I thought it’d be a fun exercise to do a comparison between working for a company and working for yourself.
The general rule of thumb is that you work for yourself if you can make more money — at least increasing your salary by 50%.
So if you normally earned $50,000 before, you should be able to earn at least $75,000 if you go out on your own.
That extra $25,000 is to cover retirement, healthcare and whatever else you have to deal with that a company would handle otherwise.
If it’s for the same amount of money, I don’t really see the point unless you really hate being under someone else’s thumb.
From my perspective:
They used to charge $150 – $180/hour for my services.
I cut out the middleman, and went from earning $30/hour (my employee salary) to $90-$130/hour.
I make more money, and I charge the client less.
In a lot of cases, you work MORE because you have to do your job and also do all the other tasks in the company like handling the books, reading contracts and dealing with the client directly.
If you run your own business you have to handle everything from vendors to customers to your own employees.
But it’s fulfilling in the sense that you know it’s directly affecting you and your earnings, so you are more motivated to do the work happily.
From my perspective:
It is the total opposite for me.
I actually work less now, than I ever did with a consulting company.
The reason being that I used to work 50-60 hours a week with a consulting company, but was only paid for 40.
I was working all that over time for free, PLUS filling out all those performance tracking and project review debriefings, all of which took
Now, I work no more than what I am allowed to bill, which ranges from 36 – 40 hours a week.
Over time has to be approved directly by the client, or I don’t do it.
And if you don’t want to go on a project that makes you travel a lot, you can say “No, I’m not going.”
With a company, you don’t have a choice.
Have to cover your own, or get your own private insurance plan.
From my perspective:
Doesn’t really apply to me as I live in Canada. My out-of-pocket expenses are around $600/year which include seeing the dentist twice, and buying prescription pills.
I am actually saving money, because I wasn’t even taking full advantage of the company plan to begin with.
Have to handle it all on your own, but this was sort of what I did before as well — contributed to a retirement plan AND saved on the side.
Have to handle it all on your own, but you don’t need much if it’s just you.
And you can buy exactly what you want, instead of bitching about what they bought! 😛
You’re the only resource, but there’s an informal network of other freelancers who are more than willing to help you out.
Paperwork, Taxes and Deductions:
Lots of paperwork to deal with for your company is the downside, but now:
- you have control over what is being spent and what isn’t
- you don’t have to deal with someone to approve any purchases
- you benefit directly from the tax breaks, rather than the company taking them
When your laptop dies, you don’t have to ask anyone for approval to get a new one (and by new, I mean refurbished).
So if my laptop dies, I just buy another one under the company.
19% Flat Rate
I think it’s a BONUS that I only pay 19% as a flat rate in taxes for my small corporation’s earnings.
My company can earn up to $500,000 before being charged more, but under $500,000, it’s considered to be a small business.
If I were to earn that kind of money through a company, I’d be paying at least 40% in taxes.
$20,000 in dividends each year
I take the money out as dividends each year, to a maximum of $20,000 (it’s all I need anyway), and as a result, I don’t pay exorbitant personal income taxes.
$20,000 might not seem like a lot, considering that in 2009 I spent around $30,000… however, I also have some of my living expenses written off under the company.
No sales taxes paid & expenses are deducted from gross taxable income
If I buy something for the company, I don’t pay the sales tax AND it’s an expense before taxes for my company, so I save on the income tax as well.
Check out the comparison chart:
Let’s assume I buy a $100 item:
As an individual, I’d pay $113 with 13% sales tax, but under my corporation (if it’s a legitimate expense), I pay $81.
Naturally, I can’t buy anything not related to consulting, so a new wardrobe, or anything that is not used for business, cannot be claimed.
This is also not an excuse to go on a spending spree because of the savings, because you are still spending the company’s money, which is eventually YOUR money and what you buy is not “free”, it’s just cheaper.
This is also the reason why I bought a used minivan instead of a fancy new car for the company.
- Fairly risky: may not work for large parts of the year (hello 2009?)
- May have to travel a lot and/or cover expenses which lowers my earnings
- No paid vacation, sick days or leave — it affects your income directly
- Managing myself & the client’s expectations
- Have to do all the work of a company by myself on my off time, for example:
- Filing taxes and other statements quarterly
- Bookkeeping — My budgeting spreadsheet comes in handy here
- Analyzing my cash flow and expected income
- Invoicing and Accounts Receivables — Making sure I get paid
- Scheduling — If I travel, I need to make sure I am on top of the bookings
So I hope I’ve given a brief but comprehensive Pros and Cons list of both: working for a company or for yourself.
Personally, it’s a much better and easier deal to be a freelancer than to work for a company, especially as an IT consultant who works on projects rather than really being an employee.