Entrepreneurship is great due to the high correlation between effort and success. But just how much entrepreneur income do you need to replace your day job income? It may surprise you that it actually takes a lot more income!
I had a day job working in investment banking from 1999 to 2012. And I've technically been an entrepreneur since 2009. It was only in 2012 when I decided to become a full-time entrepreneur.
Fortunately, starting your own website like this one is very inexpensive and easy to do nowadays. If you want autonomy and believe you have what it takes to create income out of thin air, go for it!
Entrepreneurship is an incredibly exciting adventure. There's nobody to blame for your failures. Just like there's nobody to reward but you for your victories.
Anybody who incessantly complains about their job should just give entrepreneurship a go. They will probably never complain again.
A Day Job Is Easier To Maintain
A day job is a walk in the park compared to entrepreneurship. Making entrepreneur income is very hard work because of the necessity to wear many different hats, e.g. accountant, operations, marketing, sales, producer.
What I'd like to do in this post is provide a rough estimate of how much you entrepreneur income you need to make in order to earn equivalent money as a worker bee.
Hopefully this post will give you a better idea before taking a leap of faith. After all, you don't want to quit your job and die alone do you? There's no honey when you got no money.
Entrepreneur Income Needed To Replace Day Job Income
Take a look at this chart I put together based off of a $100,000 day job salary. There are two components to the chart:
1) How much your day job salary is really worth after adding up all the benefits,
2) How much an employee doesn't have to pay because s/he is not an entrepreneur.
Overall, you need to make 30% to 60% more as an entrepreneur to be equivalent to a day job income. In other words, you need to make $130,000 – $160,000 as an entrepreneur to earn a $100,000 day job income equivalent.
Entrepreneur Income Vs Day Job Income Chart Review
True Value Of Your Day Job
I've used very typical benefits given to a $100,000 a year employee. Clearly some companies will provide more paid vacation, less 401k matching, better ongoing employee training, and higher cost of living raises.
In some fields such as banking, a bonus can be equivalent to multiples of base salary. But overall, I'm making an estimate that the true value of your job is worth 1.3X your salary. See the top half of the above chart “What You Get As An Employee” $130,800.
Contractor Salary Conversion
1.3X is also the multiple I believe a 1099 contractor can use to calculate how much more s/he needs to earn to make an equivalent day job income.
A contractor forgoes benefits such as healthcare, paid time off, pre-tax retirement plan, 401k matching, options, life insurance, disability insurance, and guaranteed 40 hours worth of full-time work a week. Some contractors actually charge much more than 1.3X a day job equivalent rate.
Business Type
I use an asset-light business model, e.g. internet. There are some businesses that are very capital expenditure heavy. But these are businesses that individuals would probably not go into.
If you assume an individual gets into a retail business such as selling baked goods or clothing, “Office” rent would shoot through the roof, as would its costs of goods sold.
Accounting Assumptions
All the items under “What You Don't Have To Pay As An Employee” are all business expenses. As a result, the $29,650 can be deducted from revenue to lower taxes. If we assume a 30% effective tax rate, the true cost goes down to roughly $20,755, making the grand total needed as an entrepreneur to replace day job income closer to 1.5X.
Furthermore, the OASDI + HI employer expense phases out at $160,200 (for 2023), which means there is convergence at higher income levels. The reason why I keep the 1.6X multiple in the chart is to be conservative.
If your total business revenue was $30,000 your first year, but you had all these necessary expenses, you'd end up with hardly anything left to live. Whereas an employee making $30,000 will breathe much easier.
Entrepreneur Operating Income Requirement
I estimate an entrepreneur needs to make 1.6X more than a day job income to come out the same. The range is probably somewhere around 1.3 – 2X for the majority of cases.
As you can see from the chart, an entrepreneur must pay extra taxes, fees, and expenditures for growing his or her business. The fun kick in the pants is that if an entrepreneur fails, s/he cannot claim unemployment insurance despite the taxes paid.
With higher income levels, there is operating leverage for the entrepreneur as s/he doesn't have to work as hard for the same income. I estimate at income levels above $500,000, there is a lower multiplier necessary for an entrepreneur to replicate a day job income.
Table For Converting Entrepreneurship Income To Day Job Income
This is a handy dandy chart if you are currently an entrepreneur looking to give it all up and go back to a day job since it's so much easier. As you can see, you don't have to make as much working for someone else as your employer will take care of a lot of the expenses you once incurred.
This chart is also a great way to compare yourself to entrepreneurs who publicly highlight their income. The higher the numbers, the more skewed the results.
Table For Converting Day Job Income Into Entrepreneur Income
This chart is very important to study for all who want to engineer their layoff to become an entrepreneur. I'm telling you from years of experience that making an equivalent entrepreneurial wage is very difficult. But, if you start to gain traction, the freedom and satisfaction you gain helps make up for the income difference.
At higher income levels, the numbers become skewed in the entrepreneur's favor given the OASDI + HI tax caps out at $132,900 for 2019 and there is more operational leverage as an entrepreneur.
There's A Mental Disconnect As Well
What's interesting is that converting entrepreneurship income to day job income seems more reasonable (2nd table) compared to converting day job income into entrepreneurship income (3rd table).
For example, I can see how $250,000 in entrepreneurship income is equivalent to about $156,250 in day job income based on experience. There are plenty of $156,250 a year jobs one could get if they no longer want to be a $250,000 a year entrepreneur e.g. consultant, banker, lawyer, engineer.
It's harder to grasp that one needs to make $250,000 a year as an entrepreneur to replace their $156,250 a year job. If you look at higher income figures, it gets more daunting e.g. $400,000 in entrepreneurship income to replace a $250,000 a year day job.
The good thing about entrepreneurial income is that there's a lot more upside and leverage. Furthermore, you're creating a business as an entrepreneur that could one day be sold.
Why The Disconnect?
The reason for this disconnect is probably my own bias for not having achieved in entrepreneurial income the maximum amount I achieved in my day job income. Most of us are worker bees, hence trying to comprehend entrepreneurial income is more difficult.
The other reason for the disconnect is that I simply don't know that many entrepreneurs who are making $250,000 a year or greater in operating profit before tax. Whereas there are plenty of people I know making $250,000 or greater at their day jobs. Heck, even our retired SF police chief makes around $250,000 a year in pension money.
Related: How To Make Six Figures A Year At Almost Any Age
Go The Hybrid Route First
I've really spent a lot of time thinking about these charts as a person who went from 13 years as an employee to 11 years as an entrepreneur now. In the beginning, being an entrepreneur is much harder than having a day job. But if you can find product-market fit, remaining an entrepreneur gets easier.
I encourage every day job employee to really think about the numbers above before taking the leap of faith. Start your website on the side and make some money while working a day job.
Here's a real life example of a blogger friend of mine who started his site in 2012 and now generates roughly $150,000 a year from his site and another $180,000 a year in consulting income due to the recognition of his site.
Starting a blog or an online business is truly one of the best ways to go because it is scaleable, cheap, and allows you to brand yourself online for new opportunities.
Pro Blogger Entrepreneur Income Statement
One thing employees take for granted is the consistency of their paycheck. Every two weeks or every month you will get paid so long as your company isn't going bankrupt. As an entrepreneur, each month is an adventure, but it's a worthwhile adventure with unlimited upside!
If you make $120,000 as an entrepreneur, it's not bad, but it's really only equivalent to about $80,000 a year as an employee.
My recommendation is to moonlight for as long as possible until you know with great certainty that your entrepreneurial income can cover all your basic expenses for six months in a row. That is the point where you should feel confident to take the leap of faith and go for entrepreneurial glory!
Recommendation For Leaving A Job
If you want to leave a job you no longer enjoy, I recommend negotiating a severance instead of quitting. If you negotiate a severance like I did back in 2012, you not only get a severance check, but potentially subsidized healthcare, deferred compensation, and worker training.
When you get laid off, you're also eligible for up to roughly 27 weeks of unemployment benefits. Having a financial runway is huge during your transition period.
Conversely, if you quit your job you get nothing. Check out, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye.The book has been updated six times and is newly revised for post-pandemic life.
It's the only book that teaches you how to negotiate a severance. In addition, it was recently updated and expanded thanks to tremendous reader feedback and successful case studies.
Start Your Own Website And Become An Entrepreneur
It's never too late to get started. There are endless possibilities to earn entrepreneur income. Plus, if you want to learn how to get very rich, the answer is to build equity in a business.
Every business needs their own website. Here's a step-by-step tutorial showing you how. Not a day goes by where I'm not thankful for starting Financial Samurai in 2009.
I ever would have imagined being able to engineer my layoff from a well-paying job in 2012 to just write and be absolutely free. You just never know what might happen if you try. Back when I started, I had to hire someone for $1,500 to launch FS. Now you can launch in under 30 minutes for less than $50.
Today, Financial Samurai generates more in operating profits that I made working 60+ hours a week as an Executive Director in investment banking. Further, I spend way less time and have a lot more fun.
Related post: Reflections On Making Money Online Since 2009
For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
Please keep in mind that you have a much broader audience than you might suspect. A huge number of Americans struggle to work toward a maximum income of $40,000 during their lifetimes. If I had a job paying me $75,000 or more, I would be ecstatic; but, as it stands, I am only a capable 33 year old woman stuck at a dead end job making $48,000 a year (50 hours a week and 2.5 hours a day in rush hour) in an area of the country where the price of living is quickly climbing. Additionally, jobs of that pay anywhere near this much with my lack of qualifications are few and far between. I have an IQ of 145, but I dropped out of college due to illness and went to work to pay medical bills which still prevent me from gettinger more student loans. I’m under qualified for corporate success. My story is just one of many demonstrating that a perfect life and education is sometimes a very far reach. There are MANY of us who don’t have a lot of hope for a financially easier life outside the dream of entrepreneuralship (if that’s not already a word, it should be). The extra hard work is more welcome to some rather than others as is the risk. So, if I worry about my future, and happen to complain a little on the way, it’s because my current path will leave next to nothing to show for the long and stressful deadend days.
Hi Endi,
Thanks for sharing your story. I’ve been recently working an extra 10 or so hours a week driving for Uber. It’s done during early mornings or at night when there’s no traffic to see what it’s like earning a pro-rated $40,000 a year, and I’ve been going at it for several months now. Maybe give it a try if you have time and want more freedom? I’m earning about $25/hour net, $35/hour gross.
See posts:
What’s It Like Driving For Uber? Feelings Of Hope And Sadness
Spoiled or Clueless? Trying Working A Minimum Wage Job As An Adult
I think you will really enjoy reading these posts. It will give you some inspiration!
One advantage of uber driving is you are in a closed room with prospective customers. This guy makes $250k a year by hanging a necklace in his car. When people ask him about it he gives them a soft sales pitch. Uber is OK with this, as long as customer initiates conversation it seems.
https://nextshark.com/how-an-la-uber-driver-makes-250000-a-year/
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To keep things interesting, if one owns a rental property business, there may be enough tax write offs (mortgage interest, depreciation, etc) where you can actually make less than a day job and come out even.
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Thanks for the chart Sam! This makes me want to review my business plan to make sure it’s viable. I have been contemplating taking the leap of the faith. Something in me is saying that this is the time to do it. The problem is I don’t have all the recommended things in place. I found a way to have at least three months of living expenses when I quit, but that’s it. Business has been stagnant and I’m not producing any income. Being an entrepreneur and working a full time job is beyond difficult. It’s hard for me to manage my time to get all the things I need to get done and I am often frustrated that I can’t devote the time and energy I need to make my business work. I feel that I would do so much better if I more time to devote to my business. To make the transition easy for me and my employer I thought about being a contractor for my current employer versus an employee. That way I have the time I need to concentrate on my business and I have some income coming in. Any advice you could get would greatly help. Thanks.
The biggest factor in determining the financial viability of entrepreneurship is how your lifestyle changes. We make less income with my entrepreneurial ventures but:
– I no longer commute (down to one car), eat out at work and pay for ridiculous amounts of dry-cleaning and other “look the part” expenses. This saves me $30K per year (I’m not kidding).
– I save the time involved in commuting, etc. That’s A LOT of time!
– I deduct a portion of our home & telecom expenses, as the office is in our home.
– I deduct all travel (all our travel is a combination of leisure and business).
The benefits of internet/home-based entrepreneurship is the change in lifestyle. The locus of control is closer to you (you won’t fire yourself & your success is your own) and the reduced stresses of externalities associated with working for The Man (all the stuff you need to do to have a job that you DON’T get paid for (see first point).
If your business is external (retail and other)–which I’ve also experienced– be careful that you are not substituting your previous boss for a new one (the bank). You may feel like not much changed and you can’t just walk away!
Wow, this was quite a thorough analysis. It is a bit sobering for those just starting out and dreaming of one day striking out on their own. When I first launched my site, I put together a similar analysis of what it would take for me to earn if I ever wanted to leave my corporate job. I did it just for craps and giggles (and because I got side tracked and caught up in the calculation) as I am nowhere even close to making such a plunge. I do think there is some intangible value to “being your own boss” and seeing the fruits of your labor manifest directly before your eyes for your own benefit. Yes, I know that means more hard work, but I’d be willing to take a discount when it comes to earnings in order to achieve that situation. Intrinsic value and personal reward seem to be much higher, in general, for entrepreneurs than for employees who are “just a number” to their company.
Oh, and isn’t it nice that the social security wage base keeps increasing each year? It has gone up by by 20% ($19,500) in just 7 years! Thanks, Federal government, for sticking it to the small business owner!!
I have always recommended people moonlight for some time. I have been moonlighting for years. I go in and out of love with the things that I do. If I get bored, then I switch. Having a full time job allows me to do so. I have been self-employed before and I like my job more. There is a lot of stress being self-employed that many people don’t realize.
Great Article Sam! I will definitely begin reading this blog regularly. I really enjoy your story.
I agree with some of the previous comments that going the entrepreneurial route is tough if your opportunity cost is high (high and steady income, good benefits, decent job security). However, It might be worthwhile to put a value on “being your own boss” and “making your own hours”. What do you think those things would be worth to an employed individual? My guess would be quite high.
Cheers!
Wes
Very interesting article on the amount of money that needs to come in to be equal to your day job.
I’m a proponate of the hybrid method. I believe you should run your finances and jobs like a business. If you only have your day job or 1 income and you lose that most would be in a huge financial mess. But if you had a day job and a side business you could make it through the tough times.
Using Nike as an example, if they only sold shoes and all of the leather and rubber became in shortage this could spell financial ruin, however since they sell shoes, clothes, sports equipment, etc they have so many streams of revenue they would weather the storm in a troubled economy.
I must say that one thing I disagree with, and totally disagree with our HR and your analysis which adds Paid Time Off to the Base Salary. If one has a base Salary, the Paid Time Off is already part of your base salary.
Based on that, your numbers are already increased by 3 extra weeks pay, so instead of 52 weeks pay, they are supposedly receiving 55 weeks pay in a year.
I should also note that I don’t receive and never have received a 10% 401k match. Granted those positions do exist I’m sure, most likely in finance since that’s one field I haven’t worked in directly.
And adding the 2% salary increase every year (while fairly small), right now is rather high as a general rule.
Feel free to remove the text at the beginning of the post that says “disagree with, and”. That was a mistype. :-)
Feel free to share what you think the right multiplier is and why. thx.
Wow, Sam. Great article! Those charts were extremely eye opening and gave me a ton to think about. Money is important, but there are opportunity costs to consider, as someone mentioned above. I’m in a constant battle of wondering what I might be missing out on, but I’m working on being more mindful.
I think so much about successful entrepreneurship is tied to having a unique product or service. By unique, it could mean a common product or service in a new market (neighbourhood). No matter what, there’s going to be a lot of risk and hard work, and, as your article points out, you have got to make probably more than anticipated to be even close to treading water. Going this route would only be palatable for me if I could make a lot more and/or have a lot less work in the long term. Having a big backup fund built up is the key, and if you’ve got the right product / service then go for it!
To the contrary, you absolutely do not need a unique product or service to make it big. That is probably the MOST risky way to do it. The payoffs can be huge if it works out, but the folks earning 6-7 ( or even 8-9) figures per year are really not doing anything unique at all. My business makes money doing exactly what thousands of other businesses do (I’m serious). There’s nothing unique about it. I just tapped into a market that had more demand than the supply was currently offering. There was room for more slices of pie and I just cut myself a piece.
For example, if you open up a Five Guys burger joint in a location that has demand for it, you could become a literal millionaire with very little work. That’s very simplified, but the concept is the same. Shoot, my buddy makes a LOT of money with his dropshipping eBay business. I’m sure 99.9% of people think that market dried up long ago. Yet he started less than 2 years ago and puts maybe 5-10 hours per month of his own time into it. I mean how much more cookie cutter can you get with an “eBay business.” My mom makes over 6 figures just helping people out with their yard sales. Yard sales!!
Most saturated industries or “niches” are not as saturated as a lot of people think. Find some demand, and fill that demand for a fee. That’s it. There are billions of consumers and businesses alike that need something and are willing to pay for it.
Too many people think they need to reinvent the wheel, or do something unique to make a comfortable living on business income. But unless you have extremely lofty monetary goals, you can easily make well over 6-7 figures doing what a lot of other businesses/people already do. Just find an opportunity and get your piece of pie. The more unique and crazy your idea, the more risky and expensive it is going to be to succeed.
Thanks Adam
I agree that tapping into a market that has more demand than supply will work which is why I said “By unique, it could mean a common product or service in a new market (neighbourhood).”
However, how to know what the saturation point is (demand = supply) and also be prepared for capital investment (like your Five Guys Burger joint example). Many business have been launched and failed due to insufficient demand.
I guess you’ve got to be pretty confident and savvy to figure out some of this stuff out.
Thanks for pointing out it may not be as scary as it looks.
Sobering food for thought,Sam. I often think about starting my own gig…with plenty of big talk @ it as well…only to stay entrenched in th corporate welfare system.
P.S. Good commercials on XM radio of late
Sam,
I think your factors are pretty close. If you are trying to replace a corporate style salary with a small business, 1.6x would be really close.
You need to be frugal. Your cost of living must be kept very low. Used cars, few meals out etc. At least until the business really gets going.
This is where marriage would be a great advantage; having a spouse with a descent full time job (with benefits), and yourself concentrating on running a small business.
The good news…… There are an infinite number of small business ideas/concepts out there. Many of them can be started as a moonlighting/hobby project.
Also, the median household income in the United States is actually around $52,000/year. It seems to me that someone living closer to the median is going to be considerably less challenged replacing that with self-employment income, and probably comfortable living frugally.
After reading this article I feel very lucky at how little expense my business actually has. It’s all online with no real ‘physical’ products, so the overhead is extremely small. Marketing costs are also very small as the majority of it is free traffic once initial set up is complete. I also do a small amount of consulting on the side for a company in exchange for health benefits – spending maybe 5 hours per month on that gig, as I’ve out sourced most of the labor for that.
If being an entrepreneur really costs that much extra, I don’t know if I would have made it. I had some very tight margins for a couple years, and any additional costs would have given my P&L too much in the red for too long. My hats off to entrepreneurs that can pull it off. Especially those with brick & mortar businesses. I know how costs can shoot up with those.
This aligns pretty well with my own experience of going from an employee to an entrepreneur. Your multiples worked pretty good in my case.
A very sobering thought there Sam (for someone who has yet to earn their first $$ from their website)..
I must say though (correct me if this is wrong) being an entrepreneur allows you to have unlimited earning capacity and can you really put a price/benefit on the flexiblity of working for yourself?
What are your thoughts?
It sure is, per the point in this post’s first paragraph. It’s just not as easy as some might think.
I’d say give things a go for a good three years. IF one can’t make in operating profits equivalent to the per capita income of their city, then one is probably just a hobbyist and should continue to work a day job.
https://www.financialsamurai.com/real-entrepreneurs-are-successful/
Thanks for the link Sam, for me I know that it’ll be successful, it is simply about having the drive and the intelligence to work at it efficiently.. I am probably focusing a little too much on the day to day or operational i.e. replying on twitter and not enough on the strategic i.e. building a product set but am about 2 months in..
Watch this space :), you are an inspiration though.. Keep the blogging up
You can keep telling yourself that a dollar earned as an employee is better than a dollar earned as an entrepreneur, but I’ll contend that it’s not.
In your first chart, you mention employee income + benefits. Sure, you can add the up to get to 1.3x of total benefits vs an entrepreneur that makes the same amount of money. But the other 30% are expenses/deductions. Thus this would not be calculated in the profit for that company. In that chart, an entrepreneur making $162,450 in REVENUE with 31,650 in deductions would be the equivalent to the value of the income + benefits that an employee makes.
Your second chart is ENTIRELY inaccurate. You include PROFITS in the left column. That would NOT include any of those expenses you put into the first chart. Thus AT MAX it would be a 1.3x factor, not a 1.6x factor. Profits assumes that those expenses have already been deducted (rent/marketing/meals/travel/captial/PPE/COGS/accounting/book keeper etc).
You also include extra SS paid. Remember, that phases out after a certain amount (i think 117k this year). Your chart should reflect that no longer being a benefit.
Furthermore, as income scales higher, the majority of those benefits diminish as a percentage. For example, you aren’t going to get a 10% matching bonus to retirement if you make 500k a year now will you? You also don’t get 10x the insurance benefits if you make 10x the money do you? Thus as an entrepreneur makes more money, the scaling factor of employee vs entrepreneur decreases. An entrepreneur that makes 400k is like an employee that makes 360-370k.
Finally, and quite possibly one of the most important reasons to become an entrepreneur, is that every dollar in profit that your business generates is 1*X (x = industry multiplier for resale value of your business) increase in the value of your business. If your business makes 400k in profit this year, and the industry multiplier is 3x annual profit, then you have an INVESTMENT worth 1.2 million dollars that you can sell. Last I checked, you don’t get this type of advantage with a job.
So now as an entrepreneur you make money in 2 ways – directly from the profit, and indirectly from the value of your company. You will make money a LOT faster as an entrepreneur than with a job.
I’m 25. My businesses profited over 900k collectively last year. They are worth several million dollars. I have a 4 year college degree. I travel monthly to wherever I want to go. I work when I want to. Can you name a job that would offer me these opportunities at my age?
Finally, to put the nail in the coffin on having a job vs a business, you are much more limited in how much you make with a job. With a job your income boils down to this simple formula:
($/unit of time x number of units of time). For example ($/hour x # hours worked) or ($/year x # years worked).
You are VERY limited in how much you can control those variables (you can’t control time now can you?). If you wanted to triple your income, can you work 3x as many hours or reasonably expect to get a 300% raise? Not very likely.
But with a business the formula is different:
(#units sold x $profit per unit) + ($total annual profit x industry multiplier)
If you want to triple your income you have a lot of things you can do: Triple the number of units sold or triple the profit per unit (don’t think this is possible? I’ve done it each year for the past 3 years). You can control these variables a lot more than you can with a job because your income doesn’t depend on the one variable that we cannot control: time. The added benefit is that you will also increase the value of your company as you increase your profit.
You said yourself that you made a ton of money with stocks. Which formula do you think that fell under? Probably something like this:
(# of stocks x $profit per stock).
You said yourself you like real estate. I wonder why?
(# of properties x $profit per property)
Neither of those things depend on your TIME. That’s why Real Estate and Stocks offer a great way to accumulate wealth.
Being an entrepreneur is the road to take to become wealthy fast. Unfortunately, most people will fail because they don’t have what it takes. That doesn’t mean the road leads to a dead end.
I think a lot of people actually do have what it takes, THEY just don’t realize they have what it takes. A lot of my colleagues are initially scared, but don’t realize that owning and running a business is not as hard / crazy as the mainstream makes it out to be.
Too many people think they are ‘stuck’ working at their day job and wrongly assume that they have no choice to leave. They get in their own way.
I wish people actually knew how easy it really can be to earn 7 figures per year (or month). Especially nowadays with the internet and literally the world at your fingertips. There are so many legitimate ways to make a lot of money, and for the most part, learning how is just a matter teaching oneself using the wealth of information available to anyone and everyone for nearly free of charge, and then just taking action.
If more people could just get over that initial fear, they might realize they actually do have what it takes, their mindset just needed an adjustment. There are a lot of hard working and intelligent people stuck in day jobs that don’t realize their own potential and that they do have the smarts to make it work. It’s too bad a strong fear mentality holds them back.
You make some good points, and here are some counterpoints:
* If you are 25 and are an entrepreneur with 4 years of college, how do you know the tables are off if you have never earned real day job income before and gone up the scale? Please share with me your experience as an employee as well as I’m highlighting both sides.
* A lot depends on what type of business one runs as I write in the post. There are asset heavy, manpower heavy businesses. Then there are asset light, manpower light businesses. Please share what type of business you run now. $900K profits is great. Is it just you?
* There is also a lifecycle to deal with. I say give things 10 years on both ends and see how one really feels. As I say in my post, my experience is skewed with 13 years employee, 2-5 years entrepreneur. So I’ll have to revisit in 5-8 years to see whether I still feel the same way. You?
* The numbers are more relevant at the lower levels e.g. $500,000. Beyond that, we’re in the subjective happiness and rarity realm.
– I have no experience as an employee since high school. Since I started making money online, there was no need for me to get a job. I’m not saying it’s impossible to be where I’m at with a job, but I would say that the probabilities of getting to this level at my age are much higher as a self-employed entrepreneur than with a job. I’ll just say this: I don’t know anyone personally 25 or younger that is self-made, worth several million and makes close to what I do with a job. Do you?
– Asset heavy or not, it doesn’t matter. The chart is still wrong. You can’t compare profit, and then take off 30% as “expenses” and use that as a scaling factor vs employee income. I run several internet businesses. I shared profit figures, the revenues were a lot higher. I have partners, but I own between 60%-100% depending on the company.
– I will not be committing 10 years to being an employee just to see how it really feels. 10 years from now, I don’t imagine I’ll ever have to work again in my life. I’ll always have some sort of passive income stream, but nothing that will require time if I don’t want to commit time to it. There’s much more freedom and ability to scale income with owning a business. I’d never get a job, even if I went broke tomorrow. I don’t need to to know how it “really” feels. I have lots of friends with 9-5s and they tell me everyday. I can tell you one thing – it doesn’t seem like it “feels” good. On the other hand, I have met a lot of people in my car club that are entrepreneurs and all of them love being an entrepreneur.
– The numbers are not relevant at 500k. They are only relevant at 117k or below. After then, the scaling factor becomes less and less significant. I agree with you that you don’t NEED more than a certain income level to achieve peak happiness, but the goal is to make sure you will be able to sustain that income level for the rest of your life. Sure, if you make 250k in one year, you might be really happy for that year, but if next year it drops to 50k then your happiness drops too, right? So why not make more if you can? It only puts your further ahead and minimizes risk that something could happen that impacts your financial situation to the point where your happiness is affected.
Your chart needs to be updated to reflect the fact that wage income + benefits approaches entrepreneurship income as you make more. But honestly, it would still only tell a part of the picture. A 100k/year entrepreneur is going to accumulate wealth faster than a 100k/year employee. They have are making money from building an asset that can be sold in the future. I’d rather be a 50k/year entrepreneur than a 100k/year employee.
Any interest in putting together a chart that you think best reflects what income needs to be generated to match a day job income then? I think it would be great perspective even if don’t have any day job experience.
All perspective is welcome and am happy to host what you think is the right chart/way.
hey Travis,
Good on you for creating a devils advocate comment/approach.. It is often those who do things differently that succeed. Would be very interested to see a diagram with you representation of the comparison too
Cheers
Jef
A wantrepreneur compared to you at the moment :)
As a 25 year old who has never been an employee, I don’t understand how you can provide a balanced approach to this post’s topic. You can talk entrepreneurship all you want, but with no employee experience, and not that much entrepreneur experience, your arrogance in the way you write typify the Millennial generation.
As a business owner for the past 20 years, you will go through some downs. Perhaps they will you show more humility and respect.
Hey Sally,
Although I am sure that you are not meaning to see this way, it seems as though you are trying to shoot Travis down.. Why would anyone need to have experience as an employee if they’re successful as an entrepreneur? Sure all Travis is really doing at the moment is seemingly boasting about his achievements however this is beside the point..
I question why someone should have to go through the “hard yards” as an employee to prove whether or not you can earn more as either one.. If the prospect of being an employee and sitting behind a desk is something that a person could not imagine anything worse, why should they do this to prove a point to someone?
I personally work a 9 to 5 or sometimes an 8 til 6 Monday to Friday as an employee and while have not made much of an impact as an entrepreneur yet (still learning), I can see that you’re able to make a lot more of an impact as an entrepreneur (in most instances) than as an employee as a number in a large organisation..
To me kudos to Travis and anyone that doesn’t need to work 9 to 6 at a day job, this doesn’t mean they don’t work or hustle twice as hard and has the flexibility to do with their time as they choose :)..
Feel free to disagree but wanted to raise this point
I somewhat agree with Sally on that one…as she was referring to his view on the post’s topic, which was the day job vs the entrepreneur income comparison, etc. So not having the experience limits his perspective, even if it’s just numbers.
However, you’re absolutely correct in that you don’t need the 9-5 grind experience to be a successful business owner, but I don’t think that is what she was really pointing out anyway.
I also agree with her about the arrogance. But I was the same way as a rich 25 yr old, so I’d be a hypocrite to criticize it. Losing it all is a very humbling experience (as she said), but it’s also one of the best things that happened to me. It gave me a chance to learn and rebuild :)
And I wouldn’t glamorize the entrepreneur prospect too much. There are huge perks to being an employee once you start hitting the mid six figures (250k – 500k, and beyond). Before that, it’s hard to beat owning your own business. But at the higher salaries, most careers have the entrepreneur-ish “feel” to them anyway, save for a few….but without some of the major drawbacks associated with running your own company or business. It really depends on what you do in either scenario and the type of person you are and what makes you “tick.” Some people just aren’t cut out for that lifestyle, and would much prefer the employee status. It doesn’t make them better or worse by any means. Different strokes… :)
Adam, I still think my points stand about the benefits not being as great at the higher income levels. Care to explain otherwise if that’s not the case? Also, I don’t think you can doubt the fact that an entrepreneur is building an asset that can be sold for a lot, and that has to be greater than almost any employee benefit at a high income level, do u agree?
Sally,
I have hit many failures on my journey. Although I’m young, I’ve been an entrepreneur for 10 years now. I didn’t see real success until 3.5 years ago. I worked for a long time without even making money because I believed in the dream. I used student loan money to bootstrap my company. I know sacrifice, failure and hard work, don’t assume that because I’m young I’ve had it easy.
If you, or anyone, let’s the arrogance in the way that I type stand between believing what I said and not, then that’s perfectly fine. Most of what I said was not boasting, more trying to explain why entrepreneurs have more tools in their arsenal to accumulate wealth. Your approval is not going to change my reality. I didn’t write a comment to seek validation or brag. I wrote to show the truth – if your goal is to make a lot of money in the fastest time possible, then the probabilities are in your favor when you are an entrepreneur, not an employee.
Like I said, I don’t need first hand experience being an employee to know that what I said is the truth. Nearly 2/3 of self-made millionaires are self-employed, while less than 20% of the workforce is self-employed. Look at IRS statistics on the top income earners, more are self-employed than employees. I don’t need to work a job to understand this.
I don’t disrespect people that have a job. I also don’t look down on anyone that has a job. I’m just saying that if your goal is to accumulate wealth, this is the path to take. If your goal is to work for 40 years, work for someone else, have the peace of mind knowing it’s easy to disconnect work from personal life, live on a fixed income, have a similar life/schedule as your peers and retire when you are old then a job is right for you. Nothing wrong with that. To me, that sounds miserable. To someone else, that is living a good life. I don’t judge, I just know what won’t work for me.
Congrats on being a business owner for 20 years. Care to share what type of business you are in? Do you still own this business or have you moved on? Did you ever get to the point where you could have sold the company and retired early, or did you get to that point and decided that you wanted to continue working?
Great comment there Travis,
You raise some good points as have Sally and Adam, being an entrepreneur really is to me about being passionate to put in those longer hours, without this you are unlikely to be successful..
I am learning the importance of being disciplined as well..
Good discussion all :)
Great response comment. As someone who spent over a decade working quickly up the W2 scale and then switching over to owning my own business, i can say that the scenario quickly flips in the $250 – $400k range completely due to taxes. At this level, depending on your state, you are paying a marginal tax rate of about 50%. Creating expenses in your business to benefit you thus means you only had to earn $1 vs. $2 that a W2 income employee of the same level would need to earn. That adds up fast.
Then, add on great benefits in your business that are a boon to you but tax deferred. Examples: Ratchet up your personal + employee 401k to the limit ($51k). Then employ your spouse if you have one (boom, another $51k untaxed). Then add on a defined benefit pension. Anywhere from $100k – 255k depending on your age. The list keeps going on but gets more esoteric for businesses generating $750k+ in gross profit before the benefit deductions.
Very interesting argument, I would agree at around 100k, you need to make more on your business than your salary to match the same living standard.
However the multiplier should reduce as your income from your business increases. If you make 960k a year from you business, it’s definitely not equivalent to 600k in day job salary. The benefits you get will not be 360k (health insurance etc), at higher income, the multiplier should reduce.
Anyway, why do you have to quit your day job to be an entrepreneur? Me and my wife both kept our 6 figure income and have a small business that generate gross income around 400k a year (based on last year, yes we paid tax more than my day job salary).
We started the business 10 years ago. And yes, starting the business is not easy, a lot of late nights for both of us and with support of families and each other, we finally made it. The business should grow from here on.
But now, we actually spend less time managing the business 2-3 hrs a day +6-8 hrs during the weekend, after standardize a system. Eventually, we would like to be able to manage the business from anywhere around the world.
We both love our day jobs to quit anytime soon unless got laid off, sure the free health ins from my company is nice.
Key to be a successful entrepreneur is
1) customer satisfaction, customer is #1, no matter what is your business.
2) Do not go all in at once, start small and learn along the way. You will always hit by unforeseen event that set you back (you learn more from your mistake/failure)
3) Never gives up (I admit I almost did), be resilience
4) Ambitious, and working harder than others, starting a business is not easy, alot of people give up easily and not willing to put in the hours.
5) always look for new opportunities, embrace change, do not whine (The book ‘Who move my cheese’ is a very good book that every entrepreneur should read.)
6) It’s a marathon, not a sprint. stay positive and be prepare for the worst.
Good article on a controversal topic…being your own boss.
Sounds easy and it’s highly glamorized in the USA. (Be your own man! Right!) It isn’t easy! Four out of five entrepreneurs will fail over a five year period and that increases during the next five years. I had never worked so hard for such a small return during the 20 years I had my company. Fortunately, the related benefits were incredible such as unlimited travel and creative curriculum design worldwide. Surprisingly, the money only matched my former salary no matter how hard I worked. ($100,000 a year wasn’t bad 20 years ago but I received the same salary in my college job with so many more benefits and less stress.)
As you express in your message, be prepared to earn less than you earn as an employee with more headaches if you hire others to work for you. That’s the key …Are you a good manager of people for growing the company or are you more creative as a lone visionary and designer? Writing blogs is great for a one person team and contracting out some of the work.
My wife hit it on the head when she said…”you can quit your very secure and high paying day job when you make the same salary and benefits doing the new dream job on the side.” We had two small children at the time and a mortgage. It took me five years of working the two jobs side by side but I did eventually create a successful company with five full time employees and 25 contractors. I was never able to match the benefits for retirement and health insurance, etc for all of us. Small business is a whole lot different from the romance of Apple, Google, Amazon or Cisco.
My advice: 1) Have at least two years of liveable savings on hand to pay your company and personal expenses because it may take several years to make a salary.
2) Don’t quit your day job at first. Numerous studies have indicated that the ones who risk everything by starting from scratch without any backup job (part-or full time) are more prone to failure.
3) Make sure the family and spouse are fully supportive and understand the sacrifices that will need to be made, including possibly using the mortgage for collateral (I don’t recommend it).
4) Be patient. For most people, it takes five to ten years to get a business really moving with ample benefits and rewards.
5) When you hire employees, you are now responsible for their lives and livelihoods. Being the boss or manager is quite different than being a one person creative director of your own company. I found having employess very challenging although it was a great growth experience. Weigh the pros and cons to really see if it’s worth it to go out on your own. For most people…it’s not!
Good point about the reserves. This is something I did not think about when I initially started my business, and I learned the hard way. A JOB has the benefits of stable income (for the most part). You don’t necessarily get that with a new business. The first couple years are definitely the most UNstable, and could end up in failure if you don’t have enough in reserves to weather the storm, even though it COULD have been a very successful if reserves were there. A lot of people start earning money on the side, and when their side income starts to match their day job, they initially think it’s safe to quit. This is rarely the case.
Fantastic insights. Congrats on running your own business for so long and employing people to help live their lives.
I cannot imagine the amount of STRESS there is firing/hiring and consoling with employees and contractors over the years. I would feel a lot of guilty having to cut wages or cut people during downturns.
Using a second mortgage to start a business… now that is risky. But what a story it would be if one succeeded.
I agree with you, but you left out 2 important aspects. One is risk which is very hard to quantify and two is investment. I realize there are usually more rewards when you take on risk, but how do you quantify it? Secondly, investment in a business can be money or capital, but don’t forget time because it is as important as money. What is a reasonable return for both?
Very interesting but the one flaw I see is a lot of the expenses you list do not scale with salary. Thus, if you are below $100k salary, you actually need to make more than 1.6X and conversely as you get higher the number come closer to 1.3 (or even below as some of those expenses are capped).
Feel free to highlight a specific example and elaborate your position. Thx
There are many opportunities in my profession to be employed or self employed. Being employed for about 5 years now, I always wonder what I would have to make being self employed to have the same standard of living. While I’m sure the numbers vary by profession, these charts are very helpful. I will get some info from some of my self employed colleagues and see what they think. Great post.
Interesting analysis. I have done it myself several times.
There is one important thing missing here – ability to write of business-related things from taxes when you run your own business vs. being a W2 employee.
When I ran my own business I wrote off
1) Car lease and all car associated expenses
2) Health insurance
3) Home office
4) Lots of trips
etc..
All these expenses still exist when you are employed, however none of them are deductible.
True, which is why I’ve suggested one compare Operating Profit before taxes, not revenue to a gross income day job.
You can write things off, but the cost is still about 70-80% of the original cost.
Furthermore, when I was an employee, I had a corporate card (expense account) that paid for flights, meals, events, entertainment 100% for free, not just a deduction.
I am just comparing my life as an independent consultant vs. working w2 for a large consulting firm. Right now I get a w2 and pay taxes through the nose. When I was independent there was a lot more to “play” with.
This is important for people to realize. Your job provides a lot more than just income. Health benefits, stability, etc.
I always thought once I saved up a bunch of money that it would be easy to make money on my own. Once I started doing my own thing I realized how hard it is. Challenging but worth it to be your own boss.
I believe that the majority of people who start a business and fail, will become much more appreciative and better employees if they return to a day job. We can only truly appreciate something once we’ve experienced a loss or a hardship imo. We can pretend to appreciate it, but not until one goes through the unemployment ringer.
I don’t agree here. As an entrepreneur, I pay much less tax for one. I think it really depends on your situation. I was able to get on my wife’s employee sponsored health insurance. Our cost stays the same. I can also deduct a lot of business expenses. Anyway, I just finished out tax and we are paying $40,000 less this year than last year on just Federal tax.
Joe,
But you’re making WAY less than when you were an engineer. Of course you are paying less taxes. Were you only making $3,500 a month as an engineer? I hope not!
You’ve got a great situation because of a working wife. Probably the most important thing you can do is to just ensure that she keeps on working so you don’t have to as much.
I think most people understand that they need to make more as an entrepreneur to equate to what they were making in a day job. While I can’t speak from experience, I’ve got to feel that the majority feel that the intangible benefits (freedom of time, location, level of control etc..) outweigh whatever they may be giving up in terms of hard dollars.
Great article and concept! It definitely costs more to own your own business. In my mind the advantages far out weight the extra costs.
1. I can hire people to make me money. As a real estate agent I have other agents on my team that make me money without me doing anything.
2. I can make my own schedule.
3. I can make all the decisions, which is very important to me.
4. This is my dream and plan, which gives me much more motivation to succeed and makes things much more interesting.
5. I can build something that runs without me their constantly working.
I think one cost that is not accounted for is the tax benefits of owning your own business. You do have to pay more in taxes thanks to social security and payroll, but business expenses are also deductible as well as some travel, car expenses and many other expenses.
Fascinating. I had never really thought about the fact that it would take a higher entrepreneurial income to maintain the same lifestyle you had when you were employed. I wonder what the stats are on the “happiness factor” when someone who dislikes their job goes to entrepreneurship. Are folks who do that mostly happy with the decision? Because if they are, as they say in the Mastercard commercial, that’s “priceless.” Or maybe not priceless if making the switch causes you to be unable to pay your bills, but as long as you can still pay your bills and put food on the table then I think there’s something to be said for taking a relative pay cut for the sake of increasing happiness.
I would say increased FREEDOM increases happiness. However, increased stress DECREASES happiness if you are just trying to make ends meet.
But I think making 70 cents as an entrepreneur generates an equal amount of happiness making $1 as an employee. The 1.6X multiplier works in this case as well.
Good article. I have run through these numbers quickly in the past and failed to factor in life insurance & long/short disability. The daunting thing to me is the additional costs incurred in entrepreneurship; primarily from office space rent. The 1.6 multiple can be a pretty eye popping reality but I think it’s a great estimate.
Yeah, office space rent + costs of goods sold if you aren’t in the internet sector. I see retail businesses shut down all the time due to high rents.
Nice article! It poses the same question as “What are your opportunity costs?”. Every time I consider starting a business (aside from passive income), I have to ask myself what kind of revenue and profit margin do I need to produce to simply break-even on my current income.
I have friends that make in the 30-40k range and I tell them that this is the sweet spot to start your own business as it doesn’t take nearly as much to recoup that wage. Once you get into the 6 figures for income, this is much harder…as you are experiencing.
$30-40K really could be the day job income sweetspot to go and try something entrepreneurial. I can totally see that. Way harder to walk away making $200,000+, which is why if you are in this bucket, you need a more concrete plan and revenue proof for a longer period of time.
Nice comparison Sam. I’m surprised to see the figure so high, but the supporting numbers look pretty good.
What impact do you think taxes would have on this calculation (corporation tax being less than income tax, tax deductions on most expenditure, etc)?
Are corporate taxes lower than income tax? I’ve looked at the numbers and they are the same as the profits pass through to the individual with an S-Corp at least.
The tax deductions are deductions that lower your cost for each deduction by 20-30%. I’d rather have a corporate card which pays 100% for things.
Doesn’t that kind of depend on how you structure your new business? For example, as a Sole Proprietorship, or Partnership (and even LLC, depending on structure), aren’t profits taxed at your personal tax rate? As a C Corp, corporate profits would be at a lower tax rate, but then you’d have to pay personal taxes on top of that for what you paid yourself. Or am I thinking about this wrong?
You’re thinking about it right.
I think your figures do not properly account for the various corporate structures available to entrepreneurs.
If you’re making more than 60k in your entrepreneurial activities, I’d highly recommend forming an S-Corp and paying yourself a reasonable wage and then taking the rest as profit sharing. This setup would allow you to offset some of the increased SS and Medicare Taxes – if you’re making over 200k as entrepreneur the taxes can actually decrease from what you’d pay as an employee since you’re no longer subject to the 2.9% (as well not being subject to the additional 0.9% on W-2 or sole proprietorship income above 200k).
Also set up a solo 401k – depending on your income the withholding levels (up to $52k in 2014 x2 if you want to include a spouse on the payroll) are much higher than as an employee which can offset the lack of a company match through tax advantaged accounts (traditional or Roth).
The home office cost can actually easily become net neutral or net positive depending on what you choose to allocate as a percentage of your home as a home office – utilities that you probably would have paid anyway such as electric, cable, internet, phone, water, cars, office equipment etc can be (at least a percentage) written off.
Really I think your figures (if you’re lucky enough to have a spouse employer cover healthcare costs) may be applicable at the below 100k mark, after that there are so many options for write offs, advantageous corporate structures, plus improved retirement options (solo 401ks allow a lot more flexibility in investment options when compared with std 401k – i.e. investing in individual stocks vs management fee laden funds) that being an entrepreneur at even an equivalent nominal salary is a better option.
In short, if your goal is to save as much as possible in pre or post tax advantaged accounts, and have maximum control of how those contributions are invested there really is no comparison.
Yep, Chris has it right. It doesn’t make a lot of sense either for tax or liability reasons for an entrepreneur making a decent profit to stick with the sole proprietor model, although many do. Sole proprietors have the option to easily convert to an LLC, by filing with their appropriate state authority. They can then file with the IRS, asking to be treated as an S-Corp for tax purposes. You can put yourself on the LLC’s payroll, paying yourself a reasonable salary for what you do for the company. It must be reasonable according to your skills, qualifications and what function you provide for the company, and what others doing these functions for other companies are being paid. Often this figure is less than your gross profit, and so the benefit is that you pay payroll taxes (SS/Medicare) only on the reasonable salary you pay yourself as an employee of the company, instead of all of your gross profit up to the max out point, around $115k. Everything else is taxed at the applicable income tax rate. So, if your reasonable salary is less than the SS max out point, there can be significant savings.
There are also IRA options for self employed people if you’re lucky enough to have profit leftover that isn’t earmarked for reinvestment, but you would like not to be taxed as gross profit.
Sam has a tremendous amount of sage advice on other topics but I vehemently disagree with him on his tables of equivalent entrepreneur pay to employee pay. Let me give one example at the low end of a hybrid employee / entrepreneur moonlighter. Say you have a full time job and derive $18,000 in income from your business activities and have set up a free TD Ameritrade solo 401k. You can put all of that 18k into the 401k and only pay SS and medicare on it, no federal, no state, no local taxes. If you made 40k in your business you could put 28k (18k plus 25% of the profits or 10k) into the 401k leaving you with a 12k tax liability pre expense deductions (namely home office, utilities, car etc.) – basically you wouldn’t be paying much for 40k of income. With all deference and respect to Sam on his other posts, I think he needs to consult with a CPA on selecting an appropriate corporate structure and solo 401k options.
The charts are really eye opening. I don’t see myself becoming an entrepreneur in the near future, but maybe some day. I’m finding it hard enough just to switch employers and not end up on the losing end financially. Finding a job that pays more than my base isn’t too tough. But, once you throw in the company’s 6% 401k contribution (not match, they give that to you regardless), very low cost health insurance with very low deductible and out of pocket max, free long term/short term disability (with great benefits), 3 weeks vacation and 6 personal days that you’re actually encouraged to take… Those benefits alone have probably added $15,000 to my annual compensation. It makes it much harder to find a company that can compete.
Curious to know what percentage of your total current income is $15,000?
I’m in the $45,000 range. Jobs in my field in that range are a dime a dozen, so to speak, but the benefits aren’t usually as good as what I have here. The Health Insurance makes the biggest difference for me; The last few years I’ve racked up big medical bills over a string of little issues, so the low deductibles and low out of pocket costs have saved me. It’s harder to find a job in the $60,000 range, especially since I’m competing against people with more experience and the right degree (I have a degree, but not in my field).
Gotcha, so the 1.3X multiplier to highlight the real value of your job is in the ballpark!