Become self-employed or work for a salary?
Statistics indicate that more than half of salary workers consider or have considered becoming self-employed. In many cases, people decide against owning their own businesses for very valid reasons, such as the security of a regular and predictable income, social benefits, prestige and support. The cost of running your own business must be calculated and compared to the benefits and income that you currently earn. If it is still worth your while and you are prepared to take the risk, then you can make the leap.
Comparing the employment benefits
If your annual salary is ,000 then the annual profit of your business should be more than ,000 a year. You cannot take the income generated by your business and compare it to your salary. You have to take the profits and in many cases, it should be the net profit and not the gross profit.
Apart from the salary, you also have to take all those other benefits into account, for instance, car allowance, housing subsidies, study bursaries, disability insurance, unemployment insurance, worker's compensation, medical aid and pension. This means that your business profit has to be compared to the salary plus benefits to get a realistic figure. It is worth your while when the business profit exceeds more than 35% of your annual salary.
You may argue that you are paying for all the benefits at present since they get deducted from your salary. The truth is your employer is paying 50% or more of these benefits. When you are self-employed, you pay the full amount for having these benefits and in many cases don't qualify for group rates, which are normally lower than private or individual rates.
Higher tax when self-employed
Although you can deduct several items from your tax when you are self-employed, you have to pay estimated tax every year. Depending on the country you work, you may pay tax up to four times a year. This is further complicated by returning tax forms on a quarterly basis. Salary workers have the advantage of 'Pay As You Earn' taxes being deducted every month, while you have to complete all those forms or hire a consultant to do so.
Other benefits that you lose when self-employed
When you are self-employed you normally put in more hours than the salary worker and don't receive any overtime payment. That annual holiday, which is normally paid, now becomes your responsibility and you are responsible for your performance or Christmas bonus.
The company car and fuel subsidy all of the sudden now come from your pocket. Any traveling expenses, training courses, and software licenses are not benefits anymore since you own the business and have to pay for them in full.
Financing in a new light
Whenever people want to open clothing accounts, get mobile phone contracts or obtain finance for buying a vehicle or house, their salary and years of employment are taken into consideration. Once you are self-employed it becomes a headache to get finance for anything. Not only do the financial or lending institute want at least six months bank statements, they want a landline, proof of residency or office, several additional securities, and proof of income. They calculate the income and payable amount with a different formula than what they use for salary workers. You may end up with higher interest rates since you are considered more of a risk than the salary worker. If you plan to become self-employed get the finance for your vehicle, home and business equipment before you leave your current employer.
If it sounds all too discouraging, you should remember that the person who handles your finance or loan application is also a salary worker with little or no understanding of how a business is managed. He doesn't consider that a person can lose his job overnight, but thinks that you as business owner can fold in one day.
Before you start your journey to become self-employed, you have to consider the benefits of being employed and whether you can afford to start and run a business. Be prepared for the risks and changes involved in the process and avoid unpleasant surprises