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Self-Employed Company Benefits

There are some cool benefits that come along with being an employee - some we may even take for granted. Most of these benefits can be replaced by self-employed individuals, it’ll just take a little more work than signing up for the benefit.


A necessary evil of becoming self-employed includes creating your own benefits package… which can get pretty complicated, but definitely imperative for overall financial (and physical!) health. Although it takes effort to vet and implement these benefits, there also may be more flexibility in having control over what is selected.


I want to point out that my writing below is geared towards sole-proprietorships. These are self-employed individuals that file a Schedule C. This can be through an LLC or not, but ultimately this is for those who do not have a corporation (s or c corp) or partnership.


Those business structures have their own unique rules, but the end result is the same - if you are the employer, you should be creating company benefits (even if you’re the only employee!).


Here are some of the major benefits to keep in mind and make available for yourself:


Insurance


Insurance is very important to your financial and physical health. Also called “risk management”, the major insurance benefits that come with employment include health, life and disability insurances:


Health Insurance


Health insurance is extremely important, and everybody should have a plan to get coverage. Here are some options for the self-employed:

  • Affordable Care Act, or Obamacare - this is health coverage available to everybody. It can be costly, but depending on your income you may qualify for tax credits on the premiums.

  • Self-insure - in other words, don’t have insurance. I wouldn’t recommend it.

  • Medicaid - *some* states have insurance coverage for low income individuals, which could be your situation towards the early years of your business.

  • COBRA - this is continuation of coverage from your prior employer. This is typically expensive, and only available to those who had employer coverage prior to a separation from that employer. It is available for a set amount of time, depending on what caused the loss in coverage.

  • Spouse - very common to have the ability to be covered by your spouse’s employer, and may even be available to domestic partners, or other non-traditional partners for some companies.

  • Parents - if you’re under 26, you can consider getting on your parents health insurance, if they’ll allow it :)

  • Private coverage - Unlike Obamacare, you must qualify for this coverage through a health screening. If you’re approved, the premiums are typically less expensive (since only ‘healthy’ individuals are allowed to be covered).

  • Other cost sharing - there are other programs that share expenses like religious or other employment related groups, depending on your situation.

Health insurance premiums can get expensive, but on the bright side, these premiums can be a tax-deductible expense (if you operate at a profit, exceptions apply) and you can choose a policy that fits the coverage you need (whereas you only have limited options through an employer).


One downside is that you will not have access to a Flexible Spending Arrangement (FSA), since this is an employer account that you cannot replace as a sole-proprietor. But, you can use a Health Savings Account (HSA) if your policy allows for it. An HSA is not through your employer, but it is your own individual account.


Which is fine because HSA > FSA

Dental and Vision Insurance


These are a bit ‘simpler’ in that you don’t have to qualify for coverage - you can apply for coverage through private companies that best meet your needs. Not easy, but definitely simpler than everything that goes into health insurance.


Life Insurance


Employers typically give a certain amount of base life insurance (e.g. 2x salary) and the ability to buy more coverage.


But, you may be better served getting life insurance personally. If you leave your employer, that life insurance does not go with you. Self-employed individuals do not even have the option, so consider getting a personal policy if it makes sense for your situation.


Be careful trusting an insurance professional selling you a permanent life insurance policy by telling you about how rich people and banks use permanent life insurance for their businesses. You are not a rich person or a bank.


If you have a buy-sell arrangement, or need to put one in place, permanent life insurance may be CONSIDERED (but still needs an objective discussion). And, this typically isn't life insurance on you personally, which should still be considered based on your needs with, or without, a buy-sell agreement.


Disability Insurance


Employers often offer short-term and long-term disability insurance; this is very important as a young professional! This protects your largest asset; your human capital, or ability to make money.


I can make a case to forgo short-term disability insurance if you have a strong financial foundation, emergency fund and access to cash in the event you can’t work for a few weeks or months.


But, long-term disability should be strongly considered. It can be cost effective, and protects such an important piece of your financial well-being. Consider talking to a disability insurance broker who can help to put a policy in place for you.


Retirement


This can be a whole separate post beyond this small section here, but I want to point out that you no longer have a company match on your retirement, or the simplicity of ‘just’ signing up for payroll withholdings. You have to do this yourself.


Can my company match my own retirement contributions?


It is a bit trickier than that - self-employed individuals are limited in the amount of contributions based on a formula. If you set up a solo-401(k), you can make your own “employee” contributions like any other employee. But your company (aka you as the “employer”) can only contribute up to a certain amount of your business profit.


In other words - your total contributions into a retirement plan is dependent upon how much profit your company shows on your tax return. It is not based on how much you contribute. At the end of the day if you’re a solo business, your company match is really just you making more contributions - so call it a match, profit share, or whatever you want as long as you stay within the limits of how much you’re allowed to contribute.


Beyond a solo-401(k), there are other retirement options available to you like an IRA, a Roth IRA, a SEP IRA, a SIMPLE IRA, a Cash Balance Plan, and a Defined Benefit Plan. There are many options available, with different attributes and reasons for each, which gets way too complicated for this blog.


But, pursue your options and start to think about what is best for you. I would say the list I gave generally goes from simplest to most complex to understand and set up.


Tax Withholding


I can’t get away from talking about taxes. Maybe this isn’t a company benefit… but it sure is a perk to have somebody handle this on your behalf.


I’ll keep it simple, I just want to make sure I mention this. You are responsible for your own withholding and paying taxes throughout the year.


The downside of this is having to project your income, or understanding your tax situation enough to accurately pay the IRS (and potentially your state) each quarter. It can be a burden and hard to understand how much and when to pay, but this is part of being self-employed.


The upside is that if you have a good understanding of your tax situation, you’re in control as to how much you pay each quarter. Many times, due to withholding schedules, companies withhold too much for employees, which results in having to wait until tax season to get that withholding back via their refund. You can avoid this situation by having the control.


Other Company Benefits


The benefits I mention above are the major benefits that should be considered when starting a business and working solely for yourself. Beyond that, there are two other major benefits I’ve seen that you could potentially give up:


Dependent Care Flexible Spending Arrangement - this is an account created by your employer that allows you to make pre-tax contributions for dependent care expenses. This is helpful, but there is also a tax credit that replaces this benefit. The tax credit typically isn’t as powerful, but its still an option.


Education assistance - I don’t see this too often, but some companies will help to pay for further education, professional development, or even help with student loans. There are certain tax breaks that help with these items as well, but these are costs you’d ultimately pay yourself.


There are also small miscellaneous benefits I’ve seen like Costco membership, cell phone stipend, etc. Although cool, these definitely aren’t moving any needles with your finances. These are all deductible business expenses that you'll be taking on yourself through running your business.


Final Thoughts


There are a lot of tradeoffs when becoming a business owner. Your path is different, but with that comes opportunity.


When searching for the top company benefits, a common one was PTO or holidays off. A business owner creates their own schedule to have it look however they want. Flexibility and time freedom are game changers, and I can make a strong case that this benefit outweighs any employer benefits that are given up.


Some may find that replacing these benefits is exciting, and some may find it daunting; but the fact remains that being self-employed gives you the control over what these benefits look like, and how you’re going to create a strong financial foundation and future for yourself through the operation of your business.