Cost of Doing Business: Part 2

Last week I talked a little about the effects of the new minimum wage increase on small businesses and their employees. But what about the self-employed folks who don’t have employees? Surely this has no impact on their business. Don’t be so sure!

So, you’re a handyman who charges $40 per hour for your services. This sounds really good. I mean, who wouldn’t love to make $40 per hour, right? The typical handyman wishes that he made $40 every hour that he worked too…

Confused? Let’s break this down:

What does every handyman need? Tools of course! You can’t replace a client’s broken window without the proper tools. We’re not talking the basic hammer, screwdriver set, and cordless drill that you have in your home toolbox. The cost of specialized, commercial tools required for projects like that is a lot more than you’d think. Those tools won’t last forever, either. A handyman has to plan on spending a fair amount of his annual income on new tools required, and replacing worn out, broken tools.

You’ve got your tools. How do you transport not just the tools, but the materials to the jobsite? This is not all going to fit in an economy car. So, you need a truck, van, or other larger vehicle to carry his equipment. A trailer may even be required for transporting some of the bulkier building materials. Transportation won’t be cheap, but it’s not just the cost of the truck and trailer either. It’s a business, so you’ll need commercial insurance on the vehicle. (Yeah, that’s more expensive than regular insurance. A lot more.) The fuel costs are also going to be higher because of the weight of the larger truck and the tools. And maintenance? You guessed it! That’s going to be more expensive too.

What about health insurance? We’re all required to have it now, but while an employee’s employer obtains a group rate and pays for a portion of the monthly premium, the self-employed person has to pay a higher rate for an individual policy and you have to pay all of the premium yourself. Go price an individual health insurance policy for a family of four sometime if you really want to experience sticker shock!

Don’t forget your commercial liability insurance and any permits and licenses required while you’re at it.

So, out of your $40 per hour you have to pay all of this? Yep, but wait! There’s more…

You aren’t getting paid for every hour that you work. What?! Anyone who’s self-employed will tell you that only a fraction of the time they work is actually billable to a client. You do a lot of job estimates for people. That takes driving to the site, measuring and looking things over, figuring out what materials will be needed, getting current pricing on those materials, estimating the hours that it’s going to take to get the job done, and then writing all of this up into a nice, clear estimate for your potential customer. Most of them will never call you back. So all of that time that you spent putting together the “free estimate” is just lost time. No one paid you for those hours, and you ended up not getting hired anyway.

Someone has to keep the books, file the paperwork, deal with the banking, keep up with the various insurance policies, and *shudder* do the taxes. Hiring a bookkeeper to do all of that is awfully expensive, and so a good chunk of self-employed folks do it themselves. Sadly, no one is paying you for the hours you will put into it. Sure, income tax returns only get filed once a year, but you have to keep receipts and records for everything business related all year long. You’re going to spend a lot of time reading IRS code trying to figure out what’s deductible, what’s taxable, and how to get it all listed correctly on your Schedule C. (Seriously, just plan on taking a week off every year to wrestle with your tax return.) You need to keep notes and records of all of your projects too, on the off chance that there’s some kind of lawsuit or such in the future that will require you to produce detailed records. Better add some lawyer fees to your annual budget for the inevitable.

You may need an office and a place to store your vehicles, tools, and materials. Rent, property tax, insurance, utilities, upkeep… You’re on the hook for all of it.

Advertising? That’s all up to you as well. You’ll need to pay for ads, business listings, business cards, maybe have a booth at trade shows, and the list goes on. If you can’t do the graphic design yourself, then you’ll have to hire that out.

Oh, and those clients and customers who you’ve done all that work for? Some of them won’t pay the invoice that you sent them. Some of them will pay it, but months, or even a year later. (Yes, speaking from experience here!) Some of them will be unhappy with the outcome of what they hired you to do, or they’ll change their mind about what they want halfway through the project. Guess who ends up eating part or even all of the cost of that. Here’s a hint: it’s usually not the client.

Figure all of this in, and you’re making a whole lot less than $40 per hour of work. It’s sort of a joke among that business owners and self-employed folks that they wish they made minimum wage! This is not to say that it’s not worth it to start your own business. There are some distinct advantages, and that’s why we put up with the less-than-glamorous side of it. Certainly, some business owners end up doing pretty well for themselves. Make no mistake, they have worked their tail off to get to that point, and they’re still working hours that would make most people quit their job.

What does all of this have to do with the minimum wage increases though?

A minimum wage increase of over 50% just makes it that much harder for a business owner to make the jump into hiring an employee. This severely limits how much a self-employed individual can grow their business. If they can’t afford to hire employees, then the amount of work they take on can never exceed what they can realistically do while still doing all of the other things required to run their business, that they don’t get paid for.

Last week I mentioned how one result of the minimum wage increase is a commensurate increase in the cost of goods and services. Those who are self-employed will have to deal with the cost of living increases just like anyone else, but it’s going to be much harder for them to raise their rates enough to compensate for this. Nobody wants to hear that the hourly rate has increased because of cost increases. At best, the customer complains, at worst, they just don’t hire you. Worse, when businesses are cutting costs and closing up shop, your client base shrinks. When employees have their hours cut, or lose their jobs, your client base shrinks.

Are there very real economic problems that families in America are dealing with? Of course. Mandatory raises are not a viable long-term solution to this problem though.

Note: If you’re interested in learning a bit more about economics, then the Mises Institute is a great website to start with. A few books that I’d recommend are The Creature from Jekyll Island by Edward Griffin, and End the Fed by Ron Paul. Wealth of Nations is considered a classic on the topic, and you can find a digital copy for free on Project Gutenberg’s website.

Cost of Doing Business: Part 1

I’ve been hearing the catchphrase “living wage” come up more and more lately. I’m sure part of that is due to the recent Citizen’s Initiative in Maine that will raise the minimum wage by more than 50% over the next few years. Even so, the topic is on the minds of families across the country.

As a family of six, with two self-employed parents, we’re no strangers to the struggle to make ends meet. Believe me, I have nothing but empathy for the folks who are trying to figure out whether to pay the electric bill or the heat bill because they just can’t pay both this month. I know what it’s like to have your only car suddenly break down and need thousands of dollars of repair work at a time when you can least afford it. I’ve been there, done that, and was too broke to buy the t-shirt. I don’t say all of this to elicit sympathy. (Truly, I don’t feel sorry for myself when I’m still better off than 95% of the people in the world.) I say it to make the point that I understand where people are coming from when they talk about wanting to make a “living wage”.

Would it surprise you to hear that I oppose mandatory minimum wage increases?

We’ve barely started to see the effects of the new increases here in Maine. Some small businesses have been forced to cut employee hours and even lay off some of their employees because they just can’t afford the increase in pay at the current number of hours that they’re paying for. Hiring employees is expensive any way that you look at it. Not only do you have the cost of the hourly wage, but you also have to pay worker’s comp insurance, health insurance, vacation pay, and so on. You’ll need to either do the payroll yourself of pay someone else to do it for you. That’s more than just writing a check every week though. There’s a lot of tax paperwork and withholding payments to the IRS that need to be taken care of. (Heaven help you if you make a mistake on any of that!) If you have 4 employees who each work about 30 hours per week, you are looking at paying out an additional $28,000 per year in wages by 2020. Keep in mind that this does not increase the number of employees or the number of hours worked.

When you’re a small business owner, $28,000 is nothing to sneeze at. Most of these business owners are not rolling in the dough. Where will this extra money come from? Well, they can reduce employee hours by enough to negate the extra wages. This also means that they’ll either need to cut the hours that their business is open, or fill in all of those extra hours themselves. (This is on top of all of the other work that they’re already doing to keep their business going.) Or, they can increase their profits to cover the cost of the additional wages they need to pay. How does a business owner do that? By raising prices, of course.

So, while Maine workers will be making more per hour, they’re going to have to contend with reduced hours and an increase in the cost goods and services that they need. Those who are working fewer hours could pick up a second or third job to make up for that. If there are jobs to be had. With businesses cutting hours and reducing staff to be able to afford to make payroll though, that’s potentially a pretty big if.

We’d like to think that these mandatory minimum wage raises are no big deal to the businesses who employ us. It’s big corporations, and they have plenty of money, right? The truth is, it is a big deal to the small, local businesses! It’s these businesses and the people they employ who will be hurt most by this sort of law.

The raise in pay only applies to those who are employees of a business, but what does that mean for the self-employed folks? Will it have any impact on them? Glad you asked! Come back next week to read the answer in Part 2.

If you’re interested in learning a bit more about economics, then the Mises Institute is a great website to start with. A few books that I’d recommend are The Creature from Jekyll Island by Edward Griffin, and End the Fed by Ron Paul. Wealth of Nations is considered a classic on the topic, and you can find a digital copy for free on Project Gutenberg’s website.