Freelancing… the streets are paved with gold?

By Slow Dad - March 08, 2017

Permanent employees are like pampered children. Freelancers are like ginger headed step-children. Which is the easy path to wealth?
I’ve been working for myself, running a business, for 20 years. For the most part this has been a lucrative and rewarding pursuit.

Every client site I’ve ever visited has contained a cluster of permanent staff grumbling about how tough they have it, and how they are going to strike out on their own to go freelancing just as soon as [insert your favourite excuse here] has been overcome.

At the same time there will be a group of disgruntled contractors who complain about how much their accountants charge, how much tax they pay, and how much time complying with all the various rules and regulations applicable to business owners actually takes.

Inevitably there are also an even smaller group of (usually younger, less experienced) freelancers who are forever going on about the dubious tax avoidance schemes they have signed up to, and the outrageous “business” expenses they claim as tax deductions.

They can’t all be telling the truth. So who is right?

Being a permanent employee is a lot like being a pampered child

First off let’s consider the lot in life of a permanent employee.

In many ways I would liken this to what it was like to being a kid.

A permanent employee is a lot like a pampered child

Those of us fortunate enough to win what Warren Buffett calls the “ovarian lottery” (that is lucky enough to be born in a developed country to parents who were both interested in and capable of supporting us while we grew up) had it pretty good.

Our basic needs were all met by others. Shelter? Food? Clothing? Healthcare? Education? Entertainment? Yep.

Our parents and teachers provided them all. In fact if we were really lucky somebody cooked our meals, did the washing up and even washed our clothes for us! In some respects becoming a grown up and leaving all that behind kind of sucked.

So how is that like being a permanent employee?

Well it provided a reasonable degree of comfort and certainty. If everything operates as it should then in return for a fair day’s work you will receive a fair day’s pay. Chances are that somebody else is going to be worrying about where that work comes from, and making sure you have enough to do. Somebody else is going to worry about making sure you actually get paid, in the correct amount, with the correct taxes deducted, and so on.

If you don’t got to work, but take a holiday instead, then you will probably still get paid. The same is true if you are unwell.

Your employer will likely contribute to your personal pension. They may even provide you with other useful benefits such as health insurance, interest free loans for train tickets, gym memberships, and so on.

Need tools to get the job done? Chances are the employer will provide everything you need, plus any training required to use the tools safely and correctly.

All the permanent employee has to do in return is show up reliably, and do a reasonably competent job most of the time, and they will get paid.

Of course they can also be made redundant, passed over for promotion, and generally treated like indentured servants, so it isn’t all rainbows and unicorns.

As an employee you likely have a boss who tells you what to do.

You will probably be subjected to some variation of an annual performance review, at which time your boss will make excuses as to why you won’t get much of a pay rise next year.

If you are really lucky you may be in a job that pays an annual bonus, in some professions these are life changing.

Freelancing is like being a ginger headed step-child... fend for yourself!

Now let’s compare that somewhat idyllic sounding employment situation, where you are spoon fed and the majority of your needs are taken care of, to self employment.

Self-employment comes in many guises. It may involve working as a freelancer, or contractor, or through an agency, or via some form of limited liability company. There are lots of pros and cons associated with each, all of which vary based on jurisdiction and personal circumstance. However there are a few characteristics they all share.

You are on your own. There is no safety net.

Freelancing. There is no safety net.

You have to find your own work. This means you are always at least partially in sales mode. Most people I know hate trying to sell things.

You might land a 12 month contract, but any contract is really only as long as the notice period it contains.

If you work then you might get paid, providing your clients pay you. Hopefully on time, and preferably in full... without too much chasing, and without you having to take them to court.

However if you do not work, then you most certainly do not get paid. Holidays? No pay. Illness? No pay. You get the idea.

If you want a pension then you have to pay for it yourself.

If you want health insurance then you have to pay for it yourself.

Same with all other forms of benefits that employees enjoy and largely take for granted.

Working out your taxes is another challenge. You will probably need to call in reinforcements, hiring a (hopefully) competent accountant to help you traverse the murky world of vague principle based legislation and centuries of case law, where the courts have determined what those badly written laws actually mean in practice. You’ll likely end up paying some combination of Corporations Tax, Value Added Tax, Pay As You Earn Tax, National Insurance (both the Employers and Employees share).

No matter how friendly and knowledgeable your Accountant appears, you are personally still on the hook for any legal punishments, fines, penalties and the like if your books are properly kept.

You’d better hope your work on a client site will expose you to the latest and greatest industry trends, providing you with an opportunity to keep your skills up to date and knowledge current. If not then you will need to pay for your own training and professional development... which if it falls on a work day means you won’t be getting paid while you attend to your education. If you don't you run the risk of becoming a dinosaur, unemployable once your current gig finishes up.

Mortgages can be much harder to arrange.

Freelancing can also be liberating

It isn’t all bad however. Working for yourself provides a lot of freedoms that permanent employees do not enjoy.
You can choose which clients and projects you take on.

You can set your own hours.

You determine how much your time is worth. If the market agrees with you then you will find work, if not then you will have some free time to catch up your unemployment television.

You determine when you are ready for a promotion, or a change in direction, not some pointy headed boss.

Every day is a performance appraisal. If you do a good job you will probably be invited to return tomorrow. If you don’t then you will mostly likely be shown the door.

You don’t need to participate in office politics or any of the silly games that go on at any organisation, because you don’t have any skin in the game. Although you can play if you choose to, and some contractors do so just for sport.

Enough fluff already, tell me about the money!

One thing is for certain, the streets are not paved with gold if you are a freelancer. While your take home pay may appear higher at face value, the numbers actually need a little bit of manipulation to be comparable.

Your remuneration as a permanent employee is not limited to your take home salary. Rather it is the total of your:

gross salary + employer pension contributions + paid holidays + sick leave + training + any other benefits you would choose to provide yourself if your employer did not.

That number is likely to be much higher than what you see in your next payslip.

It is only once you have this adjusted figure calculated that you are in a position to compare it to the hourly or daily contractor rates you may see advertised.

The difference in remuneration between permanent employees and freelancers is shrinking.

Over the last few years the gap between what a permanent employee and a contractor earn for a similar role has been steadily shrinking, to the extent that if a freelancer is doing their taxes properly and not taking the piss with their deductions, then in practice there isn’t a huge difference between the two forms of employment when it comes to remuneration.

Of course your mileage may vary, so do your own homework to verify this.

So what?

Personally I enjoy the freedom and control working for myself provides. However there can be a lot of uncertainty, which may not be for everyone.

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