The Hidden Costs of Being Self Employed

by Lois Leonard

3 min read

It’s tempting to compare your self-employment earnings to your old salary. In truth, the two figures aren’t really comparable. There are many hidden costs involved with self-employment that you avoid as an employee. To properly compare a business opportunity with an employment opportunity, consider the employment benefits you’re giving up and the extra costs of doing business that you’re taking on.

Non-Billable Hours

As a contractor, you may be happy to discover you can bill an hourly rate that exceeds your average hourly rate as an employee. The problem is, however, not all your hours as a small business owner are billable.  Administrative tasks like building a company website, networking, finding clients, bookkeeping and invoicing can’t be billed.

Even if you’re working on a project basis, getting the work done may be harder than you think. You won’t have mandatory meetings and workplace distractions, but you still need time to stretch, walk around and give your brain a periodic break from work.  To be on the safe side,  Freelance Mag recommends freelancers plan for only six hours out of each day to be billable.

Missed Benefits

You most likely had at least a few benefits and perks at your old job. Potential benefits you’re missing out on are:

  • Paid health insurance, disability and life insurance
  • Company match on your RRSP
  • Reimbursements for mileage
  • Paid continuing education, training and conferences
  • Complimentary coffee, snacks and periodic lunches
  • Regular raises and bonuses

Now that you’re self-employed, you have to foot the bill yourself for all of this. Although some perks—like coffee and lunches—aren’t that expensive, buying your health insurance and making up your RRSP contributions can easily cost thousands of dollars a year.

No Paid Time Off

As a freelancer or small business owner, you often have much more flexibility in taking time off for vacations and personal issues. However, that time off isn’t paid for. Any time that you take for illness, vacations or holidays needs to be worked into your billable rate. A standard benefits package of two weeks off, five sick days and ten paid holidays works out to be five weeks off each year. To compensate for five weeks off, your freelance rates need to be around 10% higher than your hourly rate as an employee—just to account for missing out on paid leave.

Business Expenses

One of the major perks of being self-employed is getting to work from a home office. Still, running a business out of your house isn’t free. Even if your laptop is working fine now, it will eventually need replacing, and you’ll have to foot the bill. Now that you’re at home all day, you may also need to buy a different chair or desk, or invest in a computer monitor to make your at-home setup more ergonomic. You’ll probably also notice a slight uptick in your utility bills now that you’re staying home all day.

Regulatory and Tax Costs

When you work for an employer, they are responsible for matching your Canada Pension Plan contribution, which is currently $2,737.35 for 2017. Working for yourself, you’re responsible for both the employer and employee portion. That means you’ll owe $5,474.70.

Employers also pay Employment Insurance to fund benefits for employees that are laid off or out of work. As a freelancer, you have the option to contribute to this fund, and by doing so, you will be eligible for “Special Benefits”.  As a Self-Employed individual, you must pay the same EI rate as salaried employee’s.  This rate is 1.63% or a maximum amount of $836.19.  Employers are also obligated to hold your job for you if you need to take leave under the Family Medical Leave Act. Your clients, on the other hand, have no obligation to save work for you if you need a break.

Final Thoughts

Working for yourself isn’t just about the money. It’s exhilarating and rewarding to run your own business the way you see fit. Still, to keep up your lifestyle and meet your obligations, work in these costs when you set rates or consider an opportunity. A typical consulting rate for business owners starts at two to three times the average employee hourly rate. To mitigate the extra expenses of being self-employed, make sure to maximize your business deductions each year to lower your burden once tax season comes along.

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