Self -employed Vs Regular Employee?

Question

Self-employed people has the advantage of claiming expenses against their income. However, paying income tax at the end of the financial year also means that you have to be very self disciplined financially. The disadvantages include no paid annual leave and no sick leave.

A regular employee follows the pay as you earn system, so at the end of the financial year he has no worries at all. He could sometimes get a refund cheque.

I have been both a regular employee and self employed person. I still can't definitely say which is one better. Many financial experts did comment that moving from being employed to self-employed is an improvement. What do you think of that? For those of you who are now self-employed, do you want to go back and be a regular employee again? Do you enjoy the freedom in working hours, the advantages of claiming expenses against your income, the extra money that stays in your bank account until tax is due etc.?

Answer 1

Your "question" is wrong:

1. Regular employees do not all receive paid annual leave and/or sick leave.

2. Regular employees do not all pay enough "as you go".  Some do owe, and have worries, at tax time.

3. As a self-employed person, you must make payments 4 times per year.  The first payment for each year is due in April, the second in June, the third in September, and the last in January of the following year.  You are not allowed to keep the money in your account until the end of the year.

4. If you pay more than necessary for any or all of the 4 required payments (in April, June, September, and the following January), you can (and should) get a refund.

Answer 2

Being self-employed is a "pay as you go" system; you just don't pay as frequently.  An employee has the tax withheld from every check while a self employed individual has to make quarterly estimated payments.  The extra income generated by leaving that in the bank for 2 or 3 months is modest at best.

The ability to deduct expenses is overrated at best.  Most of the things that I can deduct from the gross on my consulting engagements would be deductible if I paid them as an employee, at least to a point.  Probably the most significant is being able to call my home my place of business (for consulting) and deduct transportation costs, including what would otherwise be considered commuting.  I charge a call-out fee on my consulting so that's really a wash anyway.

From a financial standpoint, a self-employed person needs about 50% more net income after business expenses to equal the financial position of an employee once the typical fringe benefits are taken into consideration.  Health insurance is much more expensive if you're self employed unless you are in extremely good health.  And as you age, rates will inexorably rise.  If you can grow your business enough to bring on several employees you may be able to benefit from the lower rates offered on group policies but you will probably always pay more than a large employer does simply because your pool is comparatively small.  Of course you have the issue of no unemployment insurance coverage and no workers compensation coverage so you have to allow extra savings to cover those contingencies as well.

Personally I'm on the fence these days.  I have an excellent job with high pay and great benefits.  I also do some outside consulting that brings in a tidy sum, however it would be a challenge to chuck the regular paycheck and live on the consulting alone.  I have to turn down business because of the demands of the regular job, but not nearly enough to make up the shortfall.  As I'm not the worlds greatest salesman, growing the consulting business would be an extreme challenge.  Word of mouth only goes so far!

So, in my case, where I am is probably what's best for me.  The regular paycheck and bennies is worth the trade-offs.  And the extra income from the consulting gigs gives me some financial freedom that I wouldn't otherwise have.  It helped me wipe out over $50k in credit card debt over a 5 year period and is helping me build a nice nest egg for the future.  

And who knows?  In a couple of years I'll have over 2 years worth of income salted away and then it might just be worth the risk to kick the 9-5 to the curb since I won't have to worry about making the bills for a while and can then focus on building the business.  And with the equity I have in my home, I could sell it and move into a rental and coast for 4 or 6 years without worries.  In the worst case, I could always find another job in my field.