All About Insurance in the Gig Economy

There are plenty of reasons to become a freelancer. The new “gig economy” is one where people are opting out of being on a company’s payroll. Instead, they’re forming their own company and taking contract jobs. There’s plenty to like about such an arrangement. There’s often more flexibility in your schedule and although you go from a couple of bosses to often many, you get to pick who you work with. Owning your own business can also be financially lucrative as you gain a reputation for dependability and quality work.

But as we’ve been exploring in our gig economy series, there’s a lot to consider before quitting your job and going freelance. We looked at the tax implications—the fact that you no longer have an employer paying a portion of your Medicare and Social Security taxes. That represents a lot of money.  

Next, we looked at retirement. You no longer have a 401(k) that your company is paying into on your behalf. Retirement planning is now a solo endeavor so your pricing has to be high enough that you can contribute to a retirement account each month.

There’s one other major piece of freelancing you have to take into account—insurance. When you were an employee for another company, there were insurances in place to protect you and the company you worked for, but as a freelancer, it all falls on you.

First, and most important, is health insurance. Many freelancers get insurance through their spouse who remains on a company’s payroll—something for no other purpose than health insurance. If not, you can get coverage through the health insurance marketplace or through private companies. One word of warning: trying to save money by purchasing only catastrophic coverage isn’t in your best interest, especially if you have a family. Plan on getting a better plan. A 2016 analysis of healthcare costs found that a silver plan for a 40 year old non-smoker making about $30,000 cost $208 per month after the tax credit. But this is only the individual rate. Providing coverage for a family will be significantly higher. Before leaving your job, figure out your insurance costs. Sometimes health insurance alone makes freelancing as your sole source of income impossible until the business grows significantly.

RELATED: What Kinds of Insurance Does Your Small Business Need?

Life Insurance

If you were to pass away, would your family quickly fall into a state of financial emergency? If the answer is yes, you need life insurance. Consider term life rather than universal. There are a lot of opinions out there but many experts agree that cash value life insurance policies aren’t efficient investment vehicles for retirement planning.

Disability Insurance

What happens if you’re temporarily disabled for an extended period or permanently unable to work? Where will your income come from? You might qualify for disability and get a monthly amount from Social Security but that’s not likely to support your family the way you were as a freelancer. It won’t be long until you need to consider disability insurance. Prices vary depending on your age, your health and your habits—whether you smoke, for example, but plan on paying 1% to 3% of your annual salary.

Liability Insurance

There are very few businesses where making a mistake doesn’t expose you to a potential lawsuit. That’s why you need business liability insurance. Contrary to some people’s beliefs, home based businesses often aren’t covered under the owner’s residential home owner’s insurance policy. General liability policies will cover you up to a certain amount for injuries customer might sustain while on your property, copyright violations, or alcohol-related injuries if your business deals with alcohol. Some business might need a commercial policy that ups the maximum payout. Because each business has different needs, it’s hard to put an average price on this type of insurance but a sole proprietor will likely pay between $50 and $100 per month.

Business Auto Insurance

If you’re a sole proprietor who doesn’t run a delivery business or something else that centers around their car, normal auto insurance might be enough but if you have employees or use your vehicle for commercial intent, you will probably need business auto insurance. Business auto insurance works a lot like the auto insurance policy you already know. Talk to an agent. They will tell you if you need business auto insurance and how much.

Industry Specific Insurance

Doctors have malpractice insurance, financial advisers have errors and omissions insurance, and many other businesses have insurances specific to their industry that must be in place. Once you hire employees you will likely need worker’s compensation insurance as well. As you grow and evolve, ask a trusted agent or your industry trade group what’s required

All ABout Being an Independent Contractor

At some point in our lives, almost all of us dream of breaking the shackles of employment and becoming our own boss. But before making such a big decision, it’s essential to weigh up the advantages and disadvantages that becoming a contractor will bring.

Being your own boss is not all mid-morning croissants and frothy cappuccinos. The reality is that you could end up working longer hours for less. And then there are all those additional tax and accounting obligations you have to meet. You could find that being your own boss is a lot harder than you first thought.Hopefully, the below snapshot of the advantages and disadvantages of being a contractor will give you plenty of food for thought before you make the decision to go it alone.

The advantages of being a contractor

Freedom and flexibilityThe freedom to choose what contracts you want to work on, which you’d rather leave and even when you work is probably the biggest benefit of being a contractor. Although contracts are for a fixed time and are often extended, you can pick and choose whether you work with the same company for the long term, or simply move onto another contract.You can earn moreOne of the first things people think about when considering life as a contractor is the financial benefits this new route could bring. In many cases, the average contractor will earn more than they would as an employee. This is because much of an employee’s pay is actually made up of benefits, such as pension contributions and subsidized medical insurance, which contractors do not receive. As a result, contractors can be paid up to double the rate of a full-time employee. This will depend on your level of skills, the industry you work in and the location.

Tax benefitsIn the UK, independent contractors can operate through a limited company as opposed to an employee. This can provide significant tax benefits as contractors can pay themselves in the most tax efficient way i.e. by taking a small salary and more dividends. This reduces the amount of National Insurance contributions contractors have to pay.In the US, although an employee is likely to enjoy better benefits than a contractor, they will not have the same tax advantages. An independent contractor can also write-off all reasonable and necessary business expenses.

The disadvantages of being a contractor

Extra administrationThere are a number of additional burdens contractors have to deal with. This includes completing and filing tax returns and annual accounts accurately and on time. Contractors also have to keep a track of their expenses. There are specialist contractor accountants who will take care of these obligations for you, but that is an additional expense that’ll eat into your earnings.  No guarantee of workLife as a contractor is not all plain sailing. If you predominantly work short-term contracts, you have to make sure you are always on the lookout for that next job. The reality is that there is no guarantee you will find work straightaway, so it’s a good idea to keep significant savings in case the work dries up

Know More About Retirement Planning in the Gig Economy

In a previous article we looked at people who now work in the gig economy—taking contract jobs as a freelancer/small business owner rather than taking the more traditional route working as an employee for another business.

It’s not as simple as saying goodbye to your employer and setting out on your own. We looked at things like the self-employment tax and other tax considerations that significantly impact your earnings. 

Along with taxes, there’s another consideration—retirement. Maybe you saved up a valuable nest egg before you left your previous job, but for many, they’ve barely started amassing a retirement savings. Because of this, you have to consider your retirement income before going all-in on the gig economy. Yes, you’ll receive Social Security assuming you pay fully into the system, but relying on a government program to keep you financially afloat in your later years isn’t the wisest strategy.

It’s All On Your Shoulders

In our last article we talked about how your employer paid part of your Social Security and Medicare taxes but as a freelancer you have to do it all on your own. The same holds true for retirement. Studies show that nearly 9 out of 10 employers matched a portion of the employee’s 401(k) contributions. That represented a large portion of your retirement savings but as a freelancer, you won’t get any employer match. It’s all on you to save enough to retire comfortably. If you’re 30 and haven’t saved anything, you will need to save about $649 or more per month depending on your income and lifestyle to retire with enough money to live comfortably on. You can estimate the amount you’d need from this calculator.

Have employees? This article may help you navigate their retirement options.

The IRA Dilemma

It’s easy, right? Just start an IRA, contribute as much as you can, and you’re set. There are a host of problems with that plan. First, an IRA comes with a $5,500 annual limit ($6,500 if you’re age 50 or older ) allowing you to contribute a maximum monthly amount of about $458 (or $541 starting at age 50)—not nearly enough if you’re significantly behind on savings. Your spouse can get an IRA, whether he or she is working or not, giving you an extra $5,500 to work with. That’s better but what about if you’re single?

The SEP

The Simplified Employee Pension or SEP is an option. You can contribute the smaller of $53,000 or 25% of your total compensation. Learn more about it in IRS Publication 560. But be careful. Don’t “forget” to claim all of those small-dollar clients that didn’t pay you enough to file a 1099. If you “forget” to claim it, it lowers your maximum.

SIMPLE IRA

The SIMPLE IRA plan for small employers is about as simple as anything involving the IRS can be. It works the same as a regular IRA but your yearly limit is higher. Instead of $5,500, you have a $12,500 limit. If you’re over the age of 50, you can contribute as much as $15,500. Again, Publication 560 will tell you everything you want to know.

Other Options

There are other ways to fund your personal retirement from your company but the SEP and SIMPLE IRA are the most common. There are also profit sharing plans and a self employed 401(k) plan where you and your company make contributions but these are a little more difficult to set up.

Taxes

Assuming you have some kind of formalized business like an LLC, any retirement benefits your company provides to you are a business expense. Your company can write that off as an expense in most cases. How that all works depends on some factors a tax expert will probably have to help you with but it is an expense like any other.

Effect on Pricing

Be honest—as a young or new entrepreneur have you wondered why your competitors are charging so much more than you believe the service is worth? You’re probably beginning to figure out that even a consultant working out of their home has overhead expenses. You have to pay taxes on your earnings and you have to fund your retirement and even insurance. That should drive your hourly rate significantly higher.

Think about it this way. Let’s say that you figured you have to save at least $500 per month for retirement and you’re going to pay about 30% of your earnings in taxes and you work 40 hours per week, and you charge $50 per hour. (For the sake of simple math.)

Just the retirement portion makes your hourly rate $52.50 and taxes add another $15 so now you’re at $67 without taking into account any other expenses. There are surely some other expenses your business incurs like licensing, continuing education, equipment, and more. It wouldn’t be surprising to see that number make it to $80 or more