6mansam, the argument that an employee wanting to start his own business will never get ahead due to the extra 7.5% of his income he will have to pay for SS and med is illogical. Assuming a two person business, sInce an employer must pay the same 7.5% on behalf of his employee, it only makes sense that the employer would reduce the employee's pay accordingly to account for the 7.5% he has to pay so that he still can turn his expected profit, or that the employer would charge customers more to cover the same 7.5%. Either way, the employer should be finding a way to account for the 7.5% expense other than reducing the amount of profit he would receive. So in comparing whether it is better to be an employee or an employer, it's not like the employee is getting a free 7.5% bonus for being an employee.
Sure there are points in time in a business when financially it may be better to be an employee, like when a company is taking on more risk when it is expanding in the hopes of serving more customers or there are big capital expenditures that to get out in front of growth projections. However, if it ever got to the point where business was not strong enough for the employer to be in a better position than his employee, the employer would most likely let the employee go and become a one-person business.
If your friend wants to figure out whether or not to go on his own, he needs to project what he could generate in revenue, deduct all expected expenses, then take off 15% for SS/med and whatever applicable percentage for his tax bracket. He would also have to consider whatever benefits he may be receiving from his employer. Compare all this to what he is now making and getting and he will know what is a better route.
That is just the financial analysis. There is also the less quantifiable part of the equation that is based more upon personality and feelings. Your friend should also consider whether he is willing to take on the added risk/responsibility of being a business owner as there comes a point for most people when the amount of extra money he may make is not worth the added responsibility and risk. In my experience, the willingness to take on this responsibility and risk usually increases as the negative feelings that usually cause an employee to consider being an employer grow, e.g., tired of being subordinate to someone else/being told what to do, not appreciated, think you can do the job better than the one who is telling you what to do, wanting to do things differently, etc.
