How to Build Your Own Freelancer Benefits Package
In Part 3 of our Financial Toolkit for Freelancers and Entrepreneurs, we describe how freelancers can afford common job benefits. Be sure to read Part 1, which covered contracts, taxes, and cash flow, and Part 2, which helps determine how much you should charge.
Freelancers typically don’t envy their 9-to-5 counterparts too much, except when it comes to the sweet, sweet array of employer-covered benefits, like health insurance, retirement plans, disability, and life insurance. Luckily, building your own benefits package may be easier—and less expensive—than you think.
Don’t skip health insurance. Here’s where to shop for it.
The landscape of health insurance has changed a lot over the past decade. The Affordable Care Act may have expanded options for freelancers, but many are still reeling from the sticker shock of covering their entire premiums. Still, you and the 18 million other Americans buying their own insurance have a number of options.
Healthcare.gov - Check to see if you are eligible for subsidies to reduce your premiums. Pro tip: If you underestimate your income, you may have to pay back a portion of your subsidies. As Kaiser Family Foundation reports, it happens a lot.
eHealth - eHealth offers 10,000 plans from over 180 companies.
Local insurance broker - A local expert can help you decode the intricacies of your state’s options.
Consider which doctors and hospitals are covered, maximum out-of-pocket costs, deductibles, and annual estimated expenses. The first year on your new health insurance plan may be challenging to budget for, but subsequent years — with a full year of expenses to reference — should get easier.
If you decide on a plan with a high deductible, which the IRS defines as at least $1,350 for an individual or $2,700 for a family, pairing it with a health savings account may ease your financial burden by providing a number of tax benefits.
Covering your own health insurance may be a drag, but there is one benefit — medical and dental insurance premiums are deductible (yes, even for 2018). You can learn more about qualifying for this deduction here.
Prioritize saving for retirement with one of these options
It’s easy to overlook retirement when you don’t have easy access to an employer’s plan. But continually putting it on the backburner or getting trapped in analysis paralysis is a mistake.
“Just get started, because every little bit helps,” says Cathy Derus, a Chicago-based CPA financial planner and founder of Brightwater Financial.
She recommends beginning with either a Roth IRA or traditional IRA. Both let you save $5,500 per year (with an extra $1,000 if you are 50 or older). When you’re ready for the next step, options like a Solo 401(k) or SEP IRA allow you to set aside even more.
We’ve created a basic chart to help you compare the basics of each plan side-by-side:
*Learn more about calculating these contributions in Publication 560.
If you’re feeling overwhelmed by these options, you’re not alone. Derus sees retirement planning questions from freelancers all the time. Speaking with a financial professional about your unique situation should help clear up any confusion.
Regardless of which plan you choose, Derus recommends thinking about your regular retirement contributions in terms of percentages, as opposed to dollar amounts — especially if you have uneven income. “If you're having a great month, you can save more. During slower months, you won't be as crunched for cash,” she points out.
Build in vacation days and plan for time off
You may not have the luxury of paid time off, but that doesn’t mean you can’t take a vacation (or relax when you’re ill). There are a number of ways to make sure you can afford time off for recharging — like building this time into your hourly rate, padding your savings, or finding ways to smooth the dips in your monthly income.
“Make sure you have additional savings set aside to cover your expenses when not billing for client work. Or consider offering monthly retainers/subscriptions as a way to improve cash flow,” Derus says.
She also suggests giving clients plenty of notice and hiring virtual assistants to cover some of your duties while you’re away. For illness or injury that take you out for weeks more than what’s built into your hourly rate, you may need to self-insure during the waiting period—called the elimination period—until you start collecting short-term disability payments (see next section).
These days, many large companies offer paid family leave, but only two states—New York and California—offer public programs that freelancers can access for varying levels of financial assistance. Starting a family or caring for a loved one doesn’t have to mean taking a vow of poverty though. Plan ahead as much as possible, taking on additional work or temporarily subcontracting out tasks as needed. And be sure to keep in contact with existing clients, notifying them of your availability a few days or weeks before you actually anticipate being ready to go back to your old schedule—this will give you a buffer as work starts to ramp back up.
Protect your most valuable asset with disability insurance
Another area freelancers often ignore is disability insurance. The Social Security Administration says there’s a 25 percent chance of becoming disabled before age 67. And the odds of a long-term disability after age 40 are even higher — 43 percent — the Insurance Information Institute claims. But what about Social Security disability? Unfortunately, these benefits are tough to qualify for and the barely above poverty level payments may not be enough. In other words, you can’t afford to not have disability insurance.
Derus often sees freelancers without it and recommends starting your provider search with your industry’s trade organization or the Freelancer’s Union. These organizations may offer less expensive group disability plans.
She offers some additional rules of thumb when comparing plans:
Use your previous two years of earnings as an income benchmark.
Earmarking three months of expenses in your emergency fund may be sufficient for a brief disability. For anything longer than that, you will likely need coverage. This may include both short-term (up to two years) and long-term (up to age 65) disability policies.
Consider a policy that covers as much as you can afford. Group plans typically cover 50 to 60 percent, but private plans may cover up to 80 percent.
Other things to watch for: the company’s definition of “disability,” how quickly you will start receiving payments after filing a claim, if future increases are allowed, if or when the policy could be canceled, partial benefit options, and anything that won’t be covered.
Prepare for the worst-case scenario with life insurance
Derus says every client’s life insurance needs are different, depending on things like relationship status, children, debt, financial goals, current savings, and more.
That being said, “When it comes time to purchasing life insurance, 95 percent of the time term life insurance — which can last between 10 to 30 years — is going to be the best route to take. It's affordable and easy to get a quote,” Derus recommends.
Life Happens, a non-profit dedicated to helping consumers with insurance decisions, offers a free life insurance needs calculator that may steer you in the right direction. Generally speaking, the younger and healthier you are, the lower your monthly premiums will be.
Budget for professional development
It’s easy to skimp on things like conferences and educational opportunities when your employer is no longer footing the bill. But it could pay dividends in terms of professional contacts and furthering your skillset (and it may even be a deductible business expense).
Just be strategic, says Derus. “What's the predicted return on investment? Is it simply for education or do you expect to make new connections that can help grow your business? If it's not a great fit and the ROI isn't there, then maybe that money is better spent on something else,” she says.
Building your own benefits package is easier than you think
Picking your clients, working remotely, and having a flexible schedule are just a few highlights of self-employment. While being your own boss certainly has its advantages, without an HR department to rely on, your financial future rests squarely on your own shoulders. This means covering all the benefits you previously took for granted. If it feels like too much to tackle alone, seek guidance from a fee-only financial planner or CPA.