Being self-employed comes with benefits and responsibilities. There are myriad considerations when striking out on your own as a contractor. In this post, I discuss three major areas for consideration: insurance, taxes, and investment. 

I am writing as a contractor from Massachusetts in the United States; the information in this blog is based on my perspective and experiences.  I welcome comments to this post that provide additional information from other perspectives and experiences.  

Insurance

Health Insurance, for most, is essential. In the United States there are state regulations on health insurance.  As of 2022, five states (California, Massachusetts, Rhode Island, New Jersey, and Vermont) and the District of Columbia require all eligible residents to declare annual proof of health insurance coverage on their state taxes. You can be charged a penalty on your state taxes without providing proof of insurance in each of these states. Your healthcare company provides a specific tax form to submit with your taxes annually. For those of you who live in other states, you do not have to declare annual proof of health insurance.

The U.S. National Market Place provides insurance options and price comparisons.  In addition, your state may have its own resources.  Most plans are income based with varying options for deductible plans that include Preferred Provider Organization (PPO)/Health Maintenance Organization (HMO)/Exclusive Provider Organization (EPO)/Point of Service (POS).  Throughout my years as a contractor I have purchased Health and Dental insurance from the Massachusetts Health Connector. I am the breadwinner in my family and had to be sure I could provide health, dental and vision insurance for my family. The landscape for insurance is ever-changing; be sure to do your research to figure out the available options in your state and on a federal level. The best part was the education, I was able to select the plan for my family’s needs. You can decide if you want to have a high deductible plan because you are young and don’t visit the doctor except for your annual physical, or if you would rather select an all-encompassing HMO where you do not have to pay as much out of pocket when visiting the doctor; but your monthly cost may be higher, it’s hard to place a dollar amount on peace of mind. 

Be sure to retain all documentation for your taxes to be able to share with your accountant or provide on your tax forms. These expenses are helpful in reducing your taxable income.

In 2019 the U.S. government removed the penalty for not having healthcare insurance. Taxpayers are not required to provide coverage documentation on federal tax forms, although it is always a good idea to retain evidence of healthcare coverage for your records. If you are moving to a different state or country, be sure to research your new location’s requirements for healthcare insurance.

Life Insurance – Accidental Death and Dismemberment (AD&D), Short- and Long-Term Disability Insurance. Think of the type of healthcare and insurance you would traditionally receive from an employer.  Which of these types of insurance do you need or want as a contractor?  The American Automobile Association (AAA) offers some affordable life insurance options if you are a member. The Small Business Administration (SBA) also offers group rates if you have formed a company – check into your local chapter. This is a crowd-sourcing option for some benefits that you can buy into with other small businesses to obtain a reasonable rate. Life insurance should be a very personal consideration. I have always enjoyed the advice of Dave Ramsey who taught me the difference between term and whole life insurance. Ask your insurance provider for advice on all insurance you feel that you need for you and your family.

Professional liability insurance for business professionals is highly recommended.  Liability policies, sometimes called errors and omissions insurance, cover claims of negligence or mistakes related to services you provide to your clients. Liability policies can vary to cover damages and the cost of defense. You may want to explore forming a limited liability corporation (LLC). The terms of liability insurance and the regulations related to liability insurance is state-dependent.

Cyber Insurance has now become a separate policy and is no longer included in liability insurance in many instances. Data breaches and cyber-attacks have infiltrated many parts of our everyday life.  Your cyber insurance can be a rider to your liability coverage or a separate policy; check with your insurance agent for rates and options. Cyber insurance can be obtained from the same agency you use for your homeowner, renter, or car insurance.

Workman’s compensation insurance is important if you own your own business. This is generally state-regulated and cost fixed. Every state in the United States (except Texas) will expect you to purchase this insurance.

Your insurance provider can discuss these options and may even suggest an umbrella policy. Umbrella insurance is additional insurance that protects you beyond the existing limits and coverages of your policies. Umbrella insurance can provide coverage for injuries, property damage, lawsuits, and personal liability situations. Review your policies closely to consider if an umbrella policy makes sense for you.

U.S. Taxes

If you are not proficient in filing your own taxes, a good accountant or help center (such as H&R Block) can help you maximize your return. Consider filing the long form to claim all appropriate deductions. You can also call the IRS or your state tax help line for assistance. Make a list of all the assets you use in your house for your work: square footage, pest control, gas bills all count!  Refer to the previous post in this series focused on Your Home Office for more information.

Taxes can be paid online monthly or quarterly for the federal government and for most states. For example, I set aside my quarterly taxes each time I am paid and use a separate business account to hold the funds until I submit the taxes.

Invest in Your Future!

As an independent contractor your retirement plan must be self-funded. You can consult a financial planner or other financial professional to advise you about your personal situation. Alternatively, you can invest on your own by opening an account at any investment company of your choice.

If you have funds from previous employers consider rolling them into an IRA. This will help to simplify your investment profile.  I recently had to settle the estate of my aunt whose funds and investments were so fractured over time it made the job extremely difficult.

How much do I invest? There are a couple of considerations when thinking about an amount.

Age – Over a certain age you can invest more as you grow closer to retirement to maximize your tax deductions.  For example, if you are using a traditional IRA in 2023 you can invest 6,500 per year under age 50 and if you are over 50 that number increases to 7,500. You can of course invest more than these amounts but there will be tax implications. Check IRS.gov for additional information and consider enlisting the help of a financial planner. Free information is available from many financial experts who speak about investing through podcasts and vlogs (for example, Suze Orman and Dave Ramsey).

Ability – You know how much you can afford to invest. Create a budget but consider the fact that anything added to a pre-taxed IRA is going to lower your taxable income. Discussing this with your tax accountant is the best route to tailor to your personal circumstances.

How often do I invest?Once you’ve decided how much to invest, you then need to decide how frequently: weekly, monthly, or yearly. 

Where do I invest? Among many options, here are some to consider:

• 1.   Large investment firms (e.g., Fidelity, Vanguard)
  

2.  CDs or Bonds – have a lower rate of return, but they are a low-risk investment and provide the ability to get to
your money easily.
3. Real estate

Self-employment considerations can be daunting. I have only touched on a few subjects here to help you along in your journey. The best advice is to educate yourself and find the right people to support your path. Trailblazing can be hard, don’t do it alone!

Helpful Resources

U.S. states with health insurance penalties for not enrolling : https://www.talktomira.com/post/what-will-happen-if-i-don-t-have-health-insurance-in-2023
U.S. national health insurance marketplace: https://www.healthcare.gov/
Explanation of different types of HealthCare Options in the US: https://www.healthcare.gov/choose-a-plan/plan-types/
U.S. national health insurance marketplace plan types: https://www.healthcare.gov/choose-a-plan/plan-types/
American Automobile Association insurance options: https://www.aaa.com/
Small Business Association insurance options: https://www.sba.gov/
Term vs. Whole Life Insurance: What’s the Difference? By Dave Ramsey – https://www.ramseysolutions.com/insurance/term-life-vs-whole-life-insurance?gclid=Cj0KCQjww4-hBhCtARIsAC9gR3blo9CImAqHqXysA21_FxXD6jIuvEY5_naLi86AH6FfkJ9TZDRqhf4aAuEPEALw_wcB
Liability insurance: https://www.coverwallet.com/general/general-liability-without-business-license
Cyber insurance: https://www.ftc.gov/business-guidance/small-businesses/cybersecurity/cyber-insurance
Retirement plans for self-employed: https://www.nerdwallet.com/article/investing/retirement-plans-self-employed