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. Many people dream of venturing into the world of self-employment. The prospect itself can be very alluring to many people.Those interested in embarking in self-employment should proceed with caution as there are some major financial pitfalls citizens can easily fall prey to. Self-employment can be very costly if you do not proceed with care.
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 citizens have is how they will pay for health insurance. According to eHealthinsurance.com, the average premium for a non-group family policy was about $4,968 per year in 2011, while an individual policy for one subscriber averaged around $2,196 per year. This cost is just for health insurance alone. When you factor in costs of deductibles, dental insurance, vision and more, you can have one tremendous cost on your hands. In order to save money on insurance, shop around to get the best deal available. Some medical insurance carriers offer comprehensive plans that include dental and vision riders. Just as with any other large purchase, you will want to comparison shop to identify which plan is right for you.
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. Life insurance 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. This will need to be considered before making the big plunge into self-employment. If you decide to take a vacation, you will need to over-compensate 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 back-up plan in case of emergency.
Retirement Planning Expenses
Other benefits that are offered by many employers such as 401(k), pension and retirement savings plans could be more expensive for the individual consumer. Many employers offer 401(k) vesting, which matches a certain employee contributing funds up to a certain point. When you are self-employed, you do not have this added benefit.
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 paycheck. When you are self-employed, this is not often the case. Plan to pay taxes throughout the year using IRS vouchers, or in one lump sum annually.
The Bottom Line
Self-employment can be a highly rewarding experience for many people. Preparing yourself financially before making the big plunge into self-employment will ensure a higher level of success as you embark upon your journey into the business world. Many people view self-employment through rose-coloured glasses rather than weighing the pros and the cons of the venture. By understanding the benefits and the drawbacks, you are helping to fireproof your future against financial pitfalls associated with self-employment.
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This story was originally published by Investopedia.