Thursday, December 30, 2010

Do You Want to Be Self-Employed? Probably Not!



Self-Employment is no Bed of Roses


The allure of being self-employed -  it permeates our society.  Everyone dreams of being their own boss, calling the shots, and sleeping late every morning.

Con Artists prey upon this desire in the common man with their "work at home!" scams and "be your own boss!" come-ons.  And yes, they are all scams.  If you really want to be self-employed, you either have to start your own business -  a real one, not something from a "starter kit" - or have some skill or service you can market.

But even if you have a real business that can make money, being self-employed has a number of pitfalls.  Before you leap into the void of self-employment, consider the following:


1.  No Steady Paycheck:  Most Americans, as I have noted in this blog, fall into the Job Trap - they divide their paycheck into lots of little monthly payments, and thus squander away a lifetime of wealth.  That is bad enough.  But if you are going to be self-employed, there is no assurance of that steady stream of paychecks, so having a lot of debt load and monthly payments to make can really kill you.  Once you are self-employed, you can't have a lot of personal overhead for things like car payments, cable TeeVee and the like.  You have to pay cash for your cars, and make it so you can go for months without money - if necessary.  In some ways, this is an advantage, as it finally puts you on the "cash basis" you should have been living all along.  But if you want to become self-employed, you should start doing this NOW, while you have a job, as it is hard to do once you break the safety net of the weekly paycheck.


2.  Self-Motivation:  This is also tricky.  Most Americans like the idea of self-employment as they believe it is a ticket to sloth and lack of motivation.  You can goof off all day!  It's great!  The problem is, if you goof off, you don't get paid - maybe months down the road.  There is a disconnect between work and reward, and if you do not make the mental connection, you may find yourself slacking off and then starving down the road.  Most people need the structure of a daily routine in order to get any work done at all.  In other words, the vast majority of drones need a "job" - and that may mean you.


3.  Not Getting Paid:  You work hard and achieve great results for your clients, or you build an addition on to someone's house and it looks fabulous.  All that hard work!  All those expenses!  And then.....they don't pay you.  Clients and customers go bankrupt - it happens.  And it is happening more and more lately.  Over the years, I have "written off" over $100,000 of bad debt from clients.  And by "writing this off" I don't mean I get a deduction on my taxes or anything.  You just don't get paid (the average Joe Paycheck thinks, idiotically, that a write-off provides some sort of tax benefit.  It usually just means you lose money).  There is little you can do to avoid this, other than to ask for a lot of money up-front.  But the market resists this, and in many cases, it may be illegal or require that you maintain separate escrow accounts.  It is very rare that a Joe Paycheck doesn't get paid.  For self-employed people, it is  a way of life.


4.  Self-Employment Tax:  Many Joe Paychecks assume that your taxes will be lower if you are self-employed.  Not true.  They actually are higher.  If you get a paycheck, you pay your income taxes (which are withheld from your paycheck) as well as Social Security and Medicare taxes.  The latter two are matched (doubled) by the employer.  So for every dollar you receive in pay, your employer has to cough up about $1.10 - not counting benefits.  If you are self-employed, you have to pay an 18% "self employment tax" which is equivalent to your contribution plus your employer's contribution to the Social Security and Medicare funds.  The good news is, by paying this tax, you qualify for Social Security and Medicare (if you did not pay in, you can't take out!).  But it illustrates one reason why outside contractors are paid a lot more than in-house employees.  There are other reasons as well, such as....


5. Health Insurance:  You've read all the headlines about this, and if you have a "Job" you don't think too much about it, other than to bitch about co-pays and perhaps the small amount your employer asks you to contribute.  But if you are self-employed, you have to fund the whole deal - and you will go to a bare bones, $10,000 deductible in no time at all.  And as you get older, the cost will escalate into the thousands of dollars a year.  It is not a fun scenario, as your health insurance takes up more and more of your income.  For Joe Paycheck, the escalating cost of health insurance doesn't take a dime out of his bottom line - his paycheck remains largely the same, regardless of increasing costs.

6.  Retirement Plan:  Another area where you have to "fund it yourself" is retirement, and that means setting up a SEP (the self-employed version of the 401(k)) or IRA, or both.  There are few defined-benefit pension plans anymore for the Joe Paychecks of the world, but NONE ever, for the self-employed.  You have to save your money - or else!  And since you never know where your next paycheck is coming from, well, you'd better save as much as possible.

7.  Becoming Unemployable:  Once you have been self-employed for a number of years, you are basically unemployable.  You can't take a feral cat and make it into a house pet, it just doesn't work.  And employers know this.  If you've been out on your own, chances are, you'd make a lousy employee later on.  You'd bristle at the silly rules and restrictions in the workplace that keep you from getting anything done - or the volumes of unnecessary paperwork that keeps the drones busy but accomplishes little.  And you would just refuse to tolerate the petty games that "employees" play as they try to cut each others' throats to get a tiny advancement - often at the expense of company profitability and productivity.  So if you become self-employed and decide you don't like it - too bad.  It pretty much is a one-way trip.  Look before you leap.

* * * * * 

Yes, being self-employed is a lot of fun.  But it is also very, very scary, and you have to be a risk-taker and have a high tolerance for stress. 

Most people in this country are very risk-averse, as I have noted time and time again, in my blog.  People would rather lease a brand new car, and pay four times the cost of owing a used car, for fear that they might have to pay for "repairs" on a used car.  It is largely an irrational fear, of course.  But if you fall into this category, chances are, self-employment is not for you.

The main advantage of being self-employed, I have to say, in retrospect, is that I learned what money really is, and how destructive falling into the "Job Trap" can be.  Like most Joe Paychecks, I did all the stupid things like borrowing money to pay for things I didn't need, and looking at monthly payment as the only cost involved in a transaction - not the overall cost.  Being self-employed forced me to save money, to cut expenses, and move to an all-cash lifestyle.

But it was not an easy or pleasant journey, to say the least.  Many of my friends, who have "jobs" have a lot less stress.  So long as they do not lose the almighty job, they have a steady stream of income and use it to buy nice toys and gadgets, and put a little away for retirement.  Most of them will do well, provided they do not lose the almighty job.

Of course, during the recent recession, that is exactly what has happened to many, and living the Joe Paycheck lifestyle, with its high cash-flow requirements, can be a disaster once the fire-hose of cash is shut off.

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