Six Self-Employment Myths You Need To Know Before Striking Out On Your Own

home office deskWho hasn’t fantasized about quitting their job and striking out on their own? The desire is perhaps especially strong for Americans, since doing it yourself and creating your own successes are so ingrained in our value system.

As someone who has worked for many small business owners, I’ve witnessed the drawbacks of running your own business firsthand. The information that follows isn’t meant to discourage you if entrepreneurship is a dream of yours. Rather, it’s designed to serve as a reality check for both those who are thinking of starting their own businesses and those who often feel disillusioned by being someone else’s employee.

Myth #1: I’ll earn more money if I start my own business:

Are you tired of seeing your company bill your work out to clients at $175 an hour and then pay you a mere $30 an hour? It’s depressing, isn’t it? But if you started your own business, you would no longer have an established, reputable company behind your name. Without that, you might not have access to clients who are willing to pay $175 an hour for your skills. Even if you do, you might not be able to sign on enough clients or get enough hours of work from them to match or exceed your current salary, or you might have to charge less, especially at first. You can only charge as much as clients are willing to pay, after all. Your income also won’t be steady–it will depend on how much work you find and complete in a given month, and clients don’t always pay on time.

Myth #2: I’ll get to keep more of the company’s income if I start my own business:

Does your current company frustrate you with money wasting practices–money that could be better spent giving you a higher paycheck? If you had your own business, all that wasted money could be yours instead, right? But when you run your own business, all of the things your employer provides you with to get your work done will become your expense. You’ll have higher phone bills to pay and office supplies to purchase, and depending on your line of work you may need the services of a lawyer from time to time. You’ll also have to pay for your own health insurance and any other benefits you’re currently receiving from your employer.

Myth #3: I’ll save money on taxes by starting my own business and incorporating:

Unless you’re planning to cheat on your taxes (which I don’t recommend), any money that you save through the tax benefits of incorporating can easily be eaten up by the additional taxes you become responsible for as a business owner. You will be responsible for the employer matching portion of Social Security and Medicare taxes (about 7% of your salary), federal unemployment tax, and additional state taxes, not to mention the fees for legally required business insurance, business licenses, and franchise fees (these items will vary depending on the type of business you establish and your location). If you have employees, you’ll have to pay worker’s compensation (you must pay this every year regardless of whether one of your employees is injured on the job). You’ll also probably need to hire an accountant to prepare your business tax returns, which can be significantly more complicated than personal income tax returns.

Myth #4: I’ll have more vacation time and get to set my own schedule:

Vacation? What vacation? Small business owners often take fewer vacation days, work longer hours on weekdays, and even work on weekends. If you’re working on a project for a client, you probably won’t be able to take a vacation in the middle of the assignment. If you have multiple clients, you might not be able to find a time when you’ve wrapped things up with all of them and can go on a vacation. The result is that you don’t take vacations at all or end up working from your getaway spot. Also, you’ll no longer have paid time off–any time you aren’t working is time you aren’t earning money.

Myth #5: I’ll get to be my own boss–I won’t have anyone breathing down my neck anymore:

Even when you’re self-employed, you still aren’t quite your own boss. Sure, no one technically tells you what time you have to be at the office each day, when to take your lunch break, and when you can go home, but clients’ demands will often end up determining your schedule. Your clients become your new bosses. You can always quit working with one of them, but you’ll lose that income, and you won’t always be in a position to take that risk.

Myth #6: Being self-employed will make my life easier:

You may not have to wake up at 6:45 and endure rush hour traffic any more, but the truth is that when you’re in charge, you take on a great deal of additional responsibility. You can’t afford to be lazy, because your income depends entirely on your own initiative. Also, keeping up with IRS requirements when you run your own business is no walk in the park. You can choose between lots of initial training and frustration while you try to decipher tax forms and figure out what you have to pay and when (and why), or paying an accountant to handle it for you (which will add quite a bit to your expenses). Mistakes on tax forms can cost you hundreds of dollars in interest and penalties.

When it comes down to it, if you’re motivated, hardworking, have lots of connections, and know how to sell yourself, it’s quite possible that you’ll make more money and enjoy your work more when you’re running your own show. But if you really just want to collect a steady paycheck and keep the rest of your time free from worry and available to pursue other interests, you’ll be better off both mentally and financially as someone else’s employee.

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15 Responses to Six Self-Employment Myths You Need To Know Before Striking Out On Your Own

  1. Teri Newton says:

    I think being self-employed in my teens was the most valuable experience ever. Customers were flaky, sometimes did not pay. Downturns in the economy were devastating. I worked “part-time” and yet I ended up working full-time doing everything behind the scenes. At the time I thought I was making a lot of money and not having to work much to go through school. In the end I concluded I could have taken a part-time internship and been paid more. The taxes were absolutely brutal because I did not get paid that much but was too young to claim (& in school) the EIC.

    Now I work for a small business owner. I think I have it 100 times easier as his employee.

    I know a lot of people out on their own who are happier but I just don’t *get* it – I’ll take my lower responsibilities, less stress, steady paycheck and benefits any day. I work way less hours than anyone I know out on their own. It is a personality thing for sure. They were all miserable employed. I think every 9 our of 10 person out there is wishing they were self-employed – I always try to share what it is really like – the grass is looks greener I guess.

  2. Teri Newton says:

    Taxes – I had to say when you are first starting out the taxes are absolutely brutal. You don’t make that much and yet you get hit by social security, regardless how low your income is. BUT the self-employed do have an advantage. It’s retirement. If you are successful and start to make money you can put 25% into retirement – up to $45k/year or so – tax-free. That’s a tax break no employed individual will ever get. It allows business owners to avoid a lot of taxes.

    Many people assume they don’t have to pay taxes if they don’t get a W-2. That is my pet peeve. We all pay more because of this attitude. You lose out on your social security benefits and retirement benefits, etc. So be careful if you are considering not reporting your income. How will you qualify for a mortgage? Things many people don’t consider when they start hiding money form the IRS.

  3. junger says:

    Great post — Starting my own business always sounds so attractive, but it’s good to be taken back to reality before making an unprepared leap.

  4. fractalbrothers says:

    good post, as i’ve been dabbling with my own business (with my brother) for years now, on the side of a full time salary job with a software company. Our area of interest and expertise is web applications. Our business model involves providing inexpensive services to a large number of people, with recruiting for said services being done primarily over the internet. We like this model because we don’t want to have to chase clients (like you said), and customers will essentially provide residual income. Customers will not require us to be in any specific place. There will still be a level of customer support but another aspect of our business model is that we empower the customer as much as possible, making every step of using our product simple and easy, therefore reducing their interaction with us.

  5. Ian says:

    Most of these are half true… your own business is what you make of it. There are more taxes, you’ll pay 15.3% on social security. I could easily argue against most of these points…

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  7. There is some truth here, but it is only half of the story. As long as you have a skill, trade or profession where there is a proven need or market and have the drive, desire and intelligence (none of these are givens) you can be successful at your own business and enjoy it. Working “for” yourself is not the same as working “by” yourself. Having qualified employees can make you money if you run the show and make the right decisions are fair and honest and treat employees and clients well. This includes hiring qualified professionals such as accountants to make sure you maximize the tax benefits, which is everything. Your entire business life is deductible and if you have a home office that is also. Advertising and marketing are also crucial. If you have all of this down, you may work just as hard or harder but what you build is yours. You know you are as smart or smarter than successful people and your bosses, so why not you? There is no reason. You can do it and it rocks! Fun and money if you do iy half right. You may ask “what about problems?” I say everything has problems and its your problem, your success. What have you got to lose? Its life. No more 9 to 5. Do what you want, work hard, enjoy. Go for it. I work Monday afternoon through Thursday, Come in late, leave early, work from home and on the phone rest of the time and manage loyal smart employees who hold down the fort. There is stress of making the money but we always seem to at least make it and so many do. Interesting article but don’t let it discourage you. Best Luck.

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  9. Keith says:

    It really depends upon the business you are in. In some areas of the market, you can make alot more money on your own, in others it is better to be an employee. You have to factor in your knowledge and marketability against demand. This will help you make the right decision to venture out onto your own. Good luck!

  10. I personally work twice as many hours now that I am my own boss.

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  12. Erik Przekop says:

    None of the above are “myths”, except perhaps #3. Ms Fontinelle correctly (in some cases) points out that there is a downside to every upside when you strike out on your own, but this article is unduly pessimistic.

    My own experience (8 years self-employed, employed for 6, now self-employed again) is that all of the above except #3 are true. I earned significantly more and had more time to myself. There are added stresses to being your own boss, but you remove the single biggest one for me – having to trust your well being to the whims of an idiot (a.k.a. “manager/director/vp”). On balance, life is less stressful for the self-employed *if* you’re highly skilled and motivated.

  13. Breton Wench says:

    Great post….really makes people think.My husband and I run a small forestry/tree care business and love the freedom and variety – but have not had a vacation for five or six years. The last vacation was to go back home to show the grand parents the grandkids – and that really cost us. Two weeks of spending and not earning anything really hurt!

    Neither of us ever hanker for a ‘real’ job though……

  14. Mohit says:

    I have read this blog post and I feel that whatever you posted here are what you look at the starting phase of a business. And by ‘starting phase’, I mean it may be 1 year, 2 years, or 3 years or more.

    A business, when started, may take a lot of work and may not give the proper return of your time and money. But once it is properly established, it would start to kick of. It is well worth spending time with your business, provided you have the guts to take it to the end.

    Many business people who succeeded take it to the end and then enjoyed the return (the return of money and free time with passive cash flow).

    I, myself, is not as successful yet, but I believe I will make it one day.

    I will take a look of each of your myths:-

    Myth 1:- I will earn more money if I start my own business.

    Truth:- Yes, You will earn more money. Not initially, but later when your business is established. And it will be passive earning. And it will be money you cannot even imagine. All you need is to avoid outside negative influence everyday and take it to the end. Remember Bill Gates, who was once the world’s richest person.

    Myth 2: I will get the most of company’s income if i start my own biz.

    Truth:- When you own your biz you are the boss, and if you know how to handle money, you will have less expense.

    Myth 3:- I will save money on taxes if you start your own business.

    Truth:- Sorry i don’t know much about this.

    Myth 4:- I will have more vacation time and set my own schedule.

    Truth:- Whatever you told here are about the entrepreneur who are either on the starting phase, or the entrepreneur who wants to earn more money. It is absolutely true that by having your own business you can have more vacation time and set your own schedule. You will have passive income flow, which either you can use to strengthen your business (or start another business), or enjoy vacation.

    Myth 5:- I will be my own boss, i would not have anyone breathing down my neck anymore.

    Truth:- When your business is well established, you will have enough money to recruit others to do the different segments of jobs in your business for you. You will be your own boss, and you can advice your employees to do your various jobs.

    Myth 6:- Being Self Employed will make your life easier.

    Truth:- I don’t know much about the US Tax System, as i don’t live in US, but I have seen many people in my country (India) love being self employed. Here is no tax for upto a decent earning, and the other taxes are in such that they benefits the self employed as a whole.When passive cash flow comes in you will have more free time, and your life will get easier.

    But in the last paragraph of your post whatever you talked i completely agree with that. Initially, for a self employed, it will take more stress, no steady income (even no income), more responsibility. And the “job-mentality” people will not do at this stage.

  15. Sure it might be harder or more time consuming to own a business, but in the long wrong, a successful business will make hundreds of times more income than working as someone elses employee.

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