Don't leap at self-employment -- until you add
up the cost
L. Phipps Bankrate.com
One of the biggest mistakes people make when
they decide to leave a salaried position and go out on their own
is underestimating what it takes in terms of earning power to duplicate
what they made as an employee.
Nobody knows that better than Chere Estrin,
CEO of The Estrin Organization, a temporary staffing company in
Estrin, who has herself been both an employee
and an independent consultant, estimates that it requires roughly
30 to 40 percent more on top of a salary to cover standard benefits
such as health insurance, disability insurance, workers compensation
and the employer share of Social Security.
Lots of people, she says, don't appreciate that.
"It's the entitlement theory. People just take those things for
granted until they go out on their own and have to pay for them
-- then they can't figure out what's wrong,"
Not that Estrin, who is gleefully self-employed,
has any interest in working for somebody else. "I was pulling down
major dollars in the corporate world -- I was president of a division,
but I was crying in the shower every morning because I hated working
there so much," she recalls.
One day, she quit and started her own business.
"I decided I'd rather work 80 hours for myself than 40 hours for
Expect more expenses
Even if you're sympathetic and prepared to adopt Estrin's hardworking
philosophy, take her advice and don't quit your day job before you
figure out what it's going to take to continue paying the bills
and living in a style to which you've become accustomed.
compensation consultant Erisa Ojimba lists these expenses that everybody
must take into consideration no matter what their occupation:
- The employer's share of Social Security,
which raises the amount you pay to more than 15 percent;
- Health insurance; and
- Disability insurance.
When you're no longer eligible for the company
plan, those prices skyrocket.
Ojimba also reminds people to factor in the
time required for vacations, sick leave, marketing and administration.
When you work for yourself, you can't bill for this time, but you
still have to figure out how to compensate for it.
How time slips away
To begin these calculations, pick a number that you would like to
earn. A good place to start is with the number that you made or
make at your full-time job.
Misty Kuceris, a Virginia-based strategic-planning
consultant, says that while the average work year for an employee
is 40 hours x 52 weeks or 2,080 hours a year, it's unlikely than
an independent contractor can bill for more than 1,232 hours. That
sounds low until you do a little basic math.
- 10 days vacation = 80 hours
- 10 days sick and personal leave = 80 hours
- 10 days for federal holidays (even if you
want to work, these days probably won't be very productive) =
- 4 hours a week administrative time (less
four weeks away from the job for vacation and leave) = 192 hours
- 20 percent of your time devoted to marketing
(that's the least experts recommend) = 416 hours.
Add all these nonbillable hours together and
you'll get 848 hours.
Subtract that from 2,080 hours. The answer is
a measly 1,232.
As Kuceris points out, even if you work really
hard and are very lucky, it's unlikely that you'll be able to bill
a client for much more than that.
But if you are to maintain parity with your
salary at your previous place of employment, you do have to pay
yourself for those nonproductive hours -- after all, your employer
did. So calculate an hourly wage by dividing your desired salary
by 2,080. And then figure out how much it's going to cost you to
have nonbillable time by multiplying 848 hours times your hourly
You supply the supplies
When you work for an employer, the company pays for rent, supplies,
business equipment, telephone service, computers and maintenance.
The list goes on and on -- and only you can figure out how many
of them apply to your business. But to determine how to charge enough
to pay those bills, you'll have to anticipate these expenses.
To estimate that number, add up what you pay
monthly for each of these typical expenses. Just leave the line
blank, if it doesn't apply. Add anything not listed here in the
(If you have Microsoft's Excel program, this
spreadsheet will perform the following calculations for you.)
Pretty intimidating isn't it?
Don't let it scare you
But don't let this big number scare you off. Self-employed people
are often enthusiastic about what they do and find that the flexibility
and independence of working for themselves compensates in part for
an income figure that at least in the beginning may be lower than
they are accustomed to.
Ron Bird, chief economist for the Employment
Policy Foundation, is a strong supporter of the value of self-employment
and faults a calculation like this one. "When you calculate it that
way, you're comparing apples to oranges. There are intangibles that
you can't put an arbitrary value on. Those values are subjective,"
Or as Estrin, who runs her own temporary service
puts it: "It doesn't matter how much money I make. Going into business
for myself is the smartest thing I ever did because it makes me