Key Takeaways – The following considerations must be made when reviewing an opportunity to take a new job or leave a W2 salary to start a business.
- Nearly 93% of Americans earn income outside their primary job1.
- What are all the aspects of my compensation package? This includes salary and other benefits such as insurance, retirement, and other fringe benefits.
- Most health insurance policies are established through employers. Does the new opportunity have a health insurance plan? If so, does the plan meet your needs for a reasonable price? If not, how will you obtain health insurance?
- Considering all benefits and net income changes, is the job change significantly beneficial – monetarily, culturally, and professionally – to make a change to your current situation?
When we bring on a new client, one of the first commitments we make to them is to be another intelligent brain at the table, helping to evaluate any financial decisions objectively. This can vary across many different topics, such as refinancing a mortgage, helping discuss the terms of a business sale, reviewing a budget, to the finances of purchasing a new pet. One specific item we want to spend time on before making a decision is when a new job offer is being considered.
In today’s work environment, jobs take on all shapes and sizes. Some people have a typical W2 salary, more and more are becoming independent contractors, and even more have some type of side hustle. According to a 2022 survey by Insuranks, nearly 93% of Americans reported having additional income outside of their primary job. And these jobs are not insignificant. The average person is working an extra 13 hours per week and earning an additional $5,700+ per year, and that’s just the average. With continued technological advancements benefiting small business owners, we are seeing more and more people fostering their employment skills or their side hustle opportunities into new businesses where they are both the employer and the employee.
So, what does someone need to know when considering a new job or leaving their employment with benefits to go off on their own? To simplify this commentary, I solely focused on an employee seeking a new job opportunity. However, a similar process can be used when considering leaving the comfort of a W2 position and starting your own enterprise. Still, self-employment taxes and business deductible expenses must also be considered.
Great Job, Inc. vs. Opportunity, Inc.
Edward is a fictitious character who is an IT Specialist. Edward has a W2 position at Great Job, Inc. and is considering a new job as a Supervisor at Opportunity, Inc. Edward makes $80,000 per year and is immediately attracted to a new job offer at $100,000 per year. “An extra $20,000 per year! That’s a 25% increase in pay!” he thought. Before Edward leaps, he is wise enough to call his trusted Financial Advocate at Ballast, who identifies the following: Edward failed to take into consideration the benefits that he has at his current employer. Great Job, Inc. pays for many benefits, but Opportunity, Inc. does not pay for any benefits other than his salary. See the chart below.
| Great Job, Inc. | Opportunity, Inc. | ||
| Income | $80,000 | $100,000 | |
| Health, Dental, Vision, and Insurance | PAID FOR | -$6,000 | |
| Disability Insurance | PAID FOR | -$2,400 | |
| 401(k) Match (6%) | PAID FOR | -$4,800* | *6% of $80,000 |
| Cell Phone | PAID FOR | -$1,800 | |
| HSA ($2,000/Yr.) | PAID FOR | -$2,000 | |
| Professional Development | PAID FOR | -$3,000 | |
| Income After Expenses | $80,000 | $80,000 |
In Edward’s example above, it is clear that the benefits a company offers play a significant role in the total “compensation” a person receives. Unfortunately for Edward, the new opportunity above is slightly less favorable because not all the deductions from Opportunity Inc. would qualify as a pre-tax deduction.
All employer-paid benefits need to be acknowledged when considering a new employer, considering making your side hustle full-time, or if one is considering taking their skill set from an employee to an independent contractor.
So, how do you proceed if you are looking for a job or are offered a job? We have created the process below to help objectively evaluate the opportunity.
How to Analyze a New Opportunity?
- Review all the benefits that you receive up and above salary and create a chart comparing the two different job opportunities. You receive up and above salary and create a chart comparing the two. Mark any benefit that is not included adequately from both companies as deductible or non-deductible from an income tax perspective.
- Estimate your out-of-pocket costs for the benefits that are not included from one company to the other.
- Consider the NET, after-tax income you would receive from each company.
- Review Insurance coverage. How do the coverages compare, especially health insurance? Do both plans meet your and your family’s needs?
- Review the critical intangibles.
- The culture and the people within each organization.
- The opportunity to grow within the organization.
- The opportunity for career development.
- Paid time off.
- Flexibility of the workday.
| STEP 1 | Job 1 | Job 2 | Deductible? |
| All Insurances | YES | YES | N/A |
| Retirement (6%) | YES | NO | YES |
| HSA ($2,000/Year) | YES | NO | YES |
| Cell Phone Provided | YES | NO | NO |
| Professional Development? | YES | NO | NO |
| STEPS 2 & 3 | Job 1 | Job 2 |
| Salary | $75,000 | $90,000 |
| Retirement Catch Up | – | ($4,500) |
| Health Savings Account | – | ($2,000) |
| PRE-TAX INCOME | $75,000 | $83,500 |
| Federal | ($5,739) | ($6,759) |
| FICA | ($5,739) | ($6,388) |
| State | ($3,624) | ($4,049) |
| Local | ($2,063) | ($2,296) |
| NET | $57,835 | $64,008 |
| Less Non-Deductible Cell Phone | – | ($1,800) |
| Less Non-Deductible Development | – | ($750) |
| NET, NET Income Estimate | $57,835 | $61,458 |
| *Taxes estimated by https://smartasset.com/taxes/income-taxes, in Lexington, KY | ||
Making a job change is a significant decision. Studies show that most Americans will change jobs three to seven times during their lifetime. This tool will help one analyze the genuine opportunity within a new job opportunity. As always, we want to be part of the decision-making process; please do not hesitate to contact us and ask for our thoughts. We are always here to help.
Sources:
1 https://www.insuranks.com/side-hustles-2022
Dixon, Amanda; Survey: Nearly 1 in 3 side hustlers needs the income to stay afloat; Bankrate; June 5, 2019; https://www.bankrate.com/personal-finance/side-hustles-survey-june-2019/
