Some questions about Self Employment

Quite a few years back I wrote a piece on Successful Consulting. It's a longish thing, and if you are considering entering the world of self employment, I recommend reading it. However, it didn't cover everything, and particularly it skipped over a few questions that were added as comments recently:

• * Who do you get your healthcare from, and approximately what percentage of your operating costs is it?
  
  
• * I think you mentioned you used quickbooks or something like that for accounting. How much time per month do you spend doing that accounting stuff, and is it worth hiring someone else to do it for you?
  
  
• * How "bad" or complicated are taxes? Should you "outsource" this as well?
  
  

Good questions.

Before I get to them, though, let's make it clear that I am talking about real self employment here, not "contracting". Many people in the technical fields are self employed, but barely: they "contract" through larger agencies who find them work, handle the billing, often offer benefits like health insurance.. much of the uncertainty and difficulty of self employment is taken over by the contracting agency. However, you also lose many of the benefits of true self employment: you'll probably be working structured hours and you lose some of the ability to control your own destiny and some of your security (see below). There is nothing "wrong" with that: everything in life is a trade off, and contracting can be a happy middle ground between a traditional "job" and being truly on your own. But that's NOT what I am talking about here.

Insurance

So let's first deal with the health insurance issue. I'd have to say that this is usually the biggest fear of the prospective entrepreneur. It's also the biggest fear of the spouses of the would-be free-lancers. I have covered some of that here before: Health Insurance for the Self Employed talks about the reality of health insurance costs vs. the perception, but that didn't bother to explain how you get insurance when you are on your own. The answer to that is simple: you join a group.

There are dozens of organizations for the self employed. Right now I get my health insurance through NASE (National Association for the Self Employed) but in the past I have also used SBSB (Small Business Service Bureau) and others. These are easy to find through Google, inexpensive to join, and they offer everything from high priced HMO's to low cost, high deductible plans. Most offer many other benefits also (401K's for example); check a few out and decide what's best for you.

What percentage of operating costs will it be? That's impossible to say. For me, insurance is a relatively small cost but a fairly hefty percentage of total costs. Mostly that's because I have very few other operating costs. I work out of my home, so I have no office rent to pay. I have an internet connection to pay for, and web site hosting fees, but that's small potatoes. Telephone? You might want a separate line for your business, but nowadays I just use my cell phone.

Your operating costs might be very different. You may need an office because of Employees. At one time I had an 800 number and separate lines for modem work - my phone bills ran over $12,000 per year! (so glad THAT's all gone!). Your insurance costs might be a smaller part of your overhead.

Do remember that when you operate as a business, at least some of those costs are tax deductible. Right now self employed, unincorporated folks can deduct at least half of their health insurance premiums and organizations like Nase and SBS are constantly lobbying to increase that. If you decide to incorporate, health insurance for employees (that's you) can be just another business expense.

Accounting

Yes, I use QuickBooks for my accounting. That annoys me greatly because it's Windows, but I just haven't been happy with anything else. But never mind that: what software you use doesn't answer the basic question of whether you should be doing your own bookkeeping and billing.

I think you should.

First of all, accounting isn't hard. Most technical people easily grasp the concepts of debits and credits and organizing income and expenses into accounts. Programs like QuickBooks et al. make it even easier. There's no "this is too hard" excuse here.

However, it does take time. I probably spend an hour a day on accounting related tasks. Obviously that takes time away from doing billable work. Worse, you'll probably be doing it AFTER you do everything else, which may mean that you are tired and not in the mood. You can make a good argument for farming it out elsewhere if you can afford it.

But.. even if you do that, be darn sure you understand all the details. You do NOT want to farm out your books to someone and have to rely on them to tell you how your business is doing. You need to know how to read your balance sheet, you need to be fully on top of your Profit & Loss statements and be completely aware of your A/R aging at all times. I'm serious: you cannot afford not to know all your financial details cold. That being that case, you'll be investing at least a half hour every day in those details.. and they'll be second hand, so if you have questions you'll need to chase down whoever you hired.. so why not just do it yourself to start with?

Whatever you do, make sure that the bills go out quickly.

Taxes

My advice here is very similar to what I said about accounting. This is another area that you cannot afford not to understand. It's NOT particularly difficult for most of us, especially with modern tax preparation software. Yes, filing corporate returns is much more complicated than it is for sole proprietors: when I had employees and was incorporated, I did farm out the tax preparation to someone else. However: I spent many hours preparing data for them and checking their work after the fact. It's not that I don't trust, but this is MY livelihood at stake: I needed to be certain that I understood the paperwork.

Security

I'm going to close with something that wasn't mentioned in the original questions but is often present when anyone is thinking of giving up a "secure" job for the "uncertainty" of self employment. It's just this: your real security is nothing more and nothing less than your own skills, knowledge and ability.

That's it. You know that, but too many of us forget it all too easily. When someone offers you a "secure" job, what makes it secure? Your ability to perform is part of it, but for the rest, who knows? Your job can depend upon the needs of someone who doesn't know you at all but needs to trim a budget. Contrast that with self employment: your security comes entirely from your own efforts.

Self employment is more "secure" than a job. Period, end of discussion.

There are a lot of other articles here on the subject of Self Employment. I've often thought I should package all that up into a little e-book to make it easier for folks, but I just haven't found the ambition. Maybe somebody would like to help out with the boring mechanical parts of production and we could sell it here for a small fee and share in the profits? There's a business opportunity for someone..

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