Self-employment is a dream for many citizens. You can have the freedom to set your own schedule, do what you love and make your own rules. The prospect of venturing into the world of self-employment can be very alluring to many people. Those interested in doing so should proceed with caution as there are some major financial pitfalls. Here is a look at some of the hidden costs of self-employment and what you can do to keep your finances in check.
Health and dental insurance
One of the biggest concerns that many self-employed have is how they will pay for extended health care insurance. When you factor in costs of deductibles, dental insurance, vision care and more, you can have considerable costs on your hands.
Equally as daunting as paying for health and dental insurance is purchasing a life insurance policy. Many companies offer low-cost life insurance policies to their employees. However, when you are self-employed the cost can be significantly higher. The costs depend on your age and health status, but if you are buying a policy as an individual as opposed to as part of an employer group, the rates are likely to be higher.
Sick or vacation time
When you are sick or need to take a vacation day in the corporate world, you are allotted a certain number of days for which you will be automatically paid. When you are self-employed, you do not get paid if you don't work. If you decide to take a vacation, you will need to overcompensate in the weeks prior to your trip in the amount of work you do. Additionally, if you become very ill you will need to have a backup plan in case of emergency.
Retirement planning expenses
Other benefits that are offered by many employers such as pension and retirement savings plans could be more expensive for the individual consumer.
A major financial burden that many self-employed citizens overlook at first is taxes. When you work for an employer, the employer takes taxes out of each paycheque. When you are self-employed, you are responsible for diligently keeping records and paying all taxes at the end of the year. This burden is somewhat cushioned by the ability to claim certain costs of doing business.
The bottom line
Self-employment can be a highly rewarding experience, although many people view its benefits through rose-colored glasses, rather than weighing the pros and the cons of the whole venture. By understanding the benefits and the drawbacks, you are helping to guard your future against some of its financial pitfalls.