Making $100k as an Employee versus Being Self-Employed
calebporzio.com
calebporzio.com
Now whenever someone asks if I want to do contract work for them I remind myself that I don't want to be in the business of selling my time for money.
The upsides are that A) you're hopefully making more money as a consultant and B) you at least get a change of asshole scenery every 18 months or so.
In the US regular employees can be fired in two weeks most commonly, though big companies traditionally give a few months severance in good economic times.
The upside of this is you can also walk away from a crappy job/boss/etc with two weeks notice. With contracting, you may be on the hook for the contract duration plus being pestered for support help forever.
Most US states have at-will employment, so an employee can be fired for any reason, at any time, effective immediately.
For an employee, the implied social contract is to give two weeks notice.
You can choose between the illusion of security or the illusion of freedom, that’s the choice
In this case the "boss" is the cash cow and keeping it alive; also maintaining marketable skills incase the thing dies.
Having too much time and money on your hands can also pose certain social and mental health challenges. It seems everyone has a job whether they like it or not.
It seems like the system is rigged no matter which way you look at it. The only option really is to amass enough fuck you money.
It's not actually rigged though. People just sell themselves short due to information asymmetries and a just plain crappy business model (work for hire). Customers see it as a risk so are reluctant to pay much, but it's your skillset so from your perspective there's actually little risk. Better to license technology but maintain ownership so you can sell it again to others. And now that the risk is gone, the hotter the technology the more you can ask for working technology you can demonstrate. Of course this isn't possible in all technology niches but I'd say your goal when self-employed should be to maneuver into areas where it is possible. Business is a game of avoiding being the commodity that others profit from by building into wealth. Work for hire is a commodity.
This is great in theory, but in practice it’s rare to develop something that can be passively licensed off. Usually it becomes a business that requires constant attention as it scales. I know a few people who have developed apps that sold well initially and looked like easy money, only to be buried under a flood of copycat apps as soon as the market realized the opportunity was there. The best success in cutting the cord seems to be building a company which is then sold off, but that’s hardly an easy path.
This feels a bit like the “passive income” pipe dream that is frequently touted in FIRE forums but rarely comes with practical, real-world examples.
You seem to be talking about the typical solo entrepreneur story where someone tries to guess at a consumer product, makes it on their own time, then tries to sell it? No, I was talking about contractors keeping ownership of the code, for example, that people are paying them to make under contract. Give them a license not full rights. Now you can sell it again. It still takes work to sell, and work to deliver on each sale. Just less than the first time. And you can ask more since you have a demo. To make early-retirement money it still takes being in the right place at the right time, recognizing that, and setting a high price you can get. The point is the system isn't rigged to the point where heads you lose and tails someone else wins. It's in your hands.
I certainly wasn't thinking of apps either way. I am only familiar with b2b markets requiring specialized skills (where I'd think contracting is most lucrative anyway).
Great in theory, rare in practice. Usually when someone reaches the point where the code they’re writing for a company is self-contained and re-usable by other companies, they’re building a product rather than writing code.
Not strictly an app, but it’s still a product that must be maintained, supported, and sold.
I’ve hired many contractors and contracting companies to build code, features, or even products over the years. I can’t imagine a scenario where I’d willingly give any of them a license to maintain ownership of what I’m paying them to write and, even worse, a license to resell it to companies that are likely to be my competitors.
Here's an example I did: fast linear algebra algorithms in C to run an algorithm on a customer's device. They wanted the high level algo working, not my matrix code. I used it in other stuff for a really long time.
One doesn't need everyone in the world to unanimously agree to one's license terms. It's fine if you're repulsed by the idea. That's a important flag when considering potential customers.
Someone has to grow the soils, cook the pizza, maintain the electric grid, wipe the asses of the elders, etc. In a way, if more people manage to find ways to retire early and forever, others will find ways to stop this bliss and make them work for them, and it sounds fair no?
This statement assumes humans love having control over others and keeping them in a system of pseudo-slavery. But if you look at it closely humans are the faulty, unreliable pieces and if you can get them out of your business's equation it's hugely beneficial.
And don't forget automation which seems to be looming closer and closer as time goes on. Theoretically, this results in fewer jobs for the non FI-ed people to compete for. You need something to assure their future least they become restless on the streets and adding to social unrest (that preferably doesn't include some kind of bullshit job). Food, medicine and affordable housing for a long part of their lives within a few years of working and saving would be a good start. The UBI talk is something to take note of too.
This has been the consensus since the assembly line was invented. Yet, there's new jobs popping up all the time that still require people to do them. People used to work in the fields, then they moved to the factories, now they're in services. I have no clue what's next, but I don't think it's nothing.
While FIRE is of course a possibility, it's a possibility for a very vocal minority. Survivorship bias is huge in the FIRE communities.
I get anxiety reading FIRE posts from people in their 30s who have saved $1 million or less and have concluded it’s sufficient to carry them for another 5-6 decades of life. The cFIREsim results might support that conclusion, but only if they assume their frugal expenses will never, ever change as they age
Going back on-topic, it still seems like the biggest way to build wealth is either 1) kick ass at your job as an employee, or 2) hustle when starting a new business. Entrepreneurship has been romanticized this last decade with hustle porn and Silicon Valley’s mentality, but there’s nothing wrong with being a corporate employee where they hopefully pay you perfectly well.
Each have their advantages and disadvantages, and it really comes down to personal preference.
I think the real issue is the assumption that their spending will never change. At the extreme young end of the FIRE discussions the people in their mid-30s have barely been independent adults for 15 years yet are setting fixed budgets for the next 50+ years of their life.
Many of these budgets have obvious blind spots, like the people who paid off their cars before setting up their FIRE budgets, so they forget to include future costs of replacing that car some day. Likewise, many of the frugality stories come from people who were high spenders in the past but recently became frugal, which ignores the fact that much of their current lifestyle (furniture, clothing, electronics, tools and equipment) were funded by their pre-frugality spending and therefore not accounted for in their current budget. Things decay and must be replaced eventually.
Most people only know how to sell their time, which is why most people are employees and many self-employed people have no free time. It's entirely possible to be self-employed and sell something that is not your time, or maximizes the investment of your time so that you can do something once and sell it more than once.
The idea of making something once and selling it multiple times (like software) is nice, but the way I understand the market works is that competition will push down the price so much that even with your one time work investment, you'll only get the "average" rate in the end. So that means, find a niche where there is no competition yet?
Long term I think it is true, though. If you don't have any unique advantage, competition will drive down your revenue to "market" rate. But that's kind of idealized equlibrium, of course there are successful products, innovations, and so on.
The value of a currency is a representation of the faith the holder has in the issuer. Consider QE: a government issues digital payments to banks for billions of currency and the work involved is roughly as complex as sending SMS text messages, and yet for $1B you can buy a really nice yacht and a trip to space.
A paradox? No, we just believe the currency has a value unrelated to any notion of work required to produce it.
As an employee,´I cannot buy a yacht. I am free to choose many different jobs that all pay about the same for the amount of effort (or less, if I am unskilled in that field for example). So I think at least at the micro level, the labor theory of value still has some explanation power: It explains why there is no free lunch (for employees), but also why you'll want to have people work for you if you want to make more money.
Vinyl records? Text editors? User-hostile "Enterprise" software?
clients will not only pay the least that they can get away with, they will pay what it takes to achieve their goals. what my client needs is assurance that problems will be dealt with. so in effect it's like insurance. you pay for insurance but hope that you don't need it.
another way to earn money without an hourly rate is fixed price projects. the goal here is to figure out what is the value of the project is to the client. you may charge 50k to build that custom website, but if the client earns 500k from using it the next year, then it was totally worth it, even if you could have charged less.
the challenge here is to find those clients. the answer is generally reputation and referrals. you won't find them on upwork. at least not at first. finding a niche with little competition can help.
the client i mentioned above i started out with as hourly rate, continually raising the rate each year until i suggested we simplify the process and agree on a fixed monthly rate. i let the client choose the rate. figuring that if the rate was to low for the amount of work, then we'd renegotiate. it wasn't. i even get bonuses if there is a particularly busy month.
There are a lot of creative ways to make money out there that most people don't realize.
It’s tempting to try to capture the best of both worlds: A full time job with benefits and steady pay where they work on minimizing their workload, combined with hourly contracting work where they focus their efforts to capture those extra contracting paychecks.
It works for a while when things are slow at work and the contracting effort is fun and new, but eventually they start cutting corners in one or both areas to avoid burnout. If they really want to contract, they’ll go that route. However, it’s common to simply realize how low-stress and predictable a full time job is and just stick with that.
I’ve done freelance work on the side in the past. It’s a difficult balance. I’ve also had employees who tried to contract on the side, usually with an associated decline in day job output. The worst case is when someone goes all-in on contracting but tries to keep their day job paychecks as long as possible, doing the bare minimum to delay getting fired for as long as they can get away with. That situation is miserable for their teammates and coworkers.
Yes, it is possible, but more difficult. Clients will often try to find out how much time was really spent on the project, even if they are officially paying for the outcome and not the effort.
To go this route it's much better to build a product, a SaaS for instance, that you can sell many times with zero or negligible marginal costs.
That's when you respectfully remind your client that you're not a contractor but a business and that you're dealing business to business. Asking you how the sausage gets made is asking you about how you run your business -- it's none of theirs.
If they feel like they aren't getting a fair deal, you are happy for them to shop around.
If the client is trying to get a sense of your time then it's a mistake in how the relationship was framed. You want them to think that you're a business with employees, even if you're the only employee. Use more "we can" instead of "I can" language in your deals. They also aren't your only client.
(And yes, you should not depend on just one client.)
It does feel good when you get around to firing those clients later though.
The author’s points all hold up, but it would make more sense to change the title so that it was cleat that it was comparing W-2 salaried positions to 1099 contracts.
Own an S-Corp selling toothpaste? You are self-employed.
Have a sole proprietorship mowing lawns? You are self-employed.
Have a C-Corp mowing lawns? You are an employee! But then your corporation has to pay taxes too.
Everyone always assumes that if you work hard, you will succeed... It's the American dream. But it's far from the truth for many people who try this type of stuff. Most small business owners end up working 70+ hour weeks for maybe a bit more than the 100k some people might get working for an employer, with the added weight of having to run a business and losing everything if it fails.
- as a self employed person you can pick your clients, if you are good
- self employment often can be a path to something where you stop trading time for money. But it takes time to figure this out.
As always there are trade offs to everything.
Two weeks of vacation is kind of minimal. I'd figure at least three.
Health insurance varies a lot. For me it'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.
My rule of thumb has been that I need about 70% more as self-employed to be at the equivalent pay.
On the other hand, I've made a ton of extra over salaried employees during 60+ hour week crunch times.
So while I might choose to work 48 weeks a year if extra money was on the table, for any kind of rate calculations I would count 43-44 weeks a year as being equivalent to a good salaried position.
It's not worth it unless it lets you retire significantly earlier.
I'm going to take this moment to push back against the common figures I hear around how much one "should make" as a freelancer. In general, they seem inflated.
You claim that, for a $100k employee, you should be able to generate $75/hr in value. You've also generously calculated that the number needs to be close to $80/hr to break even with a $100k salary.
Even crazier, other discussions on HN place the freelance hourly number much higher. Well above $100, sometimes even more.
As someone who did freelance for about a year (after exiting a $100k job), I'd say those were not the rates I saw.
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.
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.
Great writeup!
That said there is a near infinite amount of people in the world willing to pay less for software engineering consulting services all the way down to $0. You need to avoid those people like the plague.
I have personally dabbled in self-employment and really hate the sales aspect that is required to make it work. You really need a deep network and outstanding soft skills. If you don't have that another way is go use a head hunter that specializes in placing consultants/contract employees. The draw back there is they are going to take a cut of your hourly rate so long as you hold that position but it out sources the hard part of sourcing work if that isn't your thing.
The reality is that you need to be making $140k at $70/hour to earn $100k, but you also have to invest about another day's worth of unpaid hours every week to maintain that income.
I really recommend Secrets of Consulting. I was vary since it sounds a BS title, but excellent book.
When I was freelancing I had 2-3 contacts that did freelance marketing/product management gigs that I liked working with. Whenever I needed a new client I hit them up and asked if they needed a dev for one of their current projects, which basically always worked. Since I had a good honest relationship with them they would also tell me beforehand how much/little of a nightmare the client would be, which protected me from a lot of bad scenarios that other freelances seem to encounter. For a typical 3-6 month full-time gig the overhead comes to around ~5 hours, which is less than 1%.
Overall a great symbiosis between freelancers, that I would recommend to anyone that is looking for non-consulting freelance work as a developer.
- No work
- Too much work
And very little in between....
"No work" requires a ton of time to generate leads, network, etc. You're asking people to hire an unknown. "Too much work" happens once the pump was primed. People found I did good work, and started hiring / referring me to do a lot more stuff.
The trick was to not unprime the pump. That was actually tough to manage, since e.g. clients would want me for 40 hours per week for a multiyear commitment (essentially employment), at which point, I'd get off of other people's radars. If you turn down too much work, people stop asking.
I think I'd manage this a lot better late career, but on the whole, I found employment to work better for me, at least with a good employer.
I didn't have multiyear/long-term commitment offers often, as in Germany companies are very weary of doing "false self-employment", which comes with hefty fines and hiring a full time freelancer that doesn't have other clients for a year+ is basically the definition of that.
Basically every client I've had, wanted to have me for 40 hours/week, but just like with employment contracts, there is always room for negotiation.
I usually had 2 clients at the same time with optimally 16 hours (= 2 days) each, leaving me with a 4 day work week, but I sometimes budged and gave one of my clients an additional day. If you tell a potential client "I've already given a commitment of 3 days/week to my other client", they normally recognize that there isn't too much wiggle room and from what I can tell generally take it as a sign of professionality that you honor your commitments and can expect the same from you if they are also your client.
The individual gigs were usually 3-6 months and offset with their starting time, so that if one of the 2 gigs runs out, I still have the other one. Once there were 1-2 months remaining on one of the gigs, I hit up my contacts and arranged a new client as a follow-up. That way you have a semi-regular turnover which reduces the pump primed/unprimed problem to some degree. Since I arranged 90% of my jobs through those few freelance contacts I rarely ran into that problem anyway, as the general (unspoken) arrangement with them was that I'm busy by default and they would only ask me if a potential project was really interesting and if I'm looking for a project I'd ping them.
> I think I'd manage this a lot better late career, but on the whole, I found employment to work better for me, at least with a good employer.
The main reason I started freelancing was because from everything I can tell most employers are not good employers, and if they are good employers it's usually a temporary situation that rarely lasts for more than a few years. Most jobs include working on relatively boring products in relatively bad engineering process setups, which is so unfulfilling that I'd at least want to get a good pay/a lot of free time out of it, which always seemed most attainable via freelancing.
Having said that I'm not strictly against employment, and if an interesting employment opportunity with a interesting product and great team comes my way I'm open for it. In fact, I've just started employment again last month, and so far I'm pretty happy with it :)
I'll mention good employers definitely exist. They're in the minority, but they're not rare. One of the key issues is that good employers are rarely top-dollar employers.
One of the lessons I've learned in my career is that working with good, honest people matters a lot more than top dollar. I don't work for crooks, no matter how good the offer on the surface. If someone is exploiting me at half-million-a-year, that exploitation usually comes with more cost than a cost-of-living job with someone I can trust.
A good sign is how long people were there. I'm at a company where people spend decades, and there's a real sense of community. It feels a bit like sixties-era HP. The company takes care of people who work there, and people who work there take care of the company.
2-3 year jobs, as most of the tech industry, are fundamentally transactional.
I realize that I might have been pretty lucky there, but overall the setup seems very attainable, especially if you put some effort into it, and reduces the need to "track down clients" in the long run.
https://www.irs.gov/newsroom/qualified-business-income-deduc...
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.
> Under the law, most trades or businesses are “qualifying” businesses. However, for certain types of businesses, referred to as “specified businesses,” the deduction is only available to a more limited extent. “Specified businesses” include (among others) any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.” In particular, there had been considerable concern that the IRS might view the “skill or reputation” clause broadly.
> The proposed regulations, however, take the approach that the “skill or reputation” clause is meant to refer to a “narrow set of businesses,” and generally limits it to people such as reality TV stars, media hosts, and professional gamers, as well as celebrities making money off of product or likeness endorsements.
https://www.mbopartners.com/blog/contracts-finance/section-1...
> Therefore, self employed IT professionals such as programmers and software engineers will be eligible to take the deduction. However, they will still have to contend with some limits to the deduction that apply over certain income levels. For higher income IT professionals, it may be beneficial to operate as an S Corp and pay yourself wages to enable you to qualify for the QBI deduction.
SEE: http://kbfinancialadvisors.com/making-the-switch-from-employ...
Employed at 100k Euro, no kids, not married:
- 27.406 Euro income tax
- 1.243 Euro solidarity tax
- 7.923 Euro pension fund
- 1.022 Euro unemployment insurance
- 1.030 Euro statutory nursing care insurance
- 4.440 Euro health insurance
= 56.932 Euros left over.
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.
Freelance with 100k Euro, no kids, not married:
- 22.290 Euro income tax
- 1.225 Euro solidarity tax
- 10.594 Euro health insurance
- 15.840 Euro pension fund
= 51.310 Euro
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.).
The main kicker here however is this: I work as a freelance webdev and so far I have managed to make about 80 Euros/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.
the average freelancer needs to budget about 50% unpaid time, spent on marketing themselves, searching for and negotiating with clients, so that at 80€/hour they can expect at most 70k€ per year if they want a workload that's comparable to a regular job. still 70k€ is a decent income in germany, so that works out.
So either it's webdev specific right now or I am just incredibly lucky but even as my current project is near its end I have about 3 options to chose from to continue elsewhere seamlessly after. Other freelancers I met in the field have reported similar situations but that's just anecdotal evidence. Would you have a reference of where that 50% unpaid time comes from?
A question: doesn't the tax authority complain about the lack of multiple customers?
And no they don't most of the time. Investigations about this are rare apparently and also only working for one customer in that capacity at a time is not really an indication of pseudo self-employment or tax fraud.
If the company dictates you your work hours and you suddenly appear in organisational diagrams as if you were employed and you were part of all company meetings and a couple of other things in the same vain then that would be indicative of pseudo self-employment. It's basically mostly about whether you are bound by instructions or not. This is however checked rarely (usually it would need to be initiated by one of the participating parties and we do not want that) and also hard to do rigorously. The laws around that are mainly to protect people from earning too little and being subject to paying all their social insurances/taxes by themselves and not getting any vacation days. For higher paying jobs this is not much of a threat since being paid higher than an average FTE would also count as indicative for being self-employed. Same goes with working from wherever I want (yay homeoffice).
If pseudo-self employment were ascertained during an audit my customer would need to retroactively pay the social insurances for the months I worked for him and if he were to employ me further he could deduct that from my income of the following months but only for the last three or four months. I think there is a chance under very specific circumstances that the customer could try to demand that I would have to pay the difference between what a normal FTE would be paid compared to what I was paid but it's not yet clear whether that is actually lawful and I think it only applies if both parties were not entirely clear that the business relation ship is based on the premise of freelancing.
All in all I am not very concerned that it will actually ever be a real problem. I have talked to at least two dozen freelancers doing what I do. Sometimes for over a decade and never once have they been questioned in their status in any way.
From the article: I’m figuring if you make $100k, and work only 50 weeks, that’s $50/hr. So 2 weeks (80 hrs) at $50/hr is $4k
But change the numbers: I’m figuring if you make $100k, and work only 2 weeks, that’s $1,250/hr. So 50 weeks (2,000 hrs) at $1,250/hr is $2,500,000
I admit, you could turn these numbers around and use them to determine how much you need to charge per hour. But that's just it: I believe you need to look at (total comp) / (total hours worked) with vacation reducing your denominator in both the salaried and self-employed scenarios.
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.
The key is in TAXES! Write offs / 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.
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's.
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.
When I bought insurance for myself it was $320 for a silver HMO off the exchanges. But my understanding is that it would be much cheaper today than back then.
(The difference is essentially: they are insurance plans that act like a non-specialist imagines something called "health insurance" would work.)
Write offs only boost your income by the tax rate, so you'll always spend more than you get back. Which is fine if the expenditure is necessary, but it's not a free expense fund.
I'd love to hear more about how people find contact work as a programmer.
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.
Based on my experience, can say that both startup and freelancing are more freedom friendly choices. Although in your own startup/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).
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.
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.
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.
Really curious which companies in Bangalore pay that much for a Senior Engineers. Seems a lot for me to be true.
Both reported figures in this range. This is overall compensation including stocks. I was told, one can get in this range 1 Cr+ even upto 1.5 Cr INR, for high profile companies.
You are welcome to correct my understanding, if you know of counter examples.
Edit: I guess, the MNCs need to ensure some sort of pay parity between roles in different countries. And there has been lots of upwards pressure (to increase pay) in the past 3/4 years.
The way it works in their favour is by reducing the taxable income by claiming "expenses"(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't have a salary or have way less income, so lower tax bracket).
As far as I have heard, depending on the country, the tax paid can be as low as 1/4th of what an employee will pay on a USD 100k salary.
The wheeze is/was you work, but your client pays a business that you own for your time/expertise. You then have your business bpay you minimum wage (so no income tax) and take the rest as dividends from the company (which are taxed lower than "income").
The tax rates/allowances for dividends have reduced though and there are new regulations on "disguised employment" that make it less lucrative. I think it is still pretty good though, just perhaps not as good as it was
(in UK we have NHS so you don't need health care, and employers often match up to 7% for pension contributions)
Whether this works or for you or not depends very much on circumstances. If you're willing to have cash build up in the business it works, if you want to take home over £60k/year gross it starts making less sense.
- 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.
- You usually have social obligations around lunch with your colleagues, and can'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).
- 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 "must be frugal" instincts and I just spend less money.
- If you can commute in a bike, you get some regular exercise. Overall I am more physically active when I work from the office. If the self-employed gig goes well, you may need to scale to more than one person and get an office anyway.
- Lunch break and small talk with your colleagues can be a positive experience, but if you eat what you brought from home, or want to skip meal, or read a book in silence, the truth is nobody really cares.
- Some stress is unavoidable, and as you noted income insecurity stress can be minimized when you are employed, and you can focus on few things you can do well. Also, you can leave work at work, and dedicate free time to family, sport, hobbies, there's more than one way to deal with stress. Overall I think employment is less stressful unless it's a shitty underpaid job.
I generally find the stresses different from employment. Income insecurity is bad when freelancing (though that's illusory - I have to annoy one person to lose my job, as opposed to annoying all my clients when freelancing). But dealing with bad management decisions is infuriating and creates a sense of powerlessness and outrage that I find really stressful to deal with. For some reason, retail therapy works to defuse some of this stress, whereas buying things only increases my freelancing income insecurity.
Employers can opt to offer after tax 401K contributions, which can be freely converted to Roth 401k funds.
With this you can contribute $57,000 per year between tax deferred 401k and Roth 401k.
This is a very new provision. Previously the regulations were unclear.
There is a back-door but not sure about the details on it.
Absolutely absurdly, there is no income limit to do a post-tax contribution to a non-roth-IRA, and then do an IRA to Roth-IRA conversion.
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With no income limit you can:
- $6,000 post-tax dollars contribution to IRA, then do a Roth Conversion and file a IRS8606. This is a Backdoor Roth Contribution
- $19,500 pre-tax dollars contribution to 401k.
- $xxxx company matching dollars to 401k.
- ($56,000 - $19,500 - $xxxx company match) contribution to After Tax 401k, then 401k to Roth 401k conversion This is a Mega Backdoor Roth Contribution
- HSA $3,600
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Tax implications:
- The money converted into the Roth IRA (the $6,000/year) you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out.
- The pre-tax 401k dollars (yours & matched) you did not pay tax on the principle going in, so you are taxed on the principle and capital gains coming out
- The after tax 401k contribution, converted to Roth 401k, you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out.
- The HSA you did not pay tax on the principle going in, you are not taxed on capital gains or principle going out, as long as it is for qualified medical expenses.
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Extra Notes:
- Do not get tricked into rolling over old employer 401k plans to a traditional (non-Roth) IRA. If you do this, there are very complex tax implications when doing backdoor Roth contributions. If you have an existing Traditional (non-Roth) IRA, do lots of reading or buy a couple hours of time from a "Fiduciary Financial Advisor". Do not ever trust a "Financial Advisor" under any circumstances. They do not have your best interest in mind, they have their commission in mind. Fiduciary Financial Advisors don't make a commission from your decisions. Make sure that if you go this route, you find someone who only does Fiduciary advising (and doesn't split time).
- You should carefully evaluate timing on doing a 401k to Roth 401k conversion of your withheld earnings and company contributions. If you have a year that you have lower income (back to school, travel, year off), you should probably do the conversion then. The money will be taxed as ordinary income, but then treated as Roth dollars coming out.
- Beware of employer provided retirement plans with high expense ratios. Anything over about 0.30% is a ripoff and you are wasting money. You have to dig deep into the fund information to find the expense ratio.
- Shockingly, many default investments are target-date plans, and they charge outrageous expense ratios, I have seen as high as 0.90%. Compounded over 30 years this will cost you a literal fortune.
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If you are a high earner with no health issues, you should be saving $65,600 per year in the above tax advantaged strategies.
Look up the BogleHeads wiki and guide for where to invest the money (Total Market LOW cost, unmanaged mutual funds).
This is not financial advice, hire your own fiduciary financial advisor
Do you have to know if I can convert my SEP into an individual 401k?
It does appear you can roll a SEP-IRA over to a "Qualified (pre-tax) Plan" which footnote 1 indicates includes 401K.
How much do you have in the SEP currently? You could roll $6,000 of it per year over into a Roth IRA (held at Vanguard for example).
Remember, make sure not to end up with money in a traditional IRA, or the tax situation for backdoor contributions becomes much more complex.
See this => https://www.investopedia.com/ask/answers/07/401(k)_ira.asp
You're looking for the section called "Deductibility of IRA Contributions If You Also Have an Employer Plan (2021)".
#nottaxadvice
"post-tax" is the important bit!
You then do a IRA to Roth IRA conversion with your retirement plan provider (Vanguard, Fidelity, etc).
Then you file IRS form 8606 to report two things:
- Nondeductible contributions you made to traditional IRAs.
- Conversions from traditional IRAs to Roth IRAs.
This is not financial advice, hire your own fiduciary financial advisor
For your situation, a better move would be for you to do a Roth Conversion of the money in your traditional-IRA to move it to Roth IRA dollars. You do this with your broker, and then file form 8606 with the IRS.
The $6,000 "Roth Backdoor" is indeed with post-tax dollars. This is intended. There are significant benefits to having the majority of your retirement savings in a Roth, including no minimum distributions, and the ability to withdraw funds for unqualified reasons 5 years after your last contribution.
This is not financial advice, hire your own fiduciary financial advisor
Do you have more information on what we should be looking for here? Is the backdoor roth you're referring to different from 401(k) plan sponsored mega backdoor roth?
Backdoor Roth: Contribute $6,000 in after-tax dollars to IRA, Immediately convert IRA --> Roth IRA. File Form 8606.
Mega Backdoor Roth: Contribute a total of ($56,00 - ($19,500 + Employer Match)) as After Tax contributions to a 401K. Convert those funds to a Roth 401k.
Another detail, you may see discussion about avoiding the "Step Doctrine" for backdoor Roth contributions. This is no longer required as the IRS has blessed Back Door contributions, after an obscure footnote in a 2018 congressional report.
- Footnote Commentary: https://www.forbes.com/sites/ashleaebeling/2018/01/22/congre...
- IRS Explicitly Acknowledges: https://www.napa-net.org/news-info/daily-news/case-week-de-v...
- More: https://www.fa-mag.com/news/irs-finally-says-back-door-roth-...
- https://www.physicianonfire.com/backdoor/
- https://www.biglawinvestor.com/backdoor-roth-ira-step-by-ste...
For best results, people (especially young people) should do their own homework and know their own risk tolerance and financial goals. Putting thousands of dollars towards retirement won't help you if what you really needed was to pay off your credit card, or to set aside money for your child's college, etc. etc.
If you have any unsecured debt (college, credit cards, vehicle) I would strongly suggest paying it off completely before doing any retirement savings.
If you have or plan to have kids, you need to investigate 529 college savings plans and determine the best mix for you of retirement versus 529 savings.
Getting into other uses for money such as founding your own startup (given we’re on a Y-Combinator website), I’d suggest thinking long and hard about your level of risk tolerance. If you’re happy with the risk, go for it! If you’d be happier knowing your retirement is completely secured from some years of high earning and high retirement savings, go for that.
A big key to retirement savings is really deeply understanding just how big the impact of compound interest is. Go pull up a compound interest calculator, graph a curve, something conservative say 7% growth rate over 20 years. Then do it over 40 years. The difference is amazing.
All this tax advantaged retirement savings is an almost entirely shadow-world when it comes to compensation. In tech places like http://levels.fyi has done amazing at leveling the playing field, but something small like an employer offering after-tax 401k, or only having horrible high fee fund options, makes a significant difference over the years.
Can you use a throwaway and name some names of employers that you know offer the after-tax-401k-to-personal-Roth option?
Ive never been able to figure out why personal finance sites and gurus conflate that, I can find no advantage of a roth ira it looks simply like an inferior product/provision
However until very recently it was not possible to get money into Roth funds if you made over the income limit.
It’s been a multi-decade accumulation of small changes culminating with the 2018 change that allows converting post-tax dollars from IRA or 401k dollars to Roth dollars, with no income limit.
So a roth 401k is still not a roth ira, thats my only point and am hoping for a conversation why people act like there is only one roth product and that they are the same thing when one is clearly superior in most circumstances
you can “mega backdoor roth” into self directed 401ks
* If you'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'll be more confident, have a better sleep, will be in a better position if you ever need to hire someone;
* 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.
* 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're an employee, then courses, conferences, R&D work might be included in your "remuneration".
* Increasing risk of becoming unemployable in the future, having trouble going through the hiring process.
* There is an increasing chance that you'll end up hiring people and become an employer $$ :)
* 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).
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.
And why are self-employed hit with a special tax?
To discourage self employment and innovation so people remain corporate slaves.
The self-employed aren't taxed extra per se: they "just" pay the employer and employee portions of the social taxes.
Which is a big pain when you're self-employed and feels super unfair, but that's the logic.
On the other hand you can put more money in a tax-deferred retirement account (401K etc) than regular employees, so I think it might cancel out the added tax if you have a good accountant.
Check into short-term health plans if you don't use much healthcare - esp if you don't need to cover a family. $170/mo. (plus the deduction - effective cost $100) vs. $600/mo for Obamacare.
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”
Some employers offer the “Roth mega backdoor” which allows employees to invest up to that limit.
> Laptop, Desk, etc.: $5k
> Maybe they send you to a few conferences
Though that still IMO falls short of that number, and also being sent to ~3 conferences every year seems extremely atypical.
* Macbook $2.5k to $3k (with taxes, depending on config)
* A desk - $200 to $500
* A chair - $500 to $1k. Don't bother with a $100 big box one. It will be worn out in months. A $1k chair is cheaper than back surgery (and less painful).
* A monitor - $250 to $500.
* Webcam, Headset, keyboard, mouse/trackpad, cables, likely a spare charger, etc - $250 to $500+
That comes to $3.7k on the low side. $5.5k on the high side.
I bought some of my stuff used, but to recreate my setup would cost around $5k to $7k. Laptop, monitors, and chair is the majority of the cost before getting into any other accessories. Besides triple monitors, most items are budget conscience.
$1k screen: 3 years old and going.
MacBook Air here is from 2013 (beginning to fail so I'll buy a M1 soon I guess). Work is done on my six years old desktop (16 GB Ram / NVMe PCIe 3.0x4 SSD): not a speed daemon of a PC by today's standards but not slow either.
I don't cheap out on stuff: they just last years, and years and years.
- Don't bill hourly. This has the side effects of allowing you to charge a higher effective rate while serving your clients better. Do this without doing any fixed-bid work if you work in software development. Retainers work great for this, but you really need to be clear about responsibilities before assigning a price.
- long-term contracting at a high rate. This looks like full-time work building a complex system over e.g. 12-24 months at an hourly rate (if you earned $100k at your last job, this rate will be over $100/hr). This work often looks like staff augmentation and will have you embedded in a team at the client. Then just work a normal schedule. Take an hour or two a week to reach out to other prospects for when this project ends.
I would add three related things to consider that were not highlighted by the author:
1. Business acquisition costs
2. Risks of being fired
3. Freedom to hire and fire clients
Business acquisition costs -- One benefit of being a salaried employee is that you don'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.
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 and 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.
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 really 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.
I also recently launched https://4dayweek.io - Software jobs with a better work / life balance.
I'm on a mission to help normalise the 4 day week
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're taxed first on the $50,000 and then you get to experiment (with less money.)
It's worth noting that as an employee you pay taxes then pay expenses. As a corporation you pay expenses and then pay taxes. It's far more efficient. Here's a real-world example of this in action...
I earn AUD$1,000/day on average as a senior DevOps Engineer here in Brisbane, Australia.
As an employee I'd push my tax bracket into the 45% range with those kinds of earnings. That's a lot of money going into the system. That's possibly a good thing or a bad thing, depending on your world view (I'm pro taxes.)
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/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/day at 27.5% (25% soon) and then invest what's left into shares and other vehicles, allowing me to have more money to invest with.
The more money (and time) you have to invest with the more money you can make (and lose.) That's why leveraging (margin loans) is a thing.
The business might take a different approach: pay me $400/day in wages and push $300/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/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's all capped, never reaching that 45% tax bracket until I'm ready to draw it down from the trust (and by then, I'll likely be drawing down the $400/day, allowing me to FI/RE and therefore will still remain at the 32.5% tax rate.)
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/day, but with less impact and higher taxes on the proceeds.
Being an employee is fine. It offer a safety net. You get benefits. A team to work with that'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.