Self-Employment: How's the money?

Salary Info for Business Owners, Freelancers and Contract Workers

Self-Employment: How's the money?

By Kerry Knapp
Monster Contributing Writer

If you’re thinking of going the self-employed route, you’re not alone. Statistics Canada figures about 2.5 million Canadians, or 15% of us, are “self-employed,” a category comprising business owners, freelancers and many contract workers.

That numbers has risen steadily in recent decades as employers have contracted out services once provided by workers in standard jobs. Now it looks likely to jump again as Canada’s economy sputters and stalls.

But who comes out ahead in the long run, regular or self-employed workers? Is self-employment as lucrative as you might think? I conducted a non-scientific survey of self-employed friends and colleagues to determine the pros and cons of self-employment. Here’s a snapshot of my findings.

The Positives: More money!

As a rule, self-employed workers do earn more than regular employers. Statistics Canada reports that average annual earnings in 2004 stood at $40,900 for standard jobs and $55,600 for the self-employed.

My own survey bears that out. While many respondents said they made about the same salary as their regular counterparts, over 35% reported making at least 25% more.

When calculating your hourly or annual income, however, heed this word of caution from freelancer Karin Montin: “It's quite possible to spend up to 30% of your time on administration (tracking time, billing and doing estimates), so every hour is not a paid hour.”

Tax breaks: The impact of higher wages is bolstered further by the substantial tax deductions freelance and contract workers can claim. Deductibles include anything from utility bills to furniture to the use of private vehicles, and they really add up.

Savings: Finally, self-employed workers can also rack up big savings on expenses like transportation, office apparel and lunches out. About 42% of survey respondents reported saving between $2,000 and $4,000 a year.

The Negatives: More expenses and financial insecurity

Business expenses:
Business costs can vary greatly depending on your line of work, office setup and so on. Forty-three percent of my respondents reported annual expenses between $2,000 and $4,000—just enough to offset the savings described above.

“It’s important to take into account that there are expenses to setting yourself up as a freelancer,” advises freelancer Cory McAdam. “Don't scrimp in this area. Being equipped to deal with clients who use and expect the latest technology is one way to demonstrate your professionalism. Call answer, call display, high-speed Internet, a late-model computer, up-to-date software applications, etc., are all must-haves.”

Income instability: While many self-employed workers have relatively stable incomes, 7% of my respondents had earnings that fluctuated by over 25% from year to year.

Understandably, instability is at its peak during the start-up phase. “Unless you leave a full-time job with a guarantee of contracts,” says McAdam, “you should expect to spend at least two years building up a client base. That means planning financially to spend a number of months at a much lower income.”

The cost of replacing benefits: Self-employed workers have no pension plan, no paid vacation, no sick leave, no retirement benefits, no health benefits … you get the idea. The cost of replacing some or all of those benefits on your own can be prohibitive.

Depending on the plan, disability insurance can cost upwards of $100 a month. Drug insurance may cost about $55 a month. Vacations will cost about 8% of your annual earnings.

And how’s this for a double whammy: Under the CPP/QPP, self-employed workers pay both the employer and employee contributions themselves. So while employees will pay only $2,118.60 in CPP contributions in 2009, self-employed workers will have to pay twice as much, or $4,237.20!

The Bottom Line for the Self-Employed

Self-employment is not for everyone. Contractual workers and freelancers have to be careful about how they manage their finances and put money aside for income tax instalments, PST and GST payments, RRSP contributions and so on. It’s not always easy.

But for those who have the discipline, is it worth it?

The respondents to my survey seem to think so. Asked if they were financially better off, 64% of respondents said “yes,” while 29% weren’t sure, and just 7% said “no.”