Do you ever dream of having your own business? Being your own boss, the captain of your own ship, making a go of it independently?
In recent years, fewer Americans have been making that leap to self-employment. According to the US Census Bureau, in 1977, 16.5% of businesses in the US were less than one year old, but by 2011 only 8.2% were less than one year old. This is bad news for the economy, because historically, new businesses have been the source of most job creation.
But why? What is behind the decline in business start-ups? Risk tolerance is probably a factor. Today’s young would-be entrepreneurs, raised by helicopter parents, may be more risk-averse than the baby boomers of 1945-1964, who were raised in a more free-spirited time. Certainly increased government regulation discourages starting a business. Licensing requirements are one example. In the 1950s, only 1 in 20 workers had to go through the process of getting a government-approved license to work; today, 1 in 3 workers has to have a license to perform their job.
Often overlooked, though, is the cost of health insurance for the self-employed, coupled with the added tax burden on the self-employed. Anyone thinking of quitting their job to open a business is going to be shocked at what they learn — and more likely to drive back to the old job on Monday morning.
Picture Jim and Jane, a married couple. They are both employed and make a combined gross annual income of about $100,000. Jane’s employer offers health insurance, which covers both her and Jim, with minimal co-pays and deductibles. They are talking again about their dream of leaving their 9-5 jobs and opening their own consulting firm together.
“OK, we make about $100,000,” says Jane, looking at their 2016 tax return, “and last year after our $26,000 standard deduction and $8,100 personal exemptions we paid $17,434 in federal taxes and social security/medicare withholdings. So we took home $82,566 before state taxes. So that’s our goal: to take home from our consulting business something close to $82,566.”
TAKE-HOME MAKING $100,000 (AS EMPLOYEES)
-$ 11,368 federal taxes
-$ 6,066 social security/medicare (7.65%)
= $82,566 Take-home after taxes and employer-paid health insurance
They start running the numbers, looking at the costs of renting office space, buying computers and equipment, hiring staff. It is looking good.
Until they consider health insurance. As self-employed people, they would buy health insurance through the Affordable Care Act system (“Obamacare”), and for coverage similar to Jane’s policy at work they would need a “Gold” plan. They live in North Carolina and are both 56-year-old non-smokers. They are taken aback to find that in 2018, their premiums would be $2,618 per month – $31,416 per year.
“So for us to take home the same thing we take home now,” Jim says, looking up from his calculator, “we would have to make $100,000 plus $31,416 for the Obamacare health insurance, a total of $131,416 a year?”
Jane does some figuring. “No, that’s not right.”
“Thank heavens!” says Jim. “That sounded like an awful lot.”
“Actually,” says Jane, “it’s worse. As self-employed people, our taxes go up 7.65%.”
Jane had just noticed another feature of being self-employed. Instead of the 7.65% rate that employees pay for social security/medicare, the self-employed pay the aptly named “self-employment tax” of 15.3% (2.9% after the first $127,200).
“So if we want to take home something close to the $82,566 we take home as employees,” says Jane, “how much income would we have to make from our consulting business?”
They run more numbers. “Wow,” says Jim. “Just to to stay where we are – to take home the same amount after taxes and health insurance that we take home now when we make $100,000 a year – our consulting business would have to generate annual income of $160,000.”
“What!” Jane can’t quite believe that. Jim shows her the math:
TAKE-HOME MAKING $160,000 (SELF-EMPLOYED)
-$26,368 federal taxes
-$19,813 social security/medicare (15.3% first $127,200, then 2.9%)
=$113,819 Take-home after taxes/social security/medicare
-$31,416 health insurance premiums
=$82,403 Take-home after taxes and ACA health insurance
“Or look at it another way,” Jim suggests, now feeling gloomy. “If our consulting business made the exact same amount that we earn now – $100,000 – we would net after insurance and the higher taxes . . . “ Jim punches numbers on the calculator. “We would take home a grand total of . . . $45,084.”
TAKE-HOME MAKING $100,000 (SELF-EMPLOYED)
-$11,368 federal taxes
-$12,132 social security/medicare (15.3%)
=$76,500 Take-home after taxes/social security/medicare
-$31,416 health insurance premiums
=$45,084 Take-home after taxes and ACA health insurance
Jim and Jane look at each other. Jim puts the calculator back in the drawer.
“Yeah, let’s call it a night,” Jane says. “Tomorrow’s my early day at work.”
So, anyone else want to start a business today?