 more than those with regular jobs.
There’s often more flexibility for self-employed work, too. Choosing the projects I take on and whom I work with is important to me. If work comes my way that’s not worth my time or doesn’t interest me, I can say no (and often do). Good luck trying that with your boss.
Building a business opens the door to generate income passively and through multiple income streams. While it’s not this way for all self-employed individuals, it’s virtually impossible with a job.
Claim business expenses
The self-employed can claim tax-deductible business expenses that aren’t open to employees. This can include business equipment, meals, business trips and more. Although many employers might cover these costs and there are tax deductions for employees who work from home, the self-employed definitely have an advantage.
Bosses, offices and meetings are out
A major pet peeve of mine as an employee: pointless meetings. Most meetings I went to went on for way too long, had no goals, and just wasted everyone’s time.
If you’re self-employed, you can say no to meetings whenever you want. You also don’t have to answer to a boss or deal with co-workers you don’t like, which can relieve a lot of stress.
There’s often no need to wear or buy work clothes. I don’t need to spend money on pants and shirts just for the office, and I haven’t worn khakis in almost a year.
Self-employed individuals pay extra tax above what employees pay.
The payroll tax of 15.3 percent is split evenly between employees and employers. Self-employed workers have to pay this entire tax themselves, increasing their tax rate by 7.65 percent. This includes the 2 percent payroll tax hike for 2013, which affects both self-employed and employed individuals.
Probably the most unrecognized challenge of being self-employed is making up for the benefits jobs provide.
Health insurance for the self-employed can be very expensive and hard to find.
When you work for yourself, there are no paid holidays, vacations or sick days. If you can’t or don’t work, you don’t get paid.
There’s no 401(k) match, so you’re on your own for retirement savings.
The loss of all these benefits (plus the extra taxes) mean you have to earn more when you’re self-employed than you do as an employee to maintain the same level of income after factoring in the value of these benefits.
Irregular and non-guaranteed pay
Many self-employed individuals have irregular income, making it harder to manage money. This can make paying bills difficult if you earned less than expected or if a client is late paying an invoice. The self-employed often need to keep larger emergency funds because of this.
If you work for yourself, pay isn’t guaranteed. You must complete the work first and to a client’s satisfaction. While employees often can just come in the next day and finish what’s not done by 5 p.m., self-employed workers don’t enjoy this luxury without putting their income at risk. The result, is that careful budgeting is a must.
Some self-employed perks are overrated
While some of the benefits of being self-employed compared with working are nice, not everything you hear is as amazing as it seems.
Before I quit my job, I thought working at home in my pajamas would be awesome. But I was wrong. I felt lonely, bored and got less work done.
Instead, I joined a co-working space, where I show up showered and appropriately dressed, and can socialize with other remote workers. I bike a few miles to the office, and it’s a commute I enjoy.
No definite end to work day
For many employees, there’s a definite start and end to the workday. If you don’t get your work done, you can handle it tomorrow. When the weekend rolls around, you’re off the clock until Monday.
For the self-employed, it’s easy to work long hours, including on nights and weekends. There’s always something else on your to-do list, and the work can go on forever if you don’t set limits.
Should you be self-employed?
Even though I love being self-employed, I don’t think it’s for everyone.
For those who love their jobs and are paid well, there’s often little reason for them to consider self-employment. Being self-employed is riskier for most, which might not suit workers who enjoy a stable income.
If you are interested in testing self-employment, I’d suggest a compromise: Try self-employment on the side first. I was a part-time freelancer for more than a year before quitting my job. Not only did I have a better understanding of what self-employment was like, but I had side income that made the transition was much easier once I quit.
Have you tried self-employment? Let us know in the comments what pros and cons you’d add to the list.