Making $100k as an Employee versus Being Self-Employed

When I was old enough to have some experience and felt like I knew what I was doing but not quite as old as I am now I had an idealized notion of self-employment. Mostly because of the flexibility I imagined it would provide, partly because of ego. It took some dabbling and dealing with horrible clients before coming to the realization that self employment and employment are really two sides of the same coin. The goal if you want true flexibility and freedom should be to put yourself in a situation where you are no longer dependent on selling your time for money as your source of income.<p>Now whenever someone asks if I want to do contract work for them I remind myself that I don&#x27;t want to be in the business of selling my time for money.

It&#x27;s missing paid holidays which are probably 8-10 per year so almost $4k more employee benefit.<p>Two weeks of vacation is kind of minimal. I&#x27;d figure at least three.<p>Health insurance varies a lot. For me it&#x27;s a whole family and my last salaried job paid our deductible if we used it so it was easily a $20k benefit for us over being self-employed.<p>My rule of thumb has been that I need about 70% more as self-employed to be at the equivalent pay.<p>On the other hand, I&#x27;ve made a ton of extra over salaried employees during 60+ hour week crunch times.

Really appreciate this breakdown plus your call-to-action to investigate these numbers yourself. Really fun read.<p>I&#x27;m going to take this moment to push back against the common figures I hear around how much one &quot;should make&quot; as a freelancer. In general, they seem inflated.<p>You claim that, for a $100k employee, you should be able to generate $75&#x2F;hr in value. You&#x27;ve also generously calculated that the number needs to be close to $80&#x2F;hr to break even with a $100k salary.<p>Even crazier, other discussions on HN place the freelance hourly number much higher. Well above $100, sometimes even more.<p>As someone who did freelance for about a year (after exiting a $100k job), I&#x27;d say those were not the rates I saw.<p>Towards the end of my time, some of my gigs broke $100, but they were usually just a day or two of work. If I were to average my total rate, the number was probably closer to $60.<p>Perhaps I was bad at finding the right jobs, but the low rates and difficulty in finding the right jobs are the reasons I returned to salaried life.<p>Great writeup!

The author hasn&#x27;t accounted for the unpaid time freelancers have to spend looking for work. Clients don&#x27;t just fall from the sky. You should be budgeting 15% of your time <i>at least</i> to just looking for the next job, meeting with potential clients, doing marketing things like social media, blogging, going to events etc. At the start, before you have a bank of regular clients, that can account for anything up to 100% of your time (if you don&#x27;t have any work in).<p>The reality is that you need to be making $140k at $70&#x2F;hour to earn $100k, but you <i>also</i> have to invest about another day&#x27;s worth of unpaid hours every week to maintain that income.

To the author, you should also consider the &quot;Section 199A&quot; part of the tax code in your calculations which allow you to deduct up to 20% of gross income from your taxes, thus would drop your bracket from 24% thus would make your single example be capped at 22% or your MFJ at 15%. Huge tax savings.<p><a href="https:&#x2F;&#x2F;www.irs.gov&#x2F;newsroom&#x2F;qualified-business-income-deduction" rel="nofollow">https:&#x2F;&#x2F;www.irs.gov&#x2F;newsroom&#x2F;qualified-business-income-deduc...</a><p>I would hire a CPA to advise you. I did this year and it saved me almost $30,000 in taxes had we not used the 199a.

I&#x27;d like to offer a german perspective on this. I&#x27;ve been a freelancer (webdev) for about 1.5 years now (about 3 years of experience) and this is how that calculation would look here:<p>Employed at 100k Euro, no kids, not married:<p>- 27.406 Euro income tax<p>- 1.243 Euro solidarity tax<p>- 7.923 Euro pension fund<p>- 1.022 Euro unemployment insurance<p>- 1.030 Euro statutory nursing care insurance<p>- 4.440 Euro health insurance<p>= 56.932 Euros left over.<p>Health care can be made a bit cheaper with a private insurance company but this is the ballpark most people would be in. All the listed taxes and insurances are mandatory.<p>Freelance with 100k Euro, no kids, not married:<p>- 22.290 Euro income tax<p>- 1.225 Euro solidarity tax<p>- 10.594 Euro health insurance<p>- 15.840 Euro pension fund<p>= 51.310 Euro<p>However: Paying into the pension fund is not mandatory as a freelancer and you can also choose how much to pay and health insurance can be made cheaper here as well. Health insurance and pension fund will be deducted from your taxable income. Also as others have mentioned you can suddenly deduct a lot of things (phone bills, parts of your electricity bill, buying a new laptop etc.).<p>The main kicker here however is this: I work as a freelance webdev and so far I have managed to make about 80 Euros&#x2F;hour which given my current workload will result in about 130k Euros of income this year. I have yet to get an offer from any company willing to pay more than 100k.

I don&#x27;t think it materially affects the calculations presented, but I get the feeling the &quot;value of vacation time&quot; logic is flawed and works approximately in the example only due to small relative vacation time.<p>From the article: I’m figuring if you make $100k, and work only 50 weeks, that’s $50&#x2F;hr. So 2 weeks (80 hrs) at $50&#x2F;hr is $4k<p>But change the numbers: I’m figuring if you make $100k, and work only 2 weeks, that’s $1,250&#x2F;hr. So 50 weeks (2,000 hrs) at $1,250&#x2F;hr is $2,500,000<p>I admit, you could turn these numbers around and use them to determine how much you need to charge per hour. But that&#x27;s just it: I believe you need to look at (total comp) &#x2F; (total hours worked) with vacation reducing your denominator in both the salaried and self-employed scenarios.

It&#x27;s the reason I move(d) countries to optimise for my situation; some countries are far more friendly than others for freelancers vs employees. In taxes but also social security, insurance, paperwork for deductibles etc. All these are important when self-employed. Many countries are pretty naft for self-employed (usually because the entire &#x27;company&#x27;, large or small, concept is geared towards enterprises, so as small company you get the worst of everything); if you want to remain living there, maybe consider just becoming an employee. I never understood why so many people are so inflexible, but if you are then I think it&#x27;s not in your best interest to become self-employed in some countries (for instance, Spain).

I appreciate the honest and analytical comparison here. The self-employed vs. employed discussions are usually biased in favor of being self-employed for the usual reasons (“freedom”, “be your own boss”, etc.) However I’ve come to find that being employed full-time can be seriously underrated since people might have not experienced a good full-time position which provides many of those perks with the added stability of a regular paycheck and corporate infrastructure. Additionally, being self-employed can be extremely stressful with additional responsibilities as outlined by this very blog! E.g. Needing to know more about taxes, finances, finding clients, etc.

Another potential benefit of self-employment is that you can&#x27;t sell your job. Assuming you build systems into place and remove yourself from your business, your business could be worth many more times revenue to exit. You can&#x27;t sell your job unless you are playing the startup lottery and hit it big.

I&#x27;ve been self-employed running a DevOps business for four years, and without a doubt I earn more money with my LLC then when I was employed in San Francisco at startups.<p>However I can attribute this to the fact I left California and moved to Tennessee. Tennessee does not have state income tax (savings). I signed up for the cheapest catastrophic health insurance I could find (TN health insurance is significantly less than CA). I pay out of pocket up until like $4.5k then the insurance covers 100% after that.<p>The key is in TAXES! Write offs &#x2F; deductions are huge. New office desk and chair, new MacBook Pro, AWS bill, new monitors, cell phone, servers in my office closet... All write offs.<p>Lastly, learn about and use simplified employee pension IRA (SEP). I can contribute $58,000 a year tax deferred. That is crazy higher than the standard miniscule $6,000 with standard IRA&#x27;s.<p>Moral of the story, I find the opposite of this article. Being self-employed you take home way more money than being employed. It just takes a six-figure baseline and then utilizing the tax write-offs and deductions to your favor.

For the last 10 years I&#x27;ve alternated between being an employee and doing contract work. I usually like the contract work more, but I&#x27;ve found it much easier to find highly paid work as an employee. I have no doubt I can find $150k+ as an employee, but I&#x27;ve only once found contract work that pays over $65&#x2F;hr.<p>I&#x27;d love to hear more about how people find contact work as a programmer.

I have been working in the freelancing mode, after my Startup product plateaued since September 2018. And it has been a good experience so far. I bill 50$ per hour. And working from India the rates work out pretty decent. Although, I do realize, especially when read posts like these that perhaps I am under-billing a bit.<p>Prior to that, I had experience as a corporate employee for 12+ years. And then my own startup for 10+ years. Now for past 2 and half years, work in the freelance mode.<p>Based on my experience, can say that both startup and freelancing are more freedom friendly choices. Although in your own startup&#x2F;product, its difficult to pay yourself well, unless you are one of the few very successful ones. The reason I persisted for 10+ years is that, I was able to pay myself some salary, sufficient to live a decent life without eating into my savings (but perhaps 30% of my market value).<p>Once I started doing freelancing, then suddenly began to like it. It was refreshing experience. Kind of like swimming in cash flow, and having more than 50% surplus, which you can safely park in investments.<p>Also coming to full time freelancing after own product, was significantly less work. So less that, now I worry, if I have to work more (like in my startup days) will I be able to.<p>Based on the rumors I hear, recently, the salaries in India for senior engineers is out through the roof. And I am told one can make 200k USD at Internet company jobs in Bangalore, which are in the FAANG category. But I am not sure, its worth trading my freedom, at this point. Not sure, If I should be thinking of opportunity missed cost.

One thing that is missing is a self-employed setting up a business structure (limited company, for example) is also building an asset over time that they could sell. The value of that asset, for successful small business owners, can be very lucrative.

For the tax calculation, while it is not favourable in US; it works really well in the contractor&#x27;s favour in some countries. Having friends who work as contractors (either for remote companies or freelance like), I know this works well in UK and India.<p>The way it works in their favour is by reducing the taxable income by claiming &quot;expenses&quot;(what they do sometimes enters into an ethically grey territory). Apart from legitimate work related expenses, some people go creative and claim home rent by showing it as an extension of office space, show salary paid to others(like your partner if they don&#x27;t have a salary or have way less income, so lower tax bracket).<p>As far as I have heard, depending on the country, the tax paid can be as low as 1&#x2F;4th of what an employee will pay on a USD 100k salary.

There&#x27;s more hidden costs for being an employee, though.<p>- You usually have to commute to an office every day. This requires transport and time. Freelancers usually work from home at least part of the time. Transport and time both cost money.<p>- You usually have social obligations around lunch with your colleagues, and can&#x27;t just graze from the fridge. For my last permanent job, I worked out this cost me around $50 a week. Not including beers with colleagues after work (which is a perk rather than a cost).<p>- Putting up with work shit causes mental stress. One of the ways of dealing with this stress is buying stuff. I always spend more on random stuff when employed rather than freelancing. Also, the income insecurity when freelancing triggers my &quot;must be frugal&quot; instincts and I just spend less money.

The 401K section is incorrect.<p>Employers can opt to offer after tax 401K contributions, which can be freely converted to Roth 401k funds.<p>With this you can contribute $57,000 per year between tax deferred 401k and Roth 401k.<p>This is a very new provision. Previously the regulations were unclear.

I&#x27;ve missed a couple of things here. Correct me if I&#x27;m wrong. Am self-employed for years now. Initially was a sole trader and later registered a company where I pay myself wages. A couple of points:<p>* If you&#x27;re gonna be self-employed for longer than a couple of years it is advisable to have an accountant. It will attract annual costs, but you&#x27;ll be more confident, have a better sleep, will be in a better position if you ever need to hire someone;<p>* You need to read and understand more about the business side of things; it attracts time. What to do with pensions, what taxes should you pay, what costs will reduce taxes, will this agreement hold in court if you get screwed, which business software will help you in the long run, etc.<p>* The problem space (engineering) will not be as complicated as it can be in a big corp. You will not progress in some aspects unless time and money are invested into specific courses. If you&#x27;re an employee, then courses, conferences, R&amp;D work might be included in your &quot;remuneration&quot;.<p>* Increasing risk of becoming unemployable in the future, having trouble going through the hiring process.<p>* There is an increasing chance that you&#x27;ll end up hiring people and become an employer $$ :)<p>* Depending on your job, you might actually reduce the number of connections (other employees) that you might create a larger business with. On the other hand, being self-employed increases the number of connections related to the business side of things (accountants, advisers, paying customers).<p>If you never tried being self-employed, I encourage you to do so. It is pretty hard to logically reason if you can do it and become happier.

I don&#x27;t know a lot about US taxes, but do you only pay federal taxes? I thought there were also state taxes.<p>And why are self-employed hit with a special tax?

You&#x27;re basically paying the SE tax in order to be independent, but the Solo 401k higher contributions and all the write-offs are major offsets to that.<p>Check into short-term health plans if you don&#x27;t use much healthcare - esp if you don&#x27;t need to cover a family. $170&#x2F;mo. (plus the deduction - effective cost $100) vs. $600&#x2F;mo for Obamacare.

“ Self Employed 401(k) limit: $57k<p>As a financial independence enthusiast, this is maybe the most under-rated perk to me. It means, as a married couple, my wife and I can invest (and reduce our taxable income) by $114k per year as opposed to $50k”<p>Some employers offer the “Roth mega backdoor” which allows employees to invest up to that limit.

minor but, but i&#x27;d need an extra house for my collection of computers, servers, &amp; office equipment if I were spending $5k a year on<p>&gt; Laptop, Desk, etc.: $5k

I&#x27;m curious what people find their ratio of billable&#x2F;total hours to be (which the article mentions only briefly as utilization) and how to improve it. For me over the years it&#x27;s around .8 billable per hour worked, it seems hard to do better than this.

Overtime is a big wildcard. As salaried the overtime is often part of the company culture, so not that easy to escape or ride out. As self-employed, the overtime should be specified in the contract, or if not then just ride it out until contract is over.

When I finished school, I had two opportunities to work freelance in IT. Both were coding jobs. One for the gambling industry, and one for a very shady PR person. I am glad I stumbled across these very suspicious clients, because it made it clear to me that I dont want to hunt after my next job constantly. I took a sysop job at my local uni a few months later, and I am still happy about this decision 21 years later. It definitely doesn&#x27;t pay as much as freelance would, but the peace of mind I have every day is pretty much worth it.

Kudos to the author for sharing a breakdown and analysis that could be helpful to folks considering the leap to freelancing.<p>I would add three related things to consider that were not highlighted by the author:<p>1. Business acquisition costs<p>2. Risks of being fired<p>3. Freedom to hire and fire clients<p>Business acquisition costs -- One benefit of being a salaried employee is that you don&#x27;t have to allocate resources to source clients to will pay for your services. A freelancer has to spend some of their own resources (time, money, energy) on “business acquisition costs” to maintain their work pipeline flowrate commensurate to the duration and nature of the gigs that they land. This has to be accounted for in the freelancing budget.<p>Risks of being fired -- Despite best-laid plans, a freelancer may find themselves scrambling if a client contract ends earlier than anticipated. Freelancers are the first to get “fired” from projects that are downscoped or downsized. Therefore, freelancers have to expend more energy and develop more skills managing relationships and accurately “reading the tea leaves” than employees typically bother to do. It helps to have multiple simultaneous contracts so that if one terminates, some cash is still flowing in. If there is only one contract, a freelancer should start building and maintaining a work pipeline of even a few small projects. And, must bank as much as possible to build up a buffer. These are good practices for both freelancers <i>and</i> employees. The main difference is that most employees, unlike most freelancers, believe they have more job security than they actually do, and have to develop an action plan from scratch when they are fired. The only job security is recognizing the true nature of job insecurity and constantly acting to mitigating that risk.<p>Freedom to hire and fire clients -- The two points above is to call out that a freelancer actually has two jobs: the work they are doing for clients and the work they have to do to run their own business. A freelancer who figures out how to run their business well gets the biggest benefit of all — the ability to “hire and fire clients”. Not interested in what a client is asking you to do, or feeling that you are generating more value than you are being fairly compensated for? Negotiate a new agreement or an exit with them and move to something better. Hear about another project that is <i>really</i> interesting to you? Expend the resources required to chase and add it to your portfolio of work. It’s the rarer employee that has this level of freedom to make the most use of their working hours, and it is literally priceless.

Is anyone gonna mention that by doing business as an S-Corp you can avoid the majority of that self employment tax. Especially if your partner works.

A 4 day week is the middle ground - something I currently do and love it<p>I also recently launched <a href="https:&#x2F;&#x2F;4dayweek.io" rel="nofollow">https:&#x2F;&#x2F;4dayweek.io</a> - Software jobs with a better work &#x2F; life balance.<p>I&#x27;m on a mission to help normalise the 4 day week

Here&#x27;s my story from an Australian market perspective.<p>Any and all money that comes into my business can be used to further grow that business, vastly increasing the chances I can produce more income that I and I alone take advantage of. A simple example of this is being able to take $50,000 of revenue and experiment with an idea before tax ever touches the cash. As an employee, you&#x27;re taxed first on the $50,000 and then you get to experiment (with less money.)<p>It&#x27;s worth noting that as an employee you pay taxes then pay expenses. As a corporation you pay expenses and then pay taxes. It&#x27;s far more efficient. Here&#x27;s a real-world example of this in action...<p>I earn AUD$1,000&#x2F;day on average as a senior DevOps Engineer here in Brisbane, Australia.<p>As an employee I&#x27;d push my tax bracket into the 45% range with those kinds of earnings. That&#x27;s a lot of money going into the system. That&#x27;s possibly a good thing or a bad thing, depending on your world view (I&#x27;m pro taxes.)<p>As a business I can pay my self just $400 per day from that $1,000 - $75,000 per year, roughly - which would put me into the 32.5% tax bracket, and with the rest, $600&#x2F;day, I can pay a fixed 27.5% corporate tax on it (which is going down to 25% soon.) I can then push this out to a trust with franking credits, which in turn can distribute it to another company along with the credits. That company pays 0% on the income due to the franking credits. It gets more complicated from this point onwards, but essentially I can cap the tax of the remaining $600&#x2F;day at 27.5% (25% soon) and then invest what&#x27;s left into shares and other vehicles, allowing me to have more money to invest with.<p>The more money (and time) you have to invest with the more money you can make (and lose.) That&#x27;s why leveraging (margin loans) is a thing.<p>The business might take a different approach: pay me $400&#x2F;day in wages and push $300&#x2F;day in some wild ventures, like paying someone to ghost write a book for me; produce some videos for a YouTube channel; develop a product prototype; and so on. Of course the $300&#x2F;day is pre-tax and never will be taxed. Not only that but as more money comes in from those ventures, I can dump and pump them back into those ventures to keep scaling them up, making more money and eventually pushing profits into the trust on the side, as above, and it&#x27;s all capped, never reaching that 45% tax bracket until I&#x27;m ready to draw it down from the trust (and by then, I&#x27;ll likely be drawing down the $400&#x2F;day, allowing me to FI&#x2F;RE and therefore will still remain at the 32.5% tax rate.)<p>In essence, I can hire people; create jobs; produce value; and more, as a business versus being an employee, due to the tax implications. An employee can do these things too, especially on $1,000&#x2F;day, but with less impact and higher taxes on the proceeds.<p>Being an employee is fine. It offer a safety net. You get benefits. A team to work with that&#x27;s consistent and all on the same page and rooting for the same business and solving the same problems, together. As an employee the world is still yours to shape and improve. But as a business (and an employer), the world is mine to shape also, and I have way more resources to do so than you do.

You can&#x27;t add $$ for health insurance as benefits for employed and subtract from self employment. You can just add for employed or subtract from self employment, not both.

Well, I&#x27;m glad he got to the bit about freedom. Literally the most important part of being self employed. Choose your days, you haven&#x27;t got many of them.