Many people say they don’t want to go out on their own because they value their benefits package. Indeed, when looking at salary and benefits, the average U.S. employee receives 31.7% of their total income in benefits. While most people understand the value of health insurance, they shouldn’t discount the importance of disability insurance, life insurance, retirement plans, paid leave, and vacation.

According to Pew Research, about 10% of Americans are self-employed.  That means one in ten people will have to navigate the sometimes complex world of insurance and benefits. Here are some tips to help you create the benefits plan that fits you and your business.

Healthcare, Disability,  and Long-Term Care Insurance

Despite years of changes and reform, most people still find health, disability, and long-term insurance to be a real financial burden.

If you’re 26 or younger, talk to your parents about staying on their plans. As long as it’s not an additional financial burden to them, this is one of the real advantages of recent reforms. Make use of it if you can.

As a self-employed business, you may also be eligible to deduct that you pay for medical, dental, and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents. Unlike an itemized deduction, this deduction treatment is beneficial because it lowers your adjusted gross income.

If you join the Freelancers Union, you can get discounted rates on a variety of health and disability plans. You may also get preferential rates if you go through your alumni association. For business owners 50, check out the benefits offered by AARP. Some churches, social clubs, lodges, or community groups also offer group benefits. Be sure to investigate all your options.

Life Insurance

If you have a partner, spouse, or dependents, you need to think about life insurance. If you plan to take out a loan to start a business, you might be required to have a life insurance policy in place. Even without a loan, life insurance is a good idea.  But before you purchase life insurance, make sure you know what you’re getting and if you’re building equity.

Term-life is often a less expensive option that provides lower payments for larger payouts. Whole life requires larger payments but offers the ability to borrow from your equity. Each situation is different. A certified financial planner can help you evaluate which option is right for you.

Budget for Time Off

If you’ve had jobs with paid vacation and sick time, you understand that they’re great tools that help you stay physically and mentally fit. However, for many self-employed people, taking time off means slowing down revenue. But there are a few strategies that can limit the impact of days out of the office.

• Adjust Your Budget. When you’re calculating income, don’t plan to work full-time, 52 weeks a year.  Budget revenue for 48 weeks, giving yourself two weeks off and several holidays and personal days throughout the year.
• Schedule Around Busy and Slow Periods. Many industries have periods with high volume and low volume. Many tax accounts work long hours January through May, but find their summers are slow. In the advertising industry, November and December are usually slow months. If your business requires a lot of business conferences, you may find the summer is slow for you. There will be times when you have to work long, hard hours. Compensate by planning breaks in the slow periods.
• Rethink Vacations. Not only do the self-employed need to plan ahead to pay for vacations, but they also need to plan workdays differently. Some like to spend a few hours a day online, keeping projects moving. Others like to go entirely offline. Whichever you choose, make sure you put some funds aside for vacations every month, so even if you have to keep working while you’re away, you won’t have to stress about spending.
• Take Sick Days. Being sick not only makes you feel bad, but it also affects your mental capacity. If you are under the weather, take care of yourself. Sleep in. Get bed rest. Stay home or stay offline. Pushing yourself through illness can have adverse effects on your health, increase your healing time, or even make clients or co-workers sick.

Contribute to a Tax-Advantaged Retirement Account

Another benefit you’ll need to handle on your own after becoming self-employed is contributing to a retirement account. While retirement plans might be hard to take seriously in the first few months of self-employment, once you stabilize your income, it makes sense to start thinking about a retirement savings plan. Here are a few options to consider:

Traditional IRA (Individual Retirement Arrangement)

Contributions to this IRA are tax-deductible, which means they reduce the amount of income on which you pay tax. If you or your spouse also participate in a workplace retirement plan, such as a 401k, it may influence the tax status of your IRA contributions. In 2018, you can contribute up to $5,500, or $6,500 if you’re age 50 or older. If you contribute more, the money won’t be tax-deductible. IRAs also apply a 10% early withdrawal fee, and income tax, if you withdraw before age 59½. 

Roth IRA

With this type of savings plan, contributions are taxed upfront, but withdrawals during retirement are completely tax-free. That allows you to avoid paying tax on decades of earnings and growth in a Roth after retirement.

To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes."

In 2018 you can contribute up to $5,500, or $6,500 if you’re age 50 or older, but this limit applies to all types of IRAs. So if you contribute $1,000 to a traditional IRA and $4,500 to a Roth IRA in the same year, you’re maxed out. You won’t be able to contribute $5,500 to both types of IRAs in the same year.

SEP-IRA. The SEP-IRA was created for self-employed people, with or without employees, regardless of your corporate structure. Sole proprietors, partnerships, and corporations qualify. However, contributions can only come from an employer—your employees can’t contribute their own money. So you must contribute for employees.

For 2018, you can make SEP-IRA contributions for each of your employees (including yourself) totaling up to 25% of compensation, with a max contribution of $55,000. SEP-IRA contributions can be made along with traditional or Roth IRAs and a retirement plan with another employer, such as a 401k or 403b. However, just like with other types of IRAs, withdrawal before age 59 ½ results in a 10% penalty and taxes.

SEP-IRAs also offer a little flexibility. If profits are low, you can choose to reduce or eliminate contributions. Employees are always vested in their account, so when employees leave, they take their contributions with them.

Roth Solo 401k

This is an IRA for self-employed people with no employees, other than a spouse. You can contribute more to a solo 401k than any other type of retirement account.

For 2018, on the employee side of a solo 401k, you can contribute as much as 100% of your salary up to $18,500 or up to $24,500 if you’re 50 or older. Plus, as the employer, you can contribute up to 25% of compensation, if your total contributions don’t exceed $55,000, or $61,000 if you’re age 50 or older.

If you’re doing freelance or consulting in addition to your full-time job, and you also participate in a 401k as an employee at another company, the total employee contribution you can make to both plans is $18,500 or $24,500 if you’re age 50 or older.

Retirement plans can be complicated. If you need help setting up a retirement plan, or if you are not sure how to use multiple retirement plans properly, be sure to talk with your financial advisor.

You Can Create Your Own Benefits Package

Freelancing, consulting, or starting your own business can be scary. Don’t get caught in the benefits trap. With a little planning and some good advice, you can set up a plan that works for your business, your income, and your goals.

All information is believed to be from reliable sources. However, we make no representation as to its completeness or accuracy.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.