Whether you earn multi-six figures or less than $100,000 per year, being self-employed offers many benefits over remaining an employee.
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Working for yourself is especially preferable if your employer classifies you as “exempt,” expects you to work long hours without overtime pay, yet pays you an underwhelming salary.
You may have thought longingly about the day you could tell your boss to take a hike, but you know new businesses face a lot of risks, and many don’t last even one year, let alone five, 10, or more.
Being responsible for keeping a roof overhead and food on the table makes it an especially daunting prospect.
Perhaps the following illustration of just how big the payoff can be will motivate you to consider it more seriously, and the two low-risk solutions may make it less fear-provoking…
Comparing Even High-Income Employees to the Self-Employed
Even if you make multi-six figures as an employee, striking out on your own can bring substantial benefits. Here’s how.
1. Employees Have to Split the Value They Create with Their Employer
If you have the right skill set to command a $250k compensation package as an employee, you may well be able to strike out on your own.
Then, even if you don’t scale up by hiring employees, you benefit from the full value you create without splitting it with an employer.
In this situation, you may well be able to bring in over $400k in annual revenue, and if you’re, say, a consultant or programmer, your profit margin can be over 95 percent!
2. Employees Can’t Deduct Many Work-Related Expenses that Business Owners Can
Most employee work-related expenses aren’t tax deductible, while business owners can deduct every work-related expense.
In fact, since 2018, many passthrough business owners even get a “qualified business income deduction” (QBID) of 20 percent without needing to prove any concrete expense related to it!
3. Business Owners Can Classify Much of Their Income as Profit Distribution; Employees Cannot
If they take a defensible salary, business owners may be able to classify much of their income as profit distribution, reducing payroll taxes significantly (though they do pay both the employee and employer sides on what they classify as salary).
Ryan Firth, Founder of Mercer Street Personal Financial Services, agrees, saying, “Assuming business owners actively participate in running their business, they can make an S-corporation election, pay themselves a reasonable salary, and take the rest of the profit from the business as passthrough income on their individual tax returns.
“Unlike wages, this passthrough income isn’t subject to Federal Insurance Contributions Act (FICA) taxes. Plus, business owners can defer income to a much greater extent than employees, delaying tax liabilities.”
4. Business Owners Can Set Aside Far More than Employees into 401k Plans
Finally, the self-employed can max out their 401k contribution andemployer match, deducting huge amounts from their taxes and building outsized 401k balances within not too many years.
The table below shows a plausible comparison between two situations, an employee with $250k total compensation vs. a similarly skilled self-employed person earning $400k.
The employee can only deduct about 20 percent of work-related expenses, while the business owner can deduct 100 percent of work-related expenses plus the QBID.
Despite the business owner being on the hook for 100 percent of health insurance premiums vs. the small fraction paid by the employee, the business owner’s pre-tax income is higher by over 56 percent. Despite this, the business owner’s effective tax rate is 28.5 percent vs. over 32 percent for the employee!
As a result, the bottom-line take-home for the business owner is 65 percent higher than the similar-skilled employee.
Pros and Cons of Being an Employee vs. Self-Employed
Let’s compare the benefits and drawbacks of these two situations.
Pros and Cons of Being an Employee
First and foremost, as an employee, your employer is usually responsible for bringing in paying work for employees. That means that unless you’re in sales, you don’t have to do much marketing. If your employer is successful in these efforts, you can concentrate on your specific role and don’t have to take responsibility for other aspects of the business.
On the flip side, once your employer assigns work to you, it’s difficult to get out of doing it. Worse, if your employer can’t find enough paying work for you, you’ll quickly find that “job security” has become a myth for most employees.
That’s what caused my last employer to lay me off after less than two years.
Beyond that, Eric Maldonado, CFP®, MBA, Owner of Aquila Wealth Advisors, LLC, says, “As an employee, all your taxes are automatically taken out for you by your employer’s payroll throughout the year. You will need to update withholding elections each year to try and get it close to what’s owed, but all the tax payments for federal, state, Social Security, Medicare, and state disability insurance are all automated by your employer. That simplifies things for you.”
However, he says, “You can’t deduct as many business-related expenses as a business owner, and you don’t have as much control over the deductions you can take.”
Pros and Cons of Being Self-Employed
Here, you have the benefit of being in control of everything about your business. If you don’t like a project, you don’t have to do it.
If you don’t like a client, you can fire them.
However, as a business owner, you’re responsible for all aspects of the business, including finding paying work. If you’re not successful at that, your business will fail before you can take advantage of all those nice tax breaks.
Regarding those tax breaks, Maldonado says, “Business owners can get a little more creative in finding business deductions. A business owner can take a home office deduction, a mileage deduction for business travel, and business-related meals.”
Grant Bledsoe, CFA, CFP®, Three Oaks Wealth adds, “Business owners can write off expenses, make contributions to a retirement plan, and accelerate business expenses and defer income into future years. Most of these avenues aren’t available to employees, though they can still make deductible contributions to retirement plans.”
As for drawbacks, Maldonado points out, “It takes more time and effort to manage your taxes. It’s all on your as the business owner to make sure you pay your taxes accurately and on time. You can, of course, hire a CPA or tax preparer, but it’s still your responsibility.”
Bledsoe mentions another drawback, “FICA taxes are your contribution to Medicare and Social Security. They total 7.65 percent of your wages. Employers pay payroll taxes of 7.65 percent on your wages too. Since the IRS considers business owners as both employee and employer, they have to pay 15.3 percent, which is not coincidentally the sum of an employee’s FICA taxes and an employer’s payroll taxes.”
Two Creative Solutions for Highly-Paid Employees
Beyond taking advantage of the few deductions the IRS does allow you as an employee (e.g., tax-advantaged retirement plans and health savings accounts if your health insurance plan is compatible), here are two more creative solutions.
First, start a side hustle related to your skill set and build it up over time.
Once it reliably and consistently replaces enough of your salary, you can quit your job so you can spend your full time growing your business. The sensitive thing here is to make sure you don’t run afoul of the terms of your employment contract and don’t get into conflicts of interest and/or commitment with your day job.
Second, start building a portfolio of rental properties.
As Maldonado says, “Acquiring rental real estate gives you the advantages a business owner gets tax-wise, while staying an employee.”
Doing well in this requires a lot of knowledge and experience, as well as time to build up enough capital to invest in properties. You can start by, e.g., buying a duplex or a quad, living in one part, and renting out the other(s).
You can also start leasing out your old houses each time you move to a new place.
The nice thing about real estate is that you can leverage your investment through mortgages, and you get to deduct depreciation against your income, even if the depreciation exceeds your rental income.
Should You Work for Yourself or Someone Else?
The tax code favors business owners over employees. This means that if you want to reduce your tax rate, you need to do something different or in addition. Like becoming self-employed and/or investing in real estate. Both solutions come with risks and aren’t a fit for everyone. However, if they are a fit for you, they can help you build significant wealth much faster than staying an employee.
Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
38 Financial Certifications to Know Before You Hire a Financial Professional
Accredited Asset Management Specialist (AAMS)
An Accredited Asset Management Specialist (AAMS) is a designation for financial professionals who specialize in asset management and investments. Administered by the College for Financial Planning, the AAMS provides them with the extensive knowledge they need to assess and recommend a variety of investment opportunities.
Those who hold an AAMS often support clients with retirement, college, and taxes so they can meet their long-term financial goals.
Accredited Estate Planner (AEP)
An Accredited Estate Planner (AEP) is an estate planning professional recognized by the National Association of Estate Planners & Councils (NAEPC). An AEP commits to estate planning in their career and collaborates with other professionals to provide their clients with comprehensive estate planning services.
The Accredited Estate Planner (AEP) designation is a graduate-level specialization in estate planning. The NAEPC awards this designation to an estate planning professional after thoroughly reviewing the prospective AEP’s education, experience, credentials, professional reputation, and character. An AEP is significantly engaged in estate planning in their current profession, and most importantly, they commit to the team concept of estate planning.
Accredited Financial Counselor (AFC)
An Accredited Financial Counselor (AFC) is a financial professional who teaches their clients sound financial principles so they can achieve their short and long-term financial goals.
AFC certification is earned through a combination of experience and educational requirements set forth by its issuing organization, the Association for Financial Counseling and Planning Education (AFCPE).
The AFC curriculum helps candidates become experts on topics such as budgeting, debt management, mortgages, estate planning, retirement, stocks, bonds, mutual funds, and personal income taxes. The curriculum also ensures candidates are well-versed in consumer debt and gain a strong understanding of financial counseling, consumer fraud, and debt reduction strategies. And deeply personal and emotional topics including bankruptcy and divorce-related financial issues like child support are also covered.
Accredited Investment Fiduciary (AIF)
An Accredited Investment Fiduciary (AIF) is legally obligated to always act in the best interests of their clients. They offer recommendations based on each client’s unique goals rather than prioritizing commissions, kickbacks and referral fees that solely benefit them.
Designees receive the knowledge and skills they need to evaluate the fiduciary practices of investment vehicles such as 401(k) plans and defined benefit plans. They also support those who manage endowment and foundation assets.
Accredited Portfolio Management Advisor (APMA)
An Accredited Portfolio Management Advisor (APMA) is a finance professional specializing in creating, managing, and growing investment portfolios. APMA credential holders are recognized in the industry as top experts in asset allocation, investment analysis, risk analysis, and other facets of investment management.
Professionals who pursue the APMA designation are typically highly experienced, with a background in financial planning and advice.
Behavioral Financial Advisor (BFA)
A Behavioral Financial Advisor (BFA) is a financial advisor who goes beyond asset selection and offers practical advice to positively influence their clients’ saving and spending habits. This individual is motivated to craft a financial plan and grow their client’s portfolio through a keen focus on behavioral finance and investment products.
As the name suggests, BFAs go a step further to offer value-added service by considering your behavioral patterns and emotional triggers regarding money. By understanding your relationship with money and investing, they can provide well-rounded advice and construct a plan that is more likely to bear fruit for you.
Certificate in Blockchain and Digital Assets (CBDA)
The Certificate in Blockchain and Digital Assets (CBDA) is a designation awarded by the Digital Assets Council of Financial Professionals (DACFP) and the New York Institute of Finance (NYIF). The Certificate is earned by financial professionals who are interested in and passionate about learning about the growing fields of blockchain, cryptocurrencies, non-fungible tokens (NFTs), and other digital assets.
Certificate in Investment Performance Measurement (CIPM)
The Certificate in Investment Performance Measurement is administered and awarded by the CFA Institute. While the primary certification issued by the CFA institute is the Chartered Financial Analyst (CFA) designation, many financial professionals who have earned their CFA credentials choose to pursue CIPM certification as well.
CIPM certification holders often work for asset management firms and financial institutions. You will also find financial advisors and wealth managers who have earned their CIPM certification, predominately those who serve higher net worth individuals with more complex and varied investment portfolios.
Certification in Long-Term Care (CLTC)
The Certification in Long-Term Care (CLTC) is a designation administered by the Certification for Long-Term Care Institute, an independent third-party administrator unaffiliated with any insurance carriers. The designation accredits professionals in various fields with the proper skill set to discuss the consequences of long-term care with their clients.
CLTC accredited professionals work closely with families to help mitigate the physical, emotional and financial consequences of long-term care, including care provided by nursing homes, personal caregiver agencies, home health agencies, hospitals, and more.
Certified College Financial Consultant (CCFC)
A Certified College Financial Consultant is a financial professional who specializes in education funding. They’re well-versed in student loans, tax consequences and education credits.
You can think of CCFCs as education finance experts who understand the challenges of covering the cost of college or trade school. CCFCs support students before, during and after the college planning process.
Certified College Planning Specialist (CCPS)
A Certified College Planning Specialist (CCPS) is a finance professional who specializes in helping clients with financial planning for college. CCPS members are certified by the National Institute of Certified College Planners (NICCP) to provide advice, education, and ongoing support to prepare families for the financial implications of college.
CCPS holders are finance professionals with extensive experience in guiding students and families through the complex financial implications of attending college.
Certified Credit Counselor (CCC)
A Certified Credit Counselor (CCC) takes a holistic approach to credit counseling and is well-versed in banking and credit fundamentals to help clients eliminate debt and improve credit scores.
Their primary objective is to provide clients with the knowledge and resources they need to resolve financial issues and take control of their finances. CCCs are known to educate those who are financially stressed so they can avoid common mistakes and make smart decisions in the future. They also work with clients to implement the ideal financial plans for their unique budget, goals and priorities.
Certified Digital Assets Advisor (CDAA)
The Certified Digital Asset Advisor (CDAA) designation is for financial professionals focused on helping individuals manage digital assets including cryptocurrencies and tokens like NFTs.
A financial professional who has earned the CDAA designation understands blockchain technology and cryptocurrencies like Bitcoin that are built on the blockchain. They know several valuation methods and theories around Bitcoin and digital assets. And they can help clients make more informed and educated decisions when deciding which cryptocurrencies to invest in, when to buy and sell, and the considerable risks of investing in this emerging asset class.
Certified Divorce Financial Analyst (CDFA)
Certified Divorce Financial Analysts (CDFA) help people going through a divorce (and their lawyers) understand how their financial decisions will impact their future finances. This credential is issued and overseen by the Institute for Divorce Financial Analysts (IDFA), which has been around since 1993 and offers specialized training to accounting, financial, and legal professionals in pre-divorce financial planning.
Certified Exit Planning Advisor (CEPA)
The Certified Exit Planning Advisor (CEPA) is a unique designation for financial professionals who advise business owners on how to successfully sell or transition their business, a strategy referred to as ‘exit planning’. It was created in 2007 by the Exit Planning Institute (EPI), a company focused on educating professional advisors globally on how they can support the success of business owners to maximize value and sell on their terms through a business transition.
Certified Financial Planner (CFP)
A Certified Financial Planner (CFP) is a well qualified financial professional who use a variety of strategies to help their clients. CFPs often analyze a client’s current situation and prepare a number of financial reports that show essential figures like net worth. CFPs may also assist with investment planning, insurance planning, estate planning, income tax planning, and retirement planning.
While many other professional designations concentrate in investment management, the CFP focuses on holistic financial planning. In addition, CFPs stand out because they must abide by a strict standard of fiduciary duty, meaning they are required to put their clients’ best interests ahead of their own. They can’t buy financial products for clients for the sole purpose of earning high commissions.
To earn a CFP, financial professionals must complete certain education and experience requirements as well as pass a rigorous exam that is distributed by the CFP Board.
Certified Financial Therapist
A Certified Financial Therapist is a mental health or financial professional certified by the Financial Therapy Association for their education and experience in the areas of financial therapy, financial planning, counseling and therapeutic competencies. Those who hope to earn a Certified Financial Therapist-I (CFT-I) certification must fulfill certain requirements set forth by the Financial Therapy Association.
Certified Financial Transitionist (CeFT)
A Certified Financial Transitionist (CeFT) helps clients navigate through major life events and the financial implications that come with them. Created by the Financial Transitionist Institute, the CeFT is only available to established professionals in the financial industry.
CeFT holders are financial professionals who understand how life transitions change financial situations. They have also received at least one other highly respected designation such as the CFP, CIMA, ChFC, CDFA, CPWA, CPA/PFS, or CFA.
Certified Investment Management Analyst (CIMA)
The Certified Investment Management Analyst (CIMA) is for financial professionals who would like to stand out as advanced investment consultants. Issued by the Investments and Wealth Institute, it focuses on topics such as risk measurement, asset allocation, due diligence, and investment policy.
CIMA holders have completed an education program at a top-tier business institution such as the University of Chicago Booth School of Business, the Wharton School, University of Pennsylvania, and Yale School of Management.
Certified Kingdom Advisor (CKA)
A Certified Kingdom Advisor (CKA) offers financial services with a Christian perspective to help clients plan their finances in accordance with Christian values. The CKA designation is issued by Kingdom Advisors, an organization that offers training and a community to financial professionals interested in integrating Christian faith and practice.
CKAs are specifically trained to apply biblical wisdom and abide by the Kingdom Advisors Code of Ethics. Clients who work with a CKA can gain a deep understanding of what God hopes they’ll accomplish and how they can go about fulfilling God’s wishes.
Certified Money Coach (CMC)
A Certified Money Coach (CMC) pairs “psychological principles, universal spiritual beliefs, and practical financial guidance” to support their clients. Their ultimate goal is to help people from all walks of life change their relationship with money.
They focus on money coaching, which can lead to “fulfilling purposeful, and prosperous” lives.
Certified Personal Finance Consultant (CPFC)
A Certified Personal Finance Consultant (CPFC) provides financial advice for clients in one-on-one settings. The certification is administered by Fincer, available in English and Spanish, and specifically designed for professionals who provide money coaching, budget counseling, and credit counseling.
CPFCs are highly trained to coach clients on a one-on-one basis. They know how to help them create budgets, get out of debt, and set financial goals.
Certified Private Wealth Advisor (CPWA)
The Certified Private Wealth Advisor (CPWA) certification is designed for wealth managers who work with high-net-worth individuals. These professionals focus on the cycle of wealth, which includes accumulation, preservation, and distribution.
CPWAs understand the challenges of high-net-worth individuals and use their knowledge and training to help them monetize and protect their assets, reduce their tax burden, optimize growth, and transfer wealth. They are experts in portfolio management, family dynamics, asset protection, charitable giving, estate planning, and retirement planning.
Certified Public Accountant (CPA)
A Certified Public Accountant (CPA) is an accountant who has completed rigorous educational prerequisites, met on-the-job training requirements, passed the CPA exam, and has been licensed by the Board of Accountancy in their state. Due to their expanded level of expertise, a CPA may perform many functional roles, including working as tax accountants, business advisors, tax consultants, financial planners, corporate accountants and executives, and conducting audits. According to the National Association of State Boards of Accountancy (NASBA), over 660,000 accountants have earned the CPA certification.
Certified Student Loan Professional (CSLP)
A Certified Student Loan Professional (CSLP) is a financial advisor who has completed the educational requirements for the accredited CSLP program.
CSLP is a specialized designation for licensed financial advisors. Holders of the designation are recognized as experts in student loan repayment. Created by foremost experts in the field, the CSLP designation provides financial planners with the knowledge to offer the most current and accurate advice and tactics for repaying student loans.
Chartered Alternative Investment Analyst (CAIA)
A Chartered Alternative Investment Analyst (CAIA) is an internationally recognized credential. It’s specifically designed for financial professionals who manage, analyze, or regulate venture capital, private equity, hedge funds, real estate, and other alternative investments.
Oftentimes, CAIAs work as portfolio managers, analysts, consultants, brokers, risk managers, and traders.
Chartered Financial Analyst (CFA)
A Chartered Financial Analyst (CFA) is a globally recognized and respected designation for financial professionals who would like to develop their expertise in investment management. It’s administered by the CFA Institute, which is an international organization that strives to promote knowledge and financial literacy in investments.
With a CFA designation, financial professionals gain the knowledge and skills needed to succeed in finance, banking, and securities. Its curriculum was specifically designed to reinforce a variety of important investment principles.
Chartered Financial Consultant (ChFC)
The Chartered Financial Consultant (ChFC) designation is administered and awarded by the American College of Financial Services in Bryn Mawr, Pennsylvania, it’s similar to the Certified Financial Planner (CFP).
The ChFC is available to any financial professional who wishes to help clients with complex situations. Those who pursue the ChFC will be required to complete an education component, which consists of eight college-level courses. These courses include similar topics to the ones found in CFP education such as retirement, insurance, taxation, and investing.
Chartered Life Underwriter (CLU)
The Chartered Life Underwriter (CLU) is a certification for financial professionals who specialize in life insurance as it relates to estate planning and business planning. It involves an extensive educational program that covers topics such as insurance, annuities, risk management, and more.
The CLU is one of the oldest designations as it’s been around since the late 1920s when The American College made its debut.
Chartered Retirement Planning Counselor (CRPC)
A Chartered Retirement Planning Counselor (CRPC) is a designation for financial professionals focused on retirement planning. The program is designed for new and experienced advisors who seek to define a “road map to retirement” for their clients. There is a focus on clients’ pre-and post-retirement needs and issues related to asset management and estate planning.
Chartered Special Needs Consultant (ChSNC)
A Chartered Special Needs Consultant (ChSNC) has the specialized training and experience required to help manage the unique legal and financial planning needs for individuals with disabilities. ChSNCs take pride in ensuring they can adequately address the concerns, hopes and goals of special needs families.
ChSNC holders specialize in many areas of financial planning including special needs trusts, life insurance, government benefits, estate planning, tax planning, medical expenses and retirement planning for individuals with special needs. These are all topics that are usually beyond the scope of knowledge of traditional financial planners.
Chartered SRI Counselor (CSRIC)
A Chartered SRI Counselor (CSRIC) is an expert in sustainable investing, which offers the potential for strong financial returns while demonstrating a commitment to sustainable business practices and positive impact. It’s usually measured by analyzing environmental, social, and governance (ESG) policies, practices, and performance.
Not only are CSRICs well-versed in the history and fundamentals of sustainable, responsible, and impact (SRI) investments, they understand its limitations and future potential. They’re able to support clients who value sustainable investing with an impactful portfolio that allows them to leave the legacy they’d like on the world.
Enrolled Agent (EA)
An Enrolled Agent (EA) is a tax professional recognized by the Internal Revenue Service (IRS) as an expert in personal and business tax laws. This individual can represent their clients before the IRS for tax issues, including audits, collections, and appeals.
The Enrolled Agent (EA) designation is awarded to a tax professional by the IRS after thoroughly reviewing the experience, conducting background checks, and completing official tests. Therefore, a professional with an EA designation is often considered the most experienced and proven expert in tax law.
Life Underwriter Training Council Fellow (LUTCF)
A Life Underwriter Training Council Fellow (LUTCF) is expert in understanding the life insurance options available to people from all walks of life. Often, they are newer life insurance agents who wish to jumpstart their careers or take their expertise to the next level.
LUTCFs are well-versed in a variety of life insurance products as well as how to educate others on them.
National Social Security Advisor (NSSA)
A National Social Security Advisor (NSSA) is a finance professional who has completed the educational requirements of the NSSA certification and specializes in providing advice related to social security. The Financial Industry Regulatory Authority (FINRA) recognizes the NSSA certification as an official designation.
An NSSA can help you assess family finances and determine the best age for yourself (and your spouse, if applicable) to claim social security benefits.
Personal Financial Specialist (CPA / PFS)
The Personal Financial Specialist (PFS) is a designation for licensed Certified Public Accountants (CPAs) who wish to provide financial planning services to their clients. Designed by the American Institute of Certified Public Accountants (AICPA), the PFS allows CPAs to go beyond their traditional duties and help others plan for their futures.
Registered Life Planner (RLP)
A Registered Life Planner (RLP) is a designation for financial professionals who specialize in the human side of financial planning. The Kinder Institute of Life Planning runs the program and boasts that more than 500 advisors have earned the designation globally.
The visionary concept of Life Planning seeks to discover the most profound goals of a client through a process of listening and inquiry.
Retirement Income Certified Professional (RICP)
A Retirement Income Certified Professional is a financial professional who helps people ensure all of the money they saved for retirement lasts a lifetime. RICPs can help you create steady retirement income out of your savings, figure out the optimal time to claim Social Security and company retirement benefits and plan for healthcare as well as long-term care.
You can think of RICPs as financial experts for those in retirement. While many retirement advisors focus on how to save for retirement, RICPs are concerned with how to help those who are already retired or close to retiring stretch their savings as much as possible.