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Don't leap at self-employment -- until you add up the cost
By Jennie L. Phipps

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 Los Angeles.

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 somebody else."

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.

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At, 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.

Add up:

  • 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) = 80 hours
  • 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 wage.

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 spaces provided.

(If you have Microsoft's Excel program, this spreadsheet will perform the following calculations for you.)

The cost of going solo
Salary goal
Monthly expenses
Office supplies
Computer and software
Contracted services (advertising, public relations, accounting
Web site hosting and maintenance
Health insurance
Disability insurance
Liability insurance
Quarterly expenses
Social Security
Annual expenses
Equipment replacement
Software updates
Sick days
Total expenses
Expense plus salary goal
Amount you must bill per hour

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," he says.

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 happy."


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