I remember when I first started considering self employment. I was running from the parking lot to the time clock, about a quarter mile jaunt, hoping to punch the clock within the minute so I wouldn’t get docked 15 minutes, and have a “late” on my record for when the next evaluation came up for a raise. “I would work an extra hour per day, for the same money, if the time I worked could be on my own schedule” I said to myself. After four years of the strictness of the military, this first shift machine shop job, building submarines, was better pay and more freedom, but still, I was looking for more of each.
I started taking some side work in carpentry. Here was my opportunity to live the dream of being a small business owner. If I could just string together a bunch of these projects, keep it steady, and make the same money as I was making at Electric Boat, which was $12.00 per hour, then I could take the leap. I logged my hours on this project: Stripping wallpaper, spackling cracks and holes and changing the moldings to prep for a paint job.
Keep a log – Be sure to track time when self employed. Get used to LOTS of paper work. A daily journal that you can paste receipts into, log hours worked and money collected, and “to-do” listsis important. If you are not into organizing records, maybe self employment isn’t for you. Almost twenty years ago, I did all this with a three ring binder accompanied by a daily planner. Now, in the 21st century, I highly recommend that you become proficient with Microsoft Outlook. Although, still keep an accounting journal; a three ring binder to paste with a handy glue stick, all your recipts, and copies of checks received, day by day. Don’t let more than three days worth pile up.
I spent eight hours at this carpentry project over two days, and made $100.00. Wow! This was doable! Did I even just get myself a raise? Nope! At first I thought so, $12.50 per hour vs. $12.00. But after stringing a few of these projects together, I came to some realizations. My math and accounting was way off, especially when comparing pay and benefits to my “real” job. Let’s crunch some numbers, in an accurate way:
Do the math – If you’re not a numbers person, then maybe being your own boss is not for you. You will be working percentages, and even word problems involving basic algebra…Constantly! If I lay five square of shingles in a day alone, and with a helper who is paid $10.00 per hour, we are able to do eight Sqaure and if my labor rate is $50.00 per Square, how much more money do I make per hour when working with a helper? (feel free to post your answer in the comments, I correct it after class!)
First let’s look at my “real” job: $12.00 per hour with a half-hour unpaid lunch break. 2080 hours per year. Six paid holidays, already “ups” the hourly rate for actual labor:
2080 x 12.00 / [2080 - (6 x 8)] = $12.28
Electric Boat had an excellent apprenticeship program, and paid 100% college tuition. I took six classes per year at a community college. These courses were worth $1200.00
[1200 + (2032 x 12.28)] / 2032 = $12.87
Now let’s factor in insurance benefits, starting with SSDI. Employers pay 7.5% of your taxable wage to SSDI, you pay the other 7.5%. When you are self employed, you are on the hook for the entire 15%. Simplifying the formula, let’s just say:
.075 x 12.00 + 12.87 = $13.77
Workers comp insurance for the construction industry is around 20% of taxable wages. This is what I had to pay for my employees. I was not allowed to carry it for myself. You can purchase disability insurance or accident insurance from a company like AFLAC when you are self employed. Over 18 years I probably racked up $1000.00 in work related injuries while self employed: Five stitches in the face, and a framing nail shot into my hand…I was a pretty safe worker. Even for others, I only had one comp claim: 15 stitches to the hand. 20% is a good number to put toward supplemental insurance: Life insurance and disability or accident insurance if you are self employed, even if your work isn’t as dangerous as construction or fishing. Regardless, this is the value of that benefit from my “real” job:
.20 x 12.00 + 13.77 = $16.17
Now the really big nut is health coverage. Everyone knows that. Wallmart knows it, that’s why they hire most people at under 32 hours per week so they don’t have to pay it. EB paid just about the full cost for a family health plan. This was worth at least $1,000 per month then. Now as we all know, a family plan is around $1,500.00 per month. Especially for the self employed. See: Self employment and health insurance: Why so difficult?
1000.00 x 12 / 2032 + 16.17 = $22.08
So now we see that my “real” job after factoring in paid vacation time and paid sick days that we didn’t even account for in this example, made the actual compensation for working for this employer double my taxable wage! I would need to adjust my hourly wage for side jobs to $25.00 per hour if I wanted pay myself the same as my employer did, and be my own boss.
Overtime secret – Now that we understand the employers cost of labor, it puts a new spin on overtime and bonuses. Certain payroll taxes do not apply to bonuses. Also, when the entire benefit package is considered including the fixed costs of a heath insurance plan, paying time and a half for many employers turns out to be less expensive than taking on a new employee to cover the same hours. Of course management doesn’t present it that way! “We need to cut down on the overtime, it’s costing the company too much money” really means “You need to produce more in the same amount of time so we can make a higher profit”
