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Updated: Aug 04, 2023

Can I Afford to Work for Myself?

Working for myself is something that many people yearn for. If you are ready to finally work for yourself, find out if you can afford it first.
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Can I afford to work for myself? This is the question that crossed my mind after working my full-time job for over a decade. At first, I didn’t think it would be possible but as the month went on I became more restless at my day job than ever. So I hired a business coach and began working on a foolproof plan to quit my job and become my own boss.

If you’re wondering whether or not you can afford to work for yourself, use these steps to get started. This is advice from my personal experience as well as my background as an accountant.

Know your Minimum Salary

What is your monthly paycheck right now? What amount do you need to earn to pay all your bills? How does this figure compare to what you’re currently earning, is there room for taking risks? Are you the breadwinner for your family? Do you have an alternative income stream you can supplement?

These are important questions that you need to ask yourself before taking the leap. There are many different factors that go into determining the minimum salary you need to earn. You have to balance household expenses as well as business-related ones. Calculating exactly what you need to earn to keep your business afloat is the first step.

When I was preparing my finances to quit my day job, I knew the income I received from being self-employed would have to be shared between personal and business checking accounts. I also had to establish a reasonable “salary” to be compensated for my business ventures. When you’re self-employed the IRS requires that all business owners be paid “reasonable compensation” for their efforts.

The minimum business salary can be calculated like this:

  • Total revenue – business expenses = Profit (or loss)
  • Taxes = 25-30% of profit
  • Your salary = 70-75% of profit

The remaining profit must be enough to cover your personal household expenses and other financial goals. So if you find that you’re a little short, it’s a good idea to keep nurturing your side hustle until it can eclipse your day job income.

Calculate Self-Employed Expenses

Just like there must be a separation of business and personal income, there’s also additional expenses for being self-employed on top of your regular monthly bills. When you work for yourself you’re responsible for finding proper health insurance, saving for retirement and paying additional costs like personal liability insurance.

And let’s not forget about your self-employed tax bill. Every quarter self-employed individuals are required to pay estimated tax payments based on their projected earnings. This exact amount can be calculated using small business bookkeeping software or from a tax professional. Generally speaking, it’s smart to set aside at least 25-30% of your income towards quarterly taxes.

The percentage for quarterly taxes can be calculated like this:

  • Self-employment tax - 15.3% (Social Security tax - 12.4% + Medicare tax - 2.9%)
  • Personal income tax bracket - 10% (usually starts at this rate for and goes)
  • State income tax - varies (my state income tax is 4.25%)

SE TAX TOTAL = 29.55%

It’s important to note that you won’t pay the full 25-30% of self-employment taxes because you do get one-half of this back in the form of a deduction on the front page of your tax return. Plus, you may qualify for additional credits and deductions depending on your personal situation.

Your effective tax rate will vary but you can use this formula as a starting point to estimate your own self-employed tax bill. I personally set aside 25% of every payment I receive from clients, and this amount has been pretty spot on for the past two years.

Start a “Quitting Fund”

If there’s anything I could go back and do over during the process of quitting my job to work for myself, it would be to save up more money. I did everything right in the beginning: I calculated how much I would need to save and then opened a new savings account for my “quitting fund”. I then allotted a large chunk of my paycheck and my side hustle income towards this savings goal.

As prepared as I thought I was, I wasn’t able to predict my mother-in-law being diagnosed with cancer and having to move to a new state to help her through the treatments. This change of plans meant that instead of saving up $10,000 in my quitting fund I was only able to accumulate $7,000.

Little did I know that even the $10,000 I first work towards saving wouldn't be anywhere near enough of a cushion. Determining how much you need to save is a simple formula. Just add up your total monthly expenses, including personal and business costs, and then multiply this times at least 3-6 months.

But in addition to this, I’d recommend taking advantage of your day job’s paycheck for as long as possible and save like crazy. You know how renovations always tend to go over budget and experts recommend adding an additional 20% onto the final bid? Saving up money to quit your job and make the leap to self-employment should have similar warnings. Take your base monthly expense total and add on an extra few thousand dollars. The more you can save up the better off you’ll be during your transition.

Secure Long-Term Contracts

In the event that life throws you a curveball and you’re forced to quit before your initial timeline, securing a few long-term contracts will help ease any financial gaps. In order to make a successful leap from your day job to your dream job, you need to sign multiple contracts for upcoming work.

This transition can be tricky, and if you don’t carefully plan ahead, or have a large pile of money sitting around, you could be forced to head back into the traditional workforce within the next few months. But securing multiple long-term contracts, or well-paying recurring gigs can help ease this transition and ensure a higher rate of success for your business.

Before quitting my day job I already had two separate monthly retainer contracts I was working on. One paid me $900 per month and the other just over $2,200 per month, for a total of 30 hours a week. This allowed me some extra time to seek out more jobs and pitch to new clients, while still ensuring that my base of $3,000 per month expenses was covered.

Know your Tipping Point

The five months between the time I gave my notice and work, and finally walked out the door for the last time, were some of the busiest of my career. I’m pretty sure I only went home to my apartment for a change of clothes and to sleep. But for me, it was worth the cost so I could fulfill the dream of working for myself.

Throughout the past several years of being self-employed, I’ve experienced many setbacks and financial emergencies. Sometimes they were so bad that I thought about giving up my boss position and going back to being an employee. But my financial situation was never so dire that I felt I needed to go back to the workforce.

Going back to a traditional job isn’t a bad thing and if I need the money to pay the rent or keep food on the table, I’ll do whatever it takes. If I don’t have any work for a full 60 days then my rule is that I’ll start applying for regular jobs. But that ultimatum has yet to present itself, even after nearly four years of being my own boss.

Your tipping point may be different, but it’s important to set a barrier for yourself in order to keep providing for your family. Working for yourself is an awesome thing but not at the cost of being homeless or making unwise financial decisions.

Throughout this whole process, know yourself and your limitations. Save up as much money as possible, and then add a little more on top for good measure. Above all else taking the leap is just that -- it’s a leap into the unknown. So prepare all you can and make the necessary sacrifices, but know that emergencies will happen and life will throw you curveballs. The best thing you can do is learn to handle them and roll with the punches.