Ten Dark Sides of Self-Employment

I spend a lot of time on this website hawking the virtues of self-employment. I even see self-employment as the ultimate career solution. But in the interest of full disclosure, I also have to lay out the dark sides of self-employment. They’re real. The purpose of this article is to make you aware of them and to show you how to work around them.

Ten Dark Sides of Self-Employment
Ten Dark Sides of Self-Employment

Don’t get the wrong idea – I’m certainly not trying to discourage anyone from becoming their own boss. I personally find it to be a better way of life all around. While self-employment certainly isn’t for everyone, I think it will be a step forward for the majority of people, particularly as the future economic and employment situations become more constrained. And at a minimum, I think nearly everyone can benefit by having at least a side business.

But there are certain aspects of self-employment that are at least unpleasant, and you should be aware of them before taking the plunge. There are probably more than I’m going to list here, but here are the major ones – and suggested strategies to deal with them.

1. You Have to Learn How to Generate Income Continously

If there’s one quality that most defines self-employment success, it’s the ability to generate income, and to do it continuously. It doesn’t matter how good you are at any technical or managerial skills, if you can’t generate income, your business will fail – if it even ever gets off the ground.

Generating income must always be Job 1. And in most businesses, you as the proprietor have to take control of this. Other jobs and responsibilities can be handed off to others, but you’ll have to own the income side of your business. Without it, there is no business.

Suggested strategy: Develop, test and implement your marketing program before you even launch your business on a full-time basis. If you can get the marketing of your business working, the rest is just covering the details. And once you start marketing, don’t stop. Ever.

2. You Have to Become “Chief Cook and Bottle Washer” in Your Business

When you work for someone else, you’re typically working on a limited slice of your employer’s business. That limits your responsibilities. But when you’re self-employed, you have to handle everything. It’s unlimited responsibility, especially when your business is new and you don’t have the cash flow to pay others to handle these chores. I’m not going to lie, it can become overwhelming.

Suggested strategy: In the early days of your business, there will generally be little choice but to handle all the responsibilities yourself. But as your business grows, begin using outside contractors, such as virtual assistants. You can begin offloading responsibilities to these flexible workers until you are in a position to hire actual employees – if that’s ever necessary.

3. If it’s Broke, You Have to Fix It

When you’re self-employed, you are the business. If anything goes wrong in your business or with your business, it will be up to you to fix it. Unlike a job situation, you won’t be able to turn to your boss or coworkers for advice, consolation or solutions.

Suggested strategy: This is one dark side of self-employment that isn’t going to go away no matter what you do. But you can minimize how often it happens by committing to always doing your best work. Also, do your best to anticipate problems. The saying an ounce of prevention is worth a pound of cure goes double for self-employment. If you see a situation developing that could turn into a problem, nip it in the bud early. Unlike fine wine, problems never get better with age.

Also network with other people in your business. If you do run up against a major problem, you can get advice and sometimes assistance from others in the same line of business. That means that you’ll have to stop thinking of at least some of your competitors as competitors, but rather as allies. It can work too, because at some point those same competitors will need your help.

4. You Will Lose Money on Some Business Transactions

Count on it. Most likely, it will happen more than once. And depending upon the business that you’re in, it could be a regular event.

Suggested strategy: As the saying goes, never put all of your eggs in one basket. You should anticipate losing money on some transactions. The best way to deal with this is through balance. If you make 10 transactions, expect one to go sour. But then you will have nine other transactions that pay out and will more than offset the loss.

Also make sure that your income is derived from multiple sources, and not from one or two large clients. From an income security standpoint, you’re better off earning $5,000 from 10 clients of roughly the same size, than from two very large ones.

5. You Can’t Live Paycheck-to-Paycheck

The reason why you can’t because you don’t have a paycheck! If you’re used to squeaking by between paychecks, that practice will have to change. You’ll have to go from surviving on a regular paycheck, to surviving on a cash flow. That cash flow will likely be unsteady, particularly in the early going of your business.

Getting a regular paycheck is more compatible with monthly expenses than business income usually is. You’ll probably find yourself having to completely reorder your finances, and even how to budget.

Suggested strategy Make sure that you have a well-stocked emergency fund before starting your business, and develop strategies to keep it funded from that point forward. Even in established businesses, there can be times of lean cash flows. For that reason, a generous amount of cash will always be necessary.

You might also develop a strategy of turning to alternative income strategies during times when your regular business income is weak. That could mean taking outside work on a contract, seasonal or part-time basis. The basic idea is to do whatever you can to even out your cash flow, at least until it’s large enough that you can afford to take the occasional hit and keep on running.

6. You May Actually Have LESS Time than an Employee

You may find this hard to believe, but even as a blogger/freelance blog writer I generally work more hours than most people who have salaried jobs. For one thing, your work schedule isn’t limited by office hours. Meanwhile, some months are busier than others, and it always seems that there’s a new project or a new direction to take on.

This is hardly unusual for anyone who is self-employed. But while it may seem like a painful burden, it actually isn’t. I actually have substantially more control of my time than most people who are salaried. I can work my day around non-business events, and take time off whenever I need to. But at the end of the month, I’ve usually invested more than 160 hours into my business.

It’s an occupational hazard, but it’s not as bad as it seems, particularly if you like what you do, as I do.

Suggested strategy: On a day-to-day basis, you should always try to focus on getting your most important and productive work done as soon in the day as possible. These are usually the tasks that are income generating. If you can at least get these done early on, you’ll be under less time pressure as the day goes on. Not to mention that you’ll also make sure that your most important work is always done.

Your ability to succeed in your business will be in direct proportion to the amount of time that you spend on your most important and productive tasks.

7. You Have to Make Tax Estimates

This is a function that an employee never has to worry about. His employer handles it all for him. But since a self-employed person has no employer, she has to handle the withholding function herself.

That’s done in the form of tax estimates, which must be made four times each year – April 15, June 15, September 15, and January 15 of the following year. It’s all for the purpose of making sure that your tax liability is paid by the time you file your income tax return on April 15. If you don’t, the IRS will impose stiff penalties and interest charges on the unpaid balance.

Suggested strategy: Keep an ongoing accounting of your income and expenses. In any month that you show a profit, plan to allocate at least 15% of that profit to federal tax estimates, to cover the FICA tax at a minimum. But you might actually have to think more along the lines of 25% to 30%, if your profit is at least $2,000 or $3,000 per month.

If you live in a state that has a state income tax, you should also make estimates for that, though they will be much lower. The IRS has a tax withholding calculator that might help, but you may also need to get help from an accountant to be more specific.

8. You Have to Develop Your Own Retirement Plan

Once again, this is a benefit provided by employers, especially large ones. But if you’re self-employed, you’ll have to take care of it yourself. If you don’t, you might be facing the prospect of not so golden golden years.

Suggested strategy: As soon as you have room in your budget, set up your own retirement plan. The easiest is an IRA account. If you want to save even more money, look into either a SIMPLE IRA, a SEP IRA or a Solo 401(k) plan. Each can enable you to save a lot more money than you can with a regular IRA, and will also help to reduce your income tax.

9. You Have to Arrange Your Own Health Insurance

Here in the 21st century, this may be the single biggest obstacle to self-employment for most people. The cost of health insurance is criminal. Unless you have a plan that’s partially subsidized by an employer, it can be prohibitive. If you’re self-employed and no employer plan is available, you may be forced to choose between health insurance and paying your mortgage.

This is a factor that requires very special consideration. If you are young and healthy and don’t have any children, you may be able to take a chance on not having coverage when you’re first starting out in your business. But that’s certainly not a course that you want to pursue on a long-term basis. There are options here, but unfortunately none of them are good.

Suggested strategy: If your spouse is an employee and has a policy at work, then problem solved. If not, look into getting a part-time job with health insurance – they are out there.

Otherwise, look into getting the least expensive policy you can on the health insurance exchange, at least until you can afford a better plan. This is one of the most difficult aspects of self-employment, since there are no easy or inexpensive solutions.

Small saving grace: If you do purchase coverage on the health insurance exchange, you can deduct the cost of coverage on your income tax return as a self-employed health insurance deduction. That won’t be a major windfall in most cases, but it will help a bit.

10. Disability is a Real Concern

This is also a concern if you hold a salaried job. But employees are generally covered by Worker’s Compensation and at least short-term disability. There’s also long-term disability available through Social Security, known as Social Security Disability Insurance, or SSDI.

If you’re self-employed, you will be eligible for SSDI, but it pays a relatively low monthly benefit (the average is $1,171 per month), and is notoriously difficult to get.

However, you will not be eligible for Workers Comp, which compensates you for work related injuries, and you will only have access to short-term disability if you purchase a policy for yourself. Short-term disability policies are fairly expensive, and they usually contain a very long list of exclusions.

Suggested strategy: You can look into getting a disability insurance policy, but those are expensive, and you may not be able to afford it early on. Alternatively, or in addition, gradually prep your business to minimize your own involvement. That might mean subcontracting out important responsibilities, and moving your business toward running on automatic pilot. That’s not always possible – it certainly isn’t in my business.

The purpose of laying out ten dark sides of self-employment isn’t to scare you away from starting your own business, but to be prepared for them in advance. If you can do that, then I think you’re ready to take the plunge. And my guess is that you’ll be happy you did.

Are any of these scaring you away from starting your own business?

( Photo by Eje Gustafsson )

10 Responses to Ten Dark Sides of Self-Employment

  1. Thank you for pointing out these very valid concerns! I think people jump into self-employment many times without considering items like insurance, taxes, etc. The joy of self-employment, though, is that ideally you love what you’re doing, so hopefully the longer hours wouldn’t be too much of a hassle.

  2. I think that’s really the foundation of self-employment, doing work that you like. If you do, most everything else will fall into place, even the dark sides. You’ll come to think of them more as occupational hazards than as game-stoppers. Virtually every means of earning a living has occupational hazards, and we adjust where necessary and move forward. Same thing with self-employment. Thanks for stopping by!

  3. just wondered what people do in my situation, ive thought of doing my own business but since i live in hud housing im not allowed, i havent been able to get a job i can keep since i left the resort job over two hip implants and a knee surgery. I think people might be discriminating but i cant prove it, im 4ft5, Im living on no income right now, been applying for ssi and i was in school but i think im having learning disabilities so now i wont be able to get grants either, i might be able to get adult financial once i get the paperwork back to them from financial aid.

    I had asked my apartment manager about even doing stuff like selling avon, even thats not allowed, i thought of doing it online but not sure if thats allowed either, i find it unfair that the one thing that can get me out of this unemployment funk im not allowed to do, am I supposed to move out to get income? i heard you can get grants for starting your own business but not sure if i could cause i messed up the school grants cause of not getting good grades. any suggestions on how i can get my own thing going even thou im living in a place that dont allow own businesses, not sure if its allowed if you dont have traffic coming in and out of your appt , like if i just did online stuff. any suggestions? im out of ideas. I cant take a job walking around all day, got a bad knee plus two hip implants, cant even find a babysitting job in my area or even walking pets, its ridiculous

  4. Hi Pearl – Here’s two suggestions. 1) Can you operate your business out of the house of a friend or family member? Like make online sales and ship them from the friends house? 2) My son and I dabbled in buying and selling garage sale merchandise on Craigslist when he was 18, mostly to give him exposure to self-employment. It worked. But nearly all of our sales were done at neutral locations, like Starbucks or a local park (we didn’t want people coming to our house). Maybe you could so something like that? I’m not saying exactly that, but something similar.

  5. Kevin,

    All valid points and well thought out presentation. It can be all to easy to jump in head first without evaluating the risks.

    Judge

  6. Hi Judge – I hope I’m not scaring anyone off with this list, but these are must-know realities for anyone contemplating starting their own business. And hopefully they’ll focus on the suggested strategies I’ve included for each, and be prepared. That’s the real message.

  7. Great points. I much prefer running side businesses more as a hobby or side hustle because of a lot of these reasons. It’s another way to mitigate as I’m not dependent on my business. Though that also limits it’s size.

  8. Some people run side businesses for years and years, nothing wrong with it. It’s a good income supplement, and an excellent creative outlet, particularly if your regular job is a bit on the stale side. I totally get what you’re saying about avoiding these issues. They’re more pronounced in some businesses than in others. A side business is a way to at least minimize them.

  9. When thinking about self employment, many imagine being your own boss means living a care free live on a beach somewhere, having all sorts of free time! But you’re right, that’s not the case.

    I actually dream about becoming self employed and one day I know I’ll get there, but I’m also aware of the “consequences”. Having a side hustle is already time-consuming and even stressful at times, I expect self employment to be the same.

  10. Hi Adriana – I hadn’t thought about that – “living a care free life on a beach” – but that’s a good observation. The people who promote self-employment for a living create exactly those images. You’ll be living beachfront in the tropics, sipping cocktails with cute little umbrellas, making well into six figures, doing hardly any work, and it will only take you a few months to get there. It’s a brilliant image on an emotional level, but it’s a fantasy – which is actually what they’re selling.

    My own experience in self-employment, and from when I was in accounting and doing work for a lot of self-employed people, is that it’s really a work-a-day existence, much like working a regular job. I had an accounting client many years ago who was a lawyer, and I remember him telling me that “real life lawyering looks nothing like LA Law (the TV show).” That’s about right in most businesses. I mean, you still have to work, even (and especially) when you’re self-employed. It’s just a better way to work, and one with a lot more options, in my opinion. That makes it well worth it, but you can never lose sight of the fact that it’s still work.

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