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Over the last 35 years I was an employee for 24 years, and full-time self-employed for 11.
Those first 24 years were critical in enabling me to do the work I do now through my businesses, but as far as direct compensation, they left a lot to be desired, and in some cases actually cost me money.
A lot of money.
Excess Value Created
Your employer is in business to make a profit, and there’s nothing wrong with that. However, what this means is that by definition you must be creating a lot more value than what you’re getting paid.
Indeed, since you probably cost your employer about 25-40% more than your pre-tax, pre-deductions salary, you probably create at least 100% more value than you’re paid.
If you could do the same work as your own boss, you’d keep full compensation for all that value. As an employee, the excess value you create goes into your employer’s pocket.
If you’re a professional, you’re probably considered an “exempt employee.”
This means your salary doesn’t increase if you work more than the standard 40-hour work week, even if those extra hours are involuntary.
In one employee position, my supervisor would say things like, “Weekends and holidays are for secretaries and students,” or “Working evenings and weekends is for your convenience, so you can get more done.”
Of course, my (rather anemic) salary didn’t increase by a penny when I had to work 50, 60, 70, or more hours a week for weeks on end.
Say your employer has you working 50 weekly hours on average with no overtime pay. In this situation, you’re losing the extra 25% you should be getting paid (let alone the time-and-a-half or double-time payment often required for non-exempt employees’ overtime work).
When I was a grad student, I did research work overseas for a year.
For 6 months my then wife had no work permit, making our finances super-tight.
After she got a work permit and found a great job, I remember her calling me at work to let me know she had just been given her first paycheck.
“That’s great,” I replied. “I’m going to the bank then, to withdraw our last 10 (Swiss) Francs so I can buy lunch.”
Over that year, my relationship with my supervisor became increasingly strained, because I wasn’t willing to work 100 hours a week, setting my personal limit at 70. Since in his opinion grad students were a (vanishingly small) step up from indentured slaves, my refusal to jump each time he said “Frog!” was inexcusable to him.
By the time the year was up, my wife was 8 months pregnant with our son.
I asked my supervisor to extend our stay there for a month or two, so she could continue working until giving birth. This would have given us desperately needed income, and would have had all her hospital bills paid by the extremely expensive private health insurance I was required to buy that year.
My supervisor declined.
Not being one to just give up, I told him I’d take my leave before moving back home.
“If you want to take leave, that your right,” he replied, “but first you have to move back home.”
By my estimate, his abusive reaction cost me the equivalent of 10 months’ worth of my salary at the time.
While this is an extreme example, as an employee you will likely experience cases where your supervisor or employer limit your ability to take advantage of opportunities to make extra money.
If nothing else, many employers have language in their employment contracts that prohibit you from doing paid work in your field outside of your employment.
Tax laws favor employers and business owners far more than employees. As a result, there are few work-related expenses you can deduct from your taxes as an employee.
How much this affects you depends on many factors, but it almost definitely costs you more of your hard-earned money than it should.
The Myth of Job Security
There are some exceptions to this one, for example if you’re a government employee.
However, for the rest of us, job security is mostly a thing of the past.
My final employer let me go because they weren’t able to market my skills well enough to make money from my work. This made perfect sense, and I left the company on good terms without any hard feelings.
However, this resulted in my having no income for several months, and having to pay the full cost of my health insurance through COBRA. Just that last was over $1500 each month!
The Bottom Line
Being your own boss comes with many perks, but also with lots of risks. Not everyone is cut out for this path, and not everyone who tries succeeds. However, if you stay an employee for your entire career, be aware that you’re very likely losing a lot of money as a result.
About the Author
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.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.