How Much Money Do You Need to Make to Become a Self-Employed?
Knowing how much you need to make as an entrepreneur to replace your day job’s salary requires some planning and goal-setting to become self-employed.
Becoming fully self-employed is the goal for many entrepreneurs starting their first business. Some people continue to work day jobs––either to ensure their bills are paid or their projects are funded while they chase their dreams. Transitioning from regular employment to self-employment takes planning and some research. Whether you’re a consultant or coach with a certain number of clients, or an influencer growing your Patreon subscriber list, it’s important to know how many customers your business needs to fully replace your day job’s salary.
For people who own their own business instead of working for someone else’s, they must calculate their operations costs and work to surpass that number in order to see any profits. Whereas employees simply show up to work then take home a paycheck each week, the self-employed individual is expected to take on the roles of departments like operations management, HR, accounting, and marketing––in addition to doing the actual work that earns their business money!
As such, the salary for the average employee represents a range of costs and benefits not included in the total salary for an entrepreneur. Things like health insurance, state and federal taxes, social security, are typically included in an employee’s salary. Conversely, entrepreneurs must personally foot the bill for these costs and others (such as office space, Wi-Fi, travel, and more). According to the finance writers at FinanceSamurai.com, most entrepreneurs will need to earn about 1.6 times their day job salary to replace that job’s income and become fully, securely self-employed. The table below illustrates the hidden value in a day job’s salary and the rough comparison between that salary and the net profits for entrepreneurs before taxes.
For those looking to simply replace their current job’s salary, the table below lists the yearly income the self-employed individual needs to make to more or less cover their bills, taxes, and typical business costs. The table uses FinancialSamurai.com’s multiplier of 1.6 to account for the hidden costs of running your own business.
Maintaining Steady Income as an Entrepreneur
Another aspect of self-employment many consider before quitting is the relative inconsistency of income compared to a day job. Most employees are paid at regular intervals (weekly, biweekly, or monthly) and, as long as they continue to show up to work, can expect paychecks with the usual amount. An entrepreneur, on the other hand, needs to continuously attend to their current customers as well as attract new business in order to grow. Especially when just starting out, there may not always be money coming in.
Some businesses are naturally busier in certain seasons. For instance, fitness and health coaches and personal trainers list New Years as their busiest season thanks to the tradition of making resolutions. Hence, many finance experts advise entrepreneurs to stay at least three months ahead of their bills. Ideally, a self-employed individual will maintain enough funding for the next six months to manage their business and personal needs. To ensure you have a consistent workload and solid foundation of clients, try not to spend more than 30% of your time with any one client.
New consultants and coaches often charge between $50 and $75 per hour and may spend only a few hours a day working with clients when their business starts out. Depending on your industry, you may meet with clients for a few hours once a week, biweekly, or every month. Yet, even spending 15 hours each week (or three hours daily, Monday to Friday, taking two weeks a year for vacation) with clients can bring in between $37,500 and $56,250. If you have a week every other month with no clients whatsoever, your total income for the year dips to between $33,000 and $49,500.
From our table above, we know that $37,500 per year for the self-employed worker is equivalent to about $23,438 at a day job; $56,250 equates to approximately $35,156. Consequently, the number of clients you need will depend on your type of business. Nonetheless, spending less than 20 hours with them each week can replace most hourly wage and day jobs today.
“Be Your Own Boss: 5 Valuable Tips For The Self Employed” by Amy Bergen. Updated May 22, 2019. Retrieved October 14, 2019, via https://www.moneyunder30.com/five-financial-areas-to-master-for-the-self-employed
“Calculate Your Self-Employed Salary” by Michelle Ullman. Updated June 25, 2019. Retrieved October 14, 2019, via https://www.investopedia.com/articles/personal-finance/071814/calculate-your-selfemployed-salary.asp
“How Much Do I Have To Make As An Entrepreneur To Replace My Day Job Income?” by Financial Samurai. Retrieved October 14, 2019, via https://www.financialsamurai.com/how-much-do-i-have-to-make-as-an-entrepreneur-or-contractor-to-replace-my-day-job-income/