The Pros and Cons of Being Your Own Boss

Date: July 28, 2016

For many workers, the idea of being your own boss is a dream, but as with many fantasies, dreamers who want to be self-employed can overlook the negative aspects of being the one in charge. With a complicated mix of responsibilities, opportunities and tax considerations, being your own boss carries a host of pros and cons.

 

Trading Predictable Income for Unlimited Potential

When you are your own boss, you don't draw a regular paycheck — you are solely responsible for generating your income. Whereas the bulk of the American workforce relies on regular weekly or bi-weekly paychecks, the self-employed entrepreneur has no such assurances. If you develop a business idea that flops, you could lose your entire initial investment without ever drawing enough pay to make your efforts worthwhile. 

The flip side of this equation is what draws many workers to the ranks of the self-employed. While you aren't guaranteed an income as your own boss, you also aren't limited as what you can earn. With hard work and a solid business idea, it's possible to generate great wealth when you run your own enterprise.

 

How the Tax Code Affects the Self-Employed

The American tax system treats the self-employed differently than regular employees. On the plus side, as a business owner you can deduct many items that are not typically available to the average employee. According to Internal Revenue Service regulations, deductible expenses must be "ordinary and necessary." This covers a wide swath of deductions, including office supplies, vehicle expenses, employee pay, capital expenses and, to a limited degree, meals and travel expenses. 

Conversely, you'll face self-employment tax as your own boss. As a regular employee, your employer pays a portion of your Social Security and Medicare taxes. When you're self-employed, however, you are both the employer and the employee, so you're responsible for both taxes.

 

With Control Comes Responsibility

As your own boss, you can do what you want, like choose your own vacation schedule. Having control over your own life when you're the boss is very appealing. 

While you may have the freedom to take the day off whenever you want, that reality can be different if customers and employees depend on you. Taking a casual approach to your role as a boss can have negative financial consequences on others.

 

You'll Have to Provide Your Own Benefits

As an employee, benefits are typically part of your employer's compensation package. Particularly at larger companies, you're likely to be offered free or low-cost health insurance, a retirement plan that includes employer contributions, and other perks, such as disability insurance. But if you're self-employed, you'll have to pay for such benefits yourself. If you're just starting out, your business might not have enough income to support benefits.

The IRS allows self-employed individuals to contribute to their own retirement plans with maximums that can exceed those offered by large corporations. For example, in 2015, employees could contribute only a maximum of $18,000 to their 401(k) plans. As a self-employed individual, you could create a 401(k) plan for yourself and contribute up to 25 percent of your income, with the cap topping out at $53,000.

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