Separating yourself from the ranks of salaried employees to become self-employed and a master of your own universe is a gamble that can pay off in a variety of different ways. But working for yourself may not suit everyone.
The entrepreneurial spirit is alive and well in Australia. According to the National Skills Commission, more than half of Australians think there are good opportunities to start a business and almost half believe they possess the skills to do so.
It turns out, plenty of us are trying our hand at self-employment. About 10.6% of Australia’s workforce – 1.388 million people – worked as owner-managers of enterprises with no employees as of February 2021, according to the Australian Industry Group. Many more self-employed people own thriving businesses with a number of staff. The question is, can self-employment be the right decision for you?
Should I become self-employed?
Starting your own business is a gamble at any time, particularly if you are thinking about leaving a job where you are an employee to work for yourself. It involves taking on risks that need to be weighed up against the potential rewards. To wager your own career without considering such risks would be reckless, so it is wise to conduct some sort of cost–benefit analysis before you take the plunge into self-employment. There can be a fine line between making an informed decision and being bogged down by analysis paralysis, so let’s look at some of the basic advantages and disadvantages of being self-employed.
6 advantages of being self-employed
There can be a lot to love about self-employment, with potential pros like choosing when and where you want to work; having greater control over your income, what you do and who you work with; and possible tax benefits to think about.
1. Choose when you want to work
The idea of running your own show and working when you choose instead of facing the 9-5 grind can hold plenty of appeal. And yes, if you feel like downing tools early on a Friday afternoon, or if you need time off to attend the kids’ school concert or get the car serviced, self-employment can offer plenty of flexibility – to a point. You still need to meet deadlines set by clients or customers. But if you can achieve this, your time is free to use as you choose.
2. Work where you like
Many small businesses can be operated through the use of just a mobile phone, computer and internet connection. Self-employed people running these types of businesses can work anywhere they like. You can work from your bedroom in your pajamas or beside the beach – now that’s freedom! Even if your business requires an office, practice or shop, at least you can choose its location.
3. Potential tax savings
When you’re self-employed, you may have a greater range of tax deductions available. Many of the costs that directly relate to earning your taxable income may be considered business expenses, which can be claimed on tax. Such expenses may range from advertising costs and business insurance through to the work-related portion of the cost of a new car or IT equipment. Bear in mind though that you need to pay for these costs in order to claim a deduction, and it may be a good idea to speak to a registered tax adviser to know which expenses you may be able to claim on tax and records you’ll need to keep.
4. More control over your income
Self-employment means not having to sit with the boss during pay reviews. When you work for yourself, you’re responsible for your own income. This could provide an incentive to work harder, because there can be more of a correlation between your effort and your income. You could even make a lot more money by becoming self-employed.
5. Choose the people you work with
Don’t like your boss? Not comfortable around your co-workers? When you’re self-employed you don’t have to face these issues, and in a sense you have the power to decide who you associate with. That said, you may find some clients or customers can be demanding and unreasonable. Of course, you don’t have to take them on – provided you’re in a financial position to pick and choose who you want to work with.
6. Do what you love
Instead of being given dreaded tasks by your boss that make you feel undervalued, you can do what you feel you do best and are most passionate about. You are free to carry out more fulfilling tasks that you believe best utilise your skills. Bear in mind though that every job can involve mundane tasks from time to time, and this applies no matter whether you’re an employee or your own boss. Nonetheless, a survey by Vistaprint found self-employed people tend to be more satisfied with their careers than employees.
The disadvantages of being self-employed
For many self-employed people, the pluses outweigh the drawbacks, but it’s still important to know the potential negatives of working for yourself.
1. Time not working is time not earning
When you’re self-employed, time really is money, and you could find your enjoyment of time off is tainted by thoughts of how much you could be earning. The need to work long hours can especially apply when you’re first starting out and building a customer and client base. As the National Skills Commission notes, “Starting your own business may require start-up funding, an idea, long hours, resourcefulness, and hard work.” The bottom line is that you may end up working more hours than you did as an employee.
2. Possibility of irregular pay
Self-employment often means earning an irregular income. There may be periods where you are very busy with clients, and other times where you experience a lull in work. The irregularity of your pay can make settling regular bills and loan repayments difficult. So it can call for discipline to manage your finances and stick to a budget. Irregular pay can also make it more difficult to obtain a home loan – although there is a good range of competitive low doc loans available in the market. You can compare low doc loans with Canstar, and find out more about non-conforming home loans.
3. Do your own bookkeeping
Accurate bookkeeping is required for all small businesses, and it can take up a lot of your time. It can also be stressful if you don’t know how to do it properly, but there are plenty of low-cost software packages suitable to small businesses that can make the task of keeping good records easier.
4. No sick pay, no annual leave
Possibly one of the biggest drawbacks of self-employment is that you’ll miss out on the paid benefits that employees enjoy – like sick leave and paid annual leave. When you are your own boss, if you’re not working, you’re not earning, and that can make it challenging to allow yourself time to recuperate after illness, and limit your ability to take long holidays.
5. Isolation
It can be lonely for self-employed people working entirely on their own. You may miss teamwork and not being able to share victories or frustrations with colleagues. Without the get-togethers, and social events that a company has to offer, you might become more of a hermit – totally engrossed in your work.
6. No superannuation payments
As an employee, your employer is required to contribute 10% of your base wage or salary to super each year – a figure set to rise to 12% by 2025.
As a self-employed worker, it’s up to you to grow your own retirement nest egg. This means making super contributions from your own pocket, which requires discipline. Analysis by the Association of Superannuation Funds of Australia (ASFA) has found that while some self-employed people are on track to securing comfortable levels of retirement income, the majority will struggle to achieve this. For men and women across all ages, self-employed people generally have lower balances than employees, and worryingly, around one in five of the self-employed have no superannuation at all.
The upshot is that self-employment means having the discipline to set aside money for your own retirement. It can be tempting to withhold from your superannuation contributions when your business is going through slow times. On the plus side, you may be able to claim super contributions worth up to $27,500 annually as a tax deduction if you are self-employed.
7. You need to plan for tax
Setting aside money to pay income tax is a critical part of being self-employed. As an employee, your boss will normally deduct income tax from each pay packet. When you work for yourself, it’s up to you to have the necessary savings set aside to pay your annual income tax bill. As Moneysmart notes, this makes it essential to separate ‘your’ money from money that belongs to the business. In addition, if your business has annual turnover above $75,000, you’ll also need to register for goods and services tax (GST), and collect 10% GST from your clients and customers and remit it to the Australian Tax Office or ATO. You can find out more about sole trader tax.
8. Success isn’t assured
Being self-employed isn’t always going to be smooth sailing. It’s about taking the good with the bad and making the most of having the freedom to do your own thing in a job you love. Not everyone who turns their hand at self-employment will succeed long term, but even if it all fails, would you regret not giving it a go? After all, even with a regular salaried role as an employee, there is always some uncertainty too.
Cover image source: YAKOBCHUK VIACHESLAV/Shutterstock.com
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This content was reviewed by Deputy Editor Sean Callery and Sub Editor Jacqueline Belesky as part of our fact-checking process.
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