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I love being self-employed. For years, I worked for other people and was relatively happy. However, I always had a nagging feeling that I wanted to strike out on my own. I wanted more freedom. I wanted control over my own destiny. And, now that I finally made it to self-employment, I’ll do whatever it takes to never look back.
There is a lot to love about self-employment. You have the freedom to make your own choices and decisions. You can set your own hours, build your own investment (rather than somebody else’s), and never have to ask off for vacation or family events. Of course, you don’t get paid when you go on vacation either, so there is definitely a balance that needs to be struck.
Self-employment also comes with a lot more risk. If you have a bad month, you are not guaranteed a salary. Furthermore, you‘re completely on your own when it comes to covering costs for healthcare, retirement, and business expenses. You can’t just turn in an expense report and get reimbursed. Everything that you spend on your business comes directly out of your pocket.
Worst of all, you’ll learn what it means to pay the dreaded self-employment tax. Instead of your employer paying for half of your social security and medicare taxes, you pay the entire thing. When you pay both halves of your payroll taxes AND write a check to cover your quarterly income, it quickly becomes apparent how much you are actually paying to the government each month. Trust me, it’s a shock to the system.
Don’t get me wrong. For me, the benefits of self-employment far outweigh the drawbacks. Along with the personal benefits I’ve already mentioned, there are obviously some financial benefits as well. Here are a few of my favorite financial benefits of being self-employed.
Unlimited Income Potential
One of the greatest rewards of self-employment is the opportunity to make an unlimited amount of income. Unlike most jobs in the corporate world, your salary is never be capped or topped out. You are in control of how much money you ultimately make.
Want a raise? Either work harder, drum up more business, or both. With self-employment, you get to reap what you sow – which means your income potential is only limited by your ideas and your work ethic. This is huge, but also comes with a lot of responsibility. You only get paid for the work you actually do, not for simply showing up and punching a clock.
Save Money on Transportation
If you’re lucky enough to run your business out of your home, like me, you can save a bundle on transportation costs to and from work. You probably don’t think about how much it costs you to travel to work because it’s become habit for you. According to the U.S. Census Bureau, the mean travel time to work in the United States is 27.6 minutes. That is almost an hour a day, round-trip.
Let’s assume you pay about $30 a week in gas to get to work. That’s $1,560 a year. By not driving to work, you may only fill up once a month. That’s a savings of $1,200. This doesn’t even take into account the wear and tear on your car. More importantly, you’ll get something even more valuable back: Your time. Transportation to work may not be the most obvious cost, but it definitely adds up.
Save Money on Clothing
Again, while this isn’t true for all self-employed individuals, if you’re able to work from home you can save money throughout the year on clothing costs. Those working in a professional office atmosphere have to dress the part. Even if you don’t have to wear a suit every day, you’re still expected to look professional.
I used to spend about $500 a year on clothing for work. Now that I work at home, I can wear my pajamas if I want to and nobody would know the difference.
When you think about the financial benefits of being self-employed, you immediately think of tax deductions. Yes, tax deductions are nice. But, the truth is that these deductions may not be as beneficial as they seem. Those who are not self-employed often think that a “write off” suddenly makes everything free. It doesn’t. You still have to pay for it. You’re just not charged income tax on the amount of money you spent.
The effect is that self-employed individuals are able to buy certain business related items with pre-tax dollars. Here are a few of the most common tax deductions for business owners:
- Meals – Provided that you are either traveling for business or meeting with a client, a meal can count as a tax deduction. This is a nice perk, particularly if your business requires a lot of lunch or dinner meetings. However, you rarely can deduct the entire meal. Typically, you can deduct 50% of the cost of the meal, provided that you save your receipt and note the business purpose.
- Entertainment – Like with meals, 50% of the cost of entertaining a business client can be deducted from your taxes. You are required to do business either immediately prior, during, or immediately after the event. Again, you need to keep detailed records and receipts for the event.
- Travel – Traveling for work events is another nice tax deduction. If you are self-employed, you can deduct the cost of your travel expenses (airline tickets, hotels, rental cars, taxis, etc.) from your taxes. However, your travel must have a specific business purpose. Passing out a few business cards to the beach attendant in Cancun isn’t going to cut it. Be sure you can prove that your travel was business related. If you’re mixing business and pleasure, only the business portion of your trip is deductible.
- Transportation – If you use your personal vehicle to conduct business, you can write off your business related trips as a tax deduction. I’ve always found the standard mileage deduction the easiest way to go about this. Again, you’re not allowed to deduct any personal use, and you need to keep excellent records in case of an audit.
- Home Office – If you have a room in your home that is specifically used for business purposes, then you have the right to claim it as a tax deduction. This area needs to be dedicated specifically to work, so be careful using this one. I use the home office deduction each year, but it really doesn’t amount to that much. Because the formula is so complex, I usually take the “Safe Harbor” home office deduction to avoid any issues.
- Internet & Phone – In addition to your home office, you can deduct the portion of your internet and phone bills that you use for business. Again, if you use these items for personal use, you may only deduct that portion of the bill that is dedicated to business.
- Health Insurance – Self-employed business owners are able to deduct the cost of their health insurance premiums (as well as the premiums for their spouse and children), provided that they are not eligible to be covered under another plan (such as their spouse’s employer sponsored plan.) This is certainly a nice benefit, but it isn’t as great as it might seem. Because self-employed people usually don’t have access to group health insurance rates, premiums for coverage on the open market can be outrageously high. For instance, the cheapest plan available for my family costs over $800/month in premiums with a deductible of over $13,000. Remember, this is just a deduction, so my health insurance costs are not free. Of course I’m going to take the deduction, but it is far outweighed by the fact that being self-employed limits my access to plans with lower premiums.
By far the biggest financial benefit offered by the government to self-employed individuals are the qualified retirement savings plans that are available. These options include SIMPLE IRA, SEP IRA, and Solo 401(k) plans – and they are awesome.
Because employees often receive “free money” from their employer to put toward their retirement, they are subject to stricter contribution limits. Self-employed individuals must fund their retirement completely on their own, so the contribution limits are far more generous.
For instance, SEP IRA limits for 2016 are set at either 20% of compensation or $53,000, whichever is smaller. That is a ton of tax deferred money, which is a huge benefit. It reduces the amount of tax owed now and (in theory) should reduce the amount of tax you’ll pay later (because you should be in a lower tax bracket). Again, this isn’t free money, but the generous limits are certainly a plus.
Note: SEP IRA contributions to an employee or 25% of compensation or $53,000, whichever is smaller (Source: IRS). However, as the employer, you can only deduct contributions to your own SEP IRA up to 20% of compensation or $53,000, whichever is smaller (Source: IRS). These limitations apply to 2015 and 2016 tax years.