Home Business Downside

Home Business / Self-Employment / Freelance Disadvantages

While there are lots of benefits to running a small home business, it isnít without its downsides.


The National Federation of Independent Businesses regularly polls its members about what keeps them up at night.

Small Business Ownersí Top Concerns
Cost of health insurance (56%)
Fuel costs (42%)
Business taxes (25%)
Property taxes (25%)
Workersí compensation costs (24%)
Tax complexity (23%)
Unreasonable government regulations (21%)
State taxes (21%)
Cash Ô¨āow (21%)
Locating qualiÔ¨Āed workers (20%)
Death taxes (20%)
Cost and availability of liability insurance (19%)
Finding and keeping skilled employees (18%)
Poor proÔ¨Āts (17%)
Cost of supplies/inventories (17%)
Electricity costs (16%)
Frequent changes in federal tax laws/rules (15%)
High Ô¨Āxed costs (13%)
Social Security taxes (13%)
Controlling my time (13%)

Here are more details and our own additions to some of the things that tend to sour the entrepreneurial experience.

Health Coverage

According to the National Federation for Independent Business survey, health insurance costs were a critical issue for almost two-thirds of respondents.

As an employee, your employer paid some of your health care costs. For some home business wannabes, replacing health care coverage is so difÔ¨Ācult and/or costly that it bursts their entrepreneurial bubble altogether. In some states, such as California, pre-existing conditions can preclude you from getting individual coverage at all. Individual or even group health coverage (such as one offered by an association or other membership organization) will likely cost signiÔ¨Ācantly more if you have your own home business than what your employer paid.

In addition to the home business ownerís health care woes, the cost of health care limits their ability to grow and attract good employees.


As an employee, your social security taxes and medicare taxes (totaling 12.4% and 2.9% respectively in 2009) are split 50/50 with your employer. The social security portion only applies to the first $106,800 of your net earnings. † As a freelancer or home business operator, you are both the employer and the employee so you pay both halves on any salary that you pay yourself. That adds 7.65% to your tax bill–although half of that is tax deductible. Take a look at the IRS web site for more details.

But the tax burden doesnít stop on page two of your federal tax return. State and local taxing authorities may impose additional taxes on your small business.

Sadly, the tax system is so complex that itís practically impossible for small and home business owners to prepare their own tax returnsĖthat adds another $500 to $2,000 to your cost of compliance.

Sales Tax

If you are selling anything that is subject to sales tax in your home business (most services are not in most states), you’ll need to be familiar with the sales tax laws in each state where your customers reside. If a t-shirt designer, for example, both designs the shirts and has them printed for his clientĖsomething he or she may do in order to make additional money on the shirts themselvesĖthe shirt portion of the sale may be subject to sales tax unless they have a reseller’s license and document the sale properly.

For now, internet sales are exempt from sales tax, but stay tuned as that may change.

Extra Paperwork

Uncle Sam and most states donít like to wait for tax income from business owners, including those with a home business. As a result, youíll need to Ô¨Āle and pay quarterly estimated taxes.

Sales tax returns are generally filed quarterly but some businesses are required to file monthly.

If your home business uses subcontractors you may be required to file 1099’s for them at year end.

If your home business has employees, that opens up a whole other can of worms with payroll taxes, workers compensation, and a whole host of other regulations and issues.

Workersí Compensation

As the owner of a home business, you can exempt yourself from workersí compensation, but if you have employees itís another story. Here in California, workersí compensation rates are a weird nightmare.The nightmare part is the high rate. The weird part is how theyíre determined. In our Ô¨āying business, the rate for pilots was 12 percentĖso we paid 12 cents to the California Division of Workersí Compensation over and above every dollar of pilot salary. The rate for ground crew, the kids who swept Ô¨āoors and helped people into the airplanes, was 18 percent, 50 percent higher. Go Ô¨Āgure. And if that wasnít bad enough, if one of our ofÔ¨Āce staff ever helped in the hangar, the workersí compensation rate would jump from3 to 18 percent for that job, regardless of who held the position or how often they did it.

Other Home Business / Self-Employed Insurance

Check your homeowner’s policy to see if the office equipment you use in your home business is covered.

If you’re using your personal vehicle in your home business make sure commercial use is covered. A business sign on the side of the car, for example, could affect your coverage in the event of an accident.

If anyone (customers/subcontractors) is visiting your home office, you may need to add liability insurance.

Disability and Income Replacement insurance can protect you if you are unable to work when you are self employed, but it is expensive, hard to come by, and full of caveats. In most cases, the insurance only covers you to the extent of your prior reported net income.

No Sick Days, Paid Holidays, or Paid Vacation

Can you imagine taking a job that offered no time off, no sick days, no paid holidays,no vacation? The average employee receives a month of pay each year for time they donít work. As a home business owner, youíll Ô¨Ānd the boss far less generous.

No BeneÔ¨Āts

Your new employer (you) wonít offer a 401(k), retirement plan, or gym membership, either.

The Buck Stops Here

We all make mistakes. Some are bigger than others. As an employee, regardless of how big the mistake you make, someone else pays to clean it up. As a home business owner, your screwups are your problem. We once spent $5,000 on an ad that produced zero calls, never mind any sales. Ouch.

No Safety Net

For most home business owners, thereís no unemployment insurance, workersí compensation, disability insurance, or other safety net to break the fall.

Lawsuits Lurk at Every Corner

We probably donít have to pontiÔ¨Ācate on how lawsuit-happy the world has become, but for a business owner, lawsuits are a sad reality – even for a home business. In our Ô¨āying business, we required our passengers to sign a four-page ĎĎwe didnít mean it, you canít sue usíí release of liability. Still, we feared the day when someone would trip over their own feet and sue us for their clumsiness. It never happened, and we never had to fall back on the waiver, but itís sad to have to run your home business based on thinking that runs from the courtroom back.
Liability insurance to protect your home business, if you can Ô¨Ānd it, is expensive. While it isnít noted in the list of concerns in the table above 1 in 10 business owners consider the cost and availability of liability insurance a critical problem.

So Much to Do, So Little Time

Home and small business owners stretch themselves pretty thin. Thereís always more to do. The only way to clear your to-do list is to close the business, sell it, or die. For some people, being constantly busy is † a good thing. For others, especially those who tend to get lost in the minutiae, it can be a real problem.

The Home Business Stigma

Though attitudes are changing, there are still people who will dismiss your home business as a hobby because you choose to forego the commute, save gas, reduce pollution, keep your overhead low and spend more time with your family and friends.

Regulation / Zoning Issues

Even with the best of intentions, itís easy to run afoul of some federal, state, county, city, or even homeowner association regulation when you operate a home business.

Hereís one we encountered. A pilot can earn a license at age 16 (14 in a glider or sailplane). But according to the job police they canít earn money to pay for lessons, by rubbing grease off planes or sweeping the hangar Ô¨āoor, until theyíre 18. In spite of our honest efforts to comply with every rule the government threw at us, this was one of those little nuances we werenít aware of until weíd been in business for 12 years.

In another situation, we bought a lovely old 1949 Studebaker pickup, in tip-top shape, to advertise the business. The Ô¨Ārst night we parked it outside our condo, the homeowners association informed us that we couldnít keep it there. Apparently, vehicles with signage were considered a neighborhood eyesore. Oddly, they didnít seem to have a problem with the realtorís Cadillac with company information on their car door panels.

Before you embark on a home business, be sure to do a thorough search of the rules and regulations that might affect you. Find a small business association that puts out alerts to changes, or use a Google Alert to clue you in to any changes that might impact your business. Violations, even unintentional ones, can be costly. Home-based businesses should be particularly careful of local or homeowner association rules that may limit their activities.

Effect on Personal Credit

If youíve never been self-employed, you probably havenít noticed the little box on all credit applications that says, ĎĎCheck here if self-employed.íí It might as well say, ĎĎCheck here and you can be sure it will be harder for you to get a loan.íí Hereís why itís harder for small and home business owners to obtain personal credit: (a) business use of personal credit cards affects your credit score; (b) personal guarantees on business loans (which are universally required for small businesses) may appear as contingent liabilities on your credit report; and (c) consumer lenders are used to dealing with 1099 and W-2 income. Since a small business ownerís primary income comes from the net proÔ¨Āt of their business (which is not reported on a 1099 or W-2), their tax returns look different from those of a typical consumer. The fact that home business owners do their best to minimize their taxable income (and some risk takers try to hide it altogether) doesnít help, either.

Still Want to Start a Home Business?

If the downside of a home business hasn’t deterred you, we have lots more information to get and keep your home business up and running, including: