Although working as an employee has many benefits, I believe that most people would agree they would prefer to work for themselves. Before deciding to switch over to self-employment, it is vital to fully understand what you might be giving up in benefits.
Some companies provide excellent insurance coverage for their employees. Understand that if you go the self-employed route, you may want to look at the difference in yearly costs that you would need to cover out of pocket. This compensation could mean a difference of thousands of dollars. On the other hand, some individuals who are self-employed could deduct the cost on their taxes, which could help reduce the loss.
Speaking of taxes…on top of paying an income tax, self-employed taxpayers also have to track their Social Security and Medicare taxes. Since there is not a Payroll department to do this for you, self-employed taxpayers typically set aside a separate bank account and send the 15.3% of each paycheck there to be “out of sight, out of mind.” This habit ensures that when tax season comes, you will not be blindsided with a large expense.
Although there is an obvious downside of tracking your income taxes, there is an additional
benefit as well. Business expenses! If you are a small business, being able to track and record business expenses throughout the year could save you thousands of dollars. As long as you play by the rules, this is something that would very likely be worth your time.
Depending on what type of business you are planning on running, it is important to understand the types of risk you are undertaking. For example, businesses under a sole proprietorship may seem to be beneficial as you can include the numbers on your individual tax return, but the sole proprietor also has total liability if anything goes wrong and they are to blame. That means that a court can take from some of your personal belongings to settle business shortcomings. This can leave an unsuspecting business owner facing bankruptcy in the blink of an eye. Talking with a tax professional or an accountant could be a wise decision when choosing the entity you will select during a startup (Sole Proprietorship, Partnership, LLC, S Corp, C Corp, Etc.).
Keep in mind that every situation is different, and preparedness is the key to success. Best of luck!