The Basics of Building Your Own Self-Employed Benefits Package

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Many American workers are increasingly participating in the “gig economy” — a workforce shift from traditional full-time salaried or hourly employment to self-employment, which involves offering services and talents as an independent contractor. Independent contractors are service providers who aren’t on organizations’ payrolls as employees. Instead, they work for themselves and may lead a more entrepreneurial professional path because they provide their services to multiple clients, often at the same time. While the gig life allows for some exciting flexibility and much-needed autonomy, it’s not without downsides. Living the freelance life eliminates the benefits that are often rolled into appealing employment packages for full-time workers.

Operating as an independent contractor doesn’t mean you can’t get or enjoy all of those benefits. But it does mean you’re now responsible to apply and pay for your own health, dental and vision insurance; make your own contributions to retirement accounts (and go without an employer matching those contributions); save up to fund your own vacations or time off; and potentially do without other benefits that an employer would typically cover.

It’ll take a bit more effort and plenty of research, but you can design your own holistic, self-assembled package boasting the insurance and retirement benefits you need most. We’ll walk you through the core components and strategies for crafting your own benefits package, whether you’re embarking on a new entrepreneurial journey or you’ve already fostered a successful freelance career.

Insurance Considerations for Independent Contractors

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Letting go of a company’s benefits package isn’t an easy step to take, and employer-provided insurance is often one of the big draws of traditional employment that can potentially save you hundreds of dollars a month in premium costs. Once you’ve made the leap from a full-time commitment to independent contracting, you’ll be on your own when it comes to providing health and other types of insurance.

Insurance can be costly for individuals; according to eHealth, the average monthly premium for an individual in 2020 was $456 — and that’s for subsidized plans available from the Affordable Care Act’s (ACA) online marketplace. Many employers offer to pay most or all health insurance costs for employees as a way of incentivizing and attracting top talent, and they also receive discounted “bulk” rates for teams of people and, in many cases, their families as well. The same insurance companies that issue attractive and comprehensive medical plans to large companies may not offer insurance at all to people who are self-employed.

The first step in building your self-employed benefits package, then, is obtaining a health insurance policy. Despite the potential costs, however, the ACA is commonly reported by self-employed individuals as an affordable and accessible option. One big benefit of being self-employed — no matter where you source your health insurance — is that the premiums you pay for health, dental and qualified long-term care insurance are all tax deductible. While it’s wise to choose a plan with a monthly premium you can afford, keep in mind that you can deduct these amounts from your taxes — along with any premium costs for your spouse, dependents and children under age 27. To save on costs, you can also research insurance companies that have high-deductible plans available. The higher the deductible, the lower the monthly premium costs tend to be. These types of plans tend to work better for healthy individuals who rarely visit the doctor and don’t have a need for ongoing or more complex treatments for chronic conditions.

Basic health insurance isn’t the only health coverage you’ll want if your goal is to build a comprehensive package. Employer packages also typically include the option to purchase dental and vision coverage. Dental and vision are treated as separate add-ons to your base health insurance plan. When setting coverage up on your own, you’ll want to make sure you budget for and add vision and dental coverage separately — if you decide you need them. While paying out-of-pocket for proactive dental cleanings and vision check-ups is manageable, these visits can become costly if more complex issues arise, and you may find yourself wishing you had insurance coverage.

Supplementing Your Package With Other Self-Employed Benefits

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The different types of health insurance listed above aren’t the only benefits employer packages typically offer — and they’re not the only benefits you might want to have, even as a self-employed worker. Packages also often include life insurance, which pays out a set amount of money to your policy’s named beneficiaries in the event of your death. Opting into an employer-provided life insurance program takes some of the guesswork out of the process, which can get complicated when you need to choose a policy on your own. It’s recommended that you search for a life insurance agent in your region who can walk you through available options, some of which may be more affordable than you think. They’ll work with you to determine the plan that’s ideal based on your individual needs.

Another crucial part of your benefits package planning involves looking toward your future — and to your retirement. Fortunately, there’s a variety of options available to people who work for themselves. While employers may offer 401(k) plans and match your contributions, this won’t be an option once you’re working as a freelancer. What will be an option is what’s usually called a self-employed or solo 401(k). It functions similarly to a traditional 401(k), but it’s designed for a business that has one employee: you.

If you had a 401(k) at your previous job, you can also roll the funds over into an individual retirement account, or IRA. Different types of IRAs are accessible to self-employed individuals, and it’s worth working with a trustworthy financial advisor or accountant to determine which one is right for you based on elements like contribution limits, potential tax advantages and the different rules that govern how and when you can make contributions and withdrawals to your retirement account.

What to Expect During Tax Season as an Independent Contractor

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While taxes aren’t typically factored in when considering benefits, it’s relevant to note that they’re something you can expect to experience differently as an independent contractor. A full-time employee of a company who claims zeros on their taxes can be at an advantage come tax season. When a worker is self-employed, on the other hand, they’re required to pay extra elements — self-employment taxes — in addition to the usual income taxes. These encompass the Social Security and Medicare taxes an employer would normally pay, and because you’re effectively an employer (and employee) as an independent contractor, you’re obligated to cover them.

Because you won’t have an employer covering these taxes for you, you’ll also need to estimate and pay them on a quarterly, not yearly, basis. A good rule of thumb to financially prepare and budget for this is to factor in an additional 30% in your pricing to cover all the taxes you’ll be required to pay as a self-employed worker. Some independent contractors also put aside 30% into a separate account for covering their tax dues.

There are a lot of benefits to working independently, especially when it comes to flexibility and autonomy. With the increased autonomy afforded by life as an independent contractor also comes increased personal responsibility. Putting in the research, weighing the pros and cons of multiple options, and gradually building a self-employed benefits package is a great way to begin or continue thriving as a self-employed professional.