Self-employment is a dream for many citizens. You can have the freedom to set your own schedule, do what you love and make your own rules. Many people dream of venturing into the world of self-employment. The prospect itself can be very alluring to many people. Those interested in embarking in self-employment should proceed with caution as there are some major financial pitfalls citizens can easily fall prey to. Self-employment can be very costly if you do not proceed with care. Here is a look at some of the hidden costs of self-employment and what you can do to keep your finances in check.

SEE: Starting A Small Business

Health and Dental Insurance
One of the biggest concerns that many self-employed citizens have is how they will pay for health insurance. According to, the average premium for a non-group family policy was about $4,968 per year in 2011, while an individual policy for one subscriber averaged around $2,196 per year. This cost is just for health insurance alone. When you factor in costs of deductibles, dental insurance, vision and more, you can have one tremendous cost on your hands. In order to save money on insurance, shop around to get the best deal available. Some medical insurance carriers offer comprehensive plans that include dental and vision riders. Just as with any other large purchase, you will want to comparison shop to identify which plan is right for you.

Life Insurance
Equally as daunting as paying for health and dental insurance is purchasing a life insurance policy. Many companies offer low-cost life insurance policies to their employees. However, when you are self-employed the cost can be significantly higher. Life insurance costs depend on your age and health status, but if you are buying a policy as an individual as opposed to as part of an employer group, the rates are likely to be higher.

SEE: Buying Private Health Insurance

Sick or Vacation Time
When you are sick or need to take a vacation day in the corporate world, you are allotted a certain number of days for which you will be automatically paid. When you are self-employed, you do not get paid if you don't work. This will need to be considered before making the big plunge into self-employment. If you decide to take a vacation, you will need to over-compensate in the weeks prior to your trip in the amount of work you do. Additionally, if you become very ill you will need to have a back-up plan in case of emergency.

Retirement Planning Expenses
Other benefits that are offered by many employers such as 401(k), pension and retirement savings plans could be more expensive for the individual consumer. Many employers offer 401(k) vesting, which matches a certain employee contributing funds up to a certain point. When you are self-employed, you do not have this added benefit.

A major financial burden that many self-employed citizens overlook at first is taxes. When you work for an employer, the employer takes taxes out of each paycheck. When you are self-employed, this is not often the case. Plan to pay taxes throughout the year using IRS vouchers, or in one lump sum annually.

SEE: 10 Tax Benefits For The Self-Employed

The Bottom Line
Self-employment can be a highly rewarding experience for many people. Preparing yourself financially before making the big plunge into self-employment will ensure a higher level of success as you embark upon your journey into the business world. Many people view self-employment through rose-colored glasses rather than weighing the pros and the cons of the venture. By understanding the benefits and the drawbacks, you are helping to fireproof your future against financial pitfalls associated with self-employment.

Related Articles
  1. Entrepreneurship

    Top Legal Tips for Starting a Business

    Before you launch a new business, make sure you're on top of the key issues that most startups face.
  2. Investing News

    The 10 Fastest Growing Green Startups in 2016

    These social entrepreneurs adopt triple bottom lines that champion urgent environmental problems while generating returns for shareholders.
  3. Budgeting

    5 Alternatives to Traditional Health Insurance

    Discover five of the most popular alternatives to traditional health insurance plans, alternatives that are increasingly popular as health insurance costs rise.
  4. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  5. Entrepreneurship

    Multilevel Marketing Isn't Always A Scam, But It Often Is

    Nerium and Amway are popular direct sales companies that recruit new buyers and sellers to make a profit. Sadly, many direct sales firms are scams.
  6. Insurance

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  7. Entrepreneurship

    10 Characteristics Of Successful Entrepreneurs

    Do you have the qualities of a successful entrepreneur? Those who do tend to share these 10 traits.
  8. Investing

    5 Up and Coming Social Media Startups

    Although the days of Facebook's dominance aren't close to being over, here are some new creative platforms gaining traction on the worldwide web.
  9. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  10. Products and Investments

    Cash Value vs Term Life Insurance: Which is Best?

    The debate between cash value life insurance and term insurance plus an investment plan is an ongoing one. Here's a look at both sides of the argument.
  1. Does dental insurance cover implants?

    Dental implants have become a widely used procedure in dentistry. Despite their popularity, however, they tend to not be ... Read Full Answer >>
  2. Does dental insurance cover dentures?

    Most full dental insurance policies include some restorative coverage, usually meaning that up to 50% of the cost of dentures ... Read Full Answer >>
  3. Can CareCredit be used for family members?

    CareCredit has become a widely used option when it comes to paying for medical procedures, primarily procedures not typically ... Read Full Answer >>
  4. Can a Flexible Spending Account (FSA) be used for dental?

    Flexible Spending Accounts (FSAs) can be used to pay for dental expenses including deductibles and co-payments with pretax ... Read Full Answer >>
  5. Does dental insurance cover braces?

    Most regular dental plans cover little to none of the costs of braces. The primary focus of regular dental plans is prevention ... Read Full Answer >>
  6. Does dental insurance cover crowns?

    Dental insurance coverage may vary according to the type of plan and the level of benefits that you have elected. Most dental ... Read Full Answer >>
Trading Center