What to consider before leaving a corporate job for a consulting gig or small business opportunity.
What to Consider When Considering Self Employment
Small Businesses – independent businesses with fewer than 500 employees – make up 99.9 percent of businesses in America. It must be easy to start and run a small business, particularly if seemingly everyone is doing it. The facts are that, while more than 627,000 new businesses open every year, nearly 18% fail in their first year and more than half fail after five years, according to data from the Bureau of Labor Statistics.
So, while it may be “easy” to start a small business, the fact remains that it’s a daunting and difficult challenge to sustain a small business regardless of whether you’re starting an independent or freelance consultancy or a funded small-business startup. So, before you ditch your corporate job and kiss that corporate world goodbye forever, there are a number of factors to consider before you start your own business. As this is a common occurrence, particularly in the technology sector, and for clients of varying ages and experiences, we’ve compiled some of the considerations we often discuss for you to consider before cutting your ties with corporate America for good.
Taking Stock of Your Situation
You’re considering the move to starting, running your own or joining a small business venture. That’s great news! The excitement of a new venture is intoxicating. The idea of being your own boss, setting your own schedule and working on projects you love is undeniably alluring but, like any successful business, this must be done with some forethought and planning.
Before you even consider leaving your corporate job, take some stock, as in company stock. If you’ve been granted stock options, either restricted stock units (RSUs), incentive stock options (ISOs) or non-qualified stock options (NSO), be sure you’re not departing prematurely (prior to vesting) and essentially leaving money on the table. Understand your options for stock grants and consult with a qualified financial planner or accounting professional if you have questions. Once you’re clear on your corporate stock and savings options, it’s time to consider the other pertinent details of setting out on your own.
If you consider that 50-hour-a-week corporate grind challenging, consider everything that goes into running that same business, from the sales and marketing to human resources and office management. In fact, recent and widely cited studies reported in Inc. Magazine suggest that 35% of small-business owners work more than 50 hours per week, while an additional 25% say they work 60 hours a week or more. A full 70% of survey respondents report working at least one weekend a month on a regular basis. So, while you might be making your own hours, working on projects you love, you’re also be managing accounts payable, marketing your product and services, coordinating sales, cultivating relationships, writing statements of work and coordinating every other aspect of your business from website maintenance and social media management to paying for internet services and billing clients. There’s a lot to be done to be truly successful. Entrepreneurs like Patriot Software founder and CEO Mike Kappel says he regularly worked 70-80 hours per week when he started his first business. Out the gate, if you value your free time as much as your independence, or if you have a growing family that needs your time and attention, embarking on the small business or consulting route may not be the most sensible path for you.
More Than Time to Consider
We’ve established the amount of time it might take to start and operate a successful small business, but there’s more to your corporate job than time to consider. Large corporations offer a considerable range of perks and advantages, in addition to stock options, that you’ll either need to forego or pay for on the open market as a small business owner. From a weekly or monthly direct payroll deposit to your retirement savings and disability benefits, there’s a myriad of financial considerations to weigh when becoming a business consultant or entrepreneur.
Income Stability and PTO
Working for a corporation will, as we’ve seen, require quite a bit less time and may afford you more freedom than starting, running or joining a small business. In addition to the regular paychecks, and annual cost-of-living increases, you’ve got paid time off, sick leave and other perks which should be considered. If you are an employee in Washington State, for example, your employer is required to provide you with one hour of paid sick leave for every 40 hours worked. These policies apply to any business with employees, regardless of size, so even as a freelance consultant or contractor for a small business, you won’t be receiving sick leave.
With sick leave or PTO, it’s not uncommon to take off from your corporate job on a Tuesday afternoon for a dental appointment, or leave a bit early on a Friday before a long weekend. It’s almost an accepted practice for many. As a small business owner, while you’ve got the flexibility to hit the dentist, barber or gym or start your weekend any time you like, you won’t be getting paid for that time so you may need to make up for this elsewhere. In short, there’s no PTO if you’re self-employed. And vacation? That’s going to be on your dime and your time, so consider that wisely and factor it into your business plan and rates.
Health, Life and Disability Coverage
Working tirelessly in your small business may take its toll on your physical and mental health. If you’ve left the corporate world you’ll soon find that the cost of doing business extends to well more than your fees for goods and services. One of the most compelling reasons for many to work and stay in corporate jobs is health insurance coverage. The Society of Human Resource Management reports that employer’s spent, on average, $13,020 per employer on health coverage in 2022 with an expected increase of 6.5% per employee in 2023. The employee contributions from paychecks for the same years are $2,504 and $2,502 respectively. A Mercer HR Consultancy study from 2022 found that 11% of large employers will offer free coverage in at least one medical plan in 2023.
So, in addition to extra working hours, you’ll need to consider the continually rising costs of health insurance coverage for yourself and your family. Fortunately, as a self-employed person, freelancer or business consultant you now have options for health coverage in the open marketplace thanks to the Affordable Care Act and the availability of nationwide health plans. A recent Commonwealth Fund study found that more than half of all ACA marketplace enrollees are small-business owners, self-employed individuals, or small-business employees. Nearly 16 million Americans have enrolled in health plans since the 2023 open enrollment period. Other options also exist, of course, like enrolling in your spouse or partner’s health insurance plan; you’ll still have to foot the bill, but it might give you the fiscal legroom you need to make the move.
In addition to health insurance, you’ll also want to consider the short or long term disability coverage offered by your employer. Do you have a sizable enough emergency fund to support you and your family in the event of sustained illness or injury? Prices for disability insurance vary, based on policy terms, an individual’s age, health or occupation. In the case of employee provided coverage, the insurance is wholly or partially subsidized by your employer, but you can’t take it with you. Cost for disability coverage will vary for the reasons mentioned. but disability insurance premiums will generally range from 1% to 3% of your estimated annual income. Many corporate employers also offer life insurance policies to employees. The U.S. Bureau of Labor Statistics reported that life insurance was available to 57 percent of private industry workers in March 2022. And, much like disability coverage, you likely wont’ be able to take this with you, and you’ll certainly be paying the premium yourself, so add this to your list of overhead expenses if you’re self employed or a freelance consultant.
Matching employee retirement contributions are another oft-cited reason for sticking with a corporate employer. “Defined contribution (DC) retirement plans are the centerpiece of the private sector retirement system in the United States. More than 100 million Americans are covered by DC plan accounts, with assets now in excess of $9.6 trillion,” according to Vanguard Group’s 20th Edition of How America Saves report. In 2020, the average 401(k) plan match was 4.3% of employee contributions, according to the Plan Sponsor Council of America.
As a contractor, consultant or self-employed business person, you have some options for your retirement savings. Provided you’ve vested, your corporate 401(k) will stay where it is, in your employer sponsored plan until you elect a change. At that point you can consider an individual retirement account (IRA). You also have the option of an individual 401k (i401k), Simplified Employee Pension plan (SEP). A SEP-IRA account is a traditional IRA and follows the similar investment, distribution, and rollover rules as traditional IRAs, according to the IRS, except you can contribute much more than to a traditional IRA If you’re a high-income earner, you have the additional options of a cash balance plan, allowing sizable before-tax contributions. In all of these cases, there are limits to your contribution so consulting a tax advisor or financial planner is advised, which, of course, takes time. Maybe on the weekend you aren’t working?
Tax Implications of Self Employment
It’s advised to consult a CPA or financial planner when considering the transition to self-employment or a shift to small business. The implications of such transitions can have lasting effects on your savings, your benefits and, perhaps most importantly, your tax obligations. In addition to self-employed income taxes, self-employed persons can expect to pay 12.4% annually into the Social Security Administration’s Old-Age, Survivors, and Disability Insurance (OASDI) program. The payroll tax rates are set by law, and for OASI and DI, apply to earnings up to a certain amount.
A financial planner, fiduciary or accountant who specializes in small businesses and self-employed consultants can offer you insights well beyond those offered in this overview. It’s important to have a strategy for your business and a plan. This strategy should incorporate your accounting and tax approach, so qualified professionals are highly recommended. Corporations maintain strategic business and operational plans which incorporate tax considerations, so why wouldn’t you? Self-employed individuals are expected to pay self-employment (SE) tax as well as income tax. The form of your business determines which income tax return form you have to file, with the most common formations being sole proprietorships, partnerships, corporations, and S corporations. A qualified tax accountant, CPA or financial advisor can provide you insights into your best corporate formation based on industry, equity and income considerations. A qualified tax professional will also be ready to help with your deductions, as these change dramatically for the self-employed and small business owners.
Considering that you change your income from a single source (your corporate employer) to a pool of clients, your accounting and tax practices must necessarily change. You may be using your dining room as an office to start, and sharing your internet with the family, so you’ll need to itemize deductions and align your expenses as a business. It’s a lot, running a business and keeping your finances in order, not to mention additional requirements for business insurance and county business licenses.
More than Benefits and Taxes
There’s a lot more to consider than employment taxes, retirement savings and PTO when deciding to make a move to consulting or small business ventures. If you’ve been working in your corporate job for an extended period of time, you’ll want to truly evaluate and understand the marketplace you’re hoping to break into. Is the market already saturated? Is there a market for the services you offer? If you’re highly specialized, are you missing some necessary or pertinent skills to make yourself marketable. Are there conflicts of interest and non-competes in place which would put you in a legal jam if you were to approach former colleagues or associates in your industry?
If you’re moving into a startup environment, this can be exciting, but you might be expected to give more than your forty or so hours at the office. You might have to be flexible in your expectations and, perhaps, even give up some of the perks and benefits you’ve grown accustomed to in the corporate environment. If you’re over the age of 30, you might want to be aware, or at least consider, the prevalence of ageism in tech startups. A startling 89% of respondents to the annual State of Startups survey “agree that older people face age discrimination in the tech industry generally.”
Before you depart any corporate job, you want to ensure your network is intact to support you. If you can, discuss your departure with your trusted colleagues and see what they can do to ensure support for you in your new venture. Can they make introductions or offer referrals or letters of recommendation? Plant seeds at conferences and start making contacts early. Personal referrals and professional relationships go a long way and are sometimes key in establishing and growing a business, so don’t ignore these considerations.
Taking the Leap
You’ve evaluated the benefit situation, determined your rates and accepted a radical shift in your work-life balance. You’ve decided to forego corporate cupcake Fridays and the PTO for a life as an independent consultant, startup or small business owner. Good for you. It’s an exciting time. You’re now one of the brave millions of Americans making the shift to freelance consulting and small business ownership. As you become wildly successful and need additional support for your finances and investments, consider contacting a wealth manager with expertise in small business operations, independent consulting and high-net-worth investing to find the maximum benefits for your income, assets and investments.