Does your employee need benefits?
Employee???? Whiskey Tango Foxtrot! What are you talking about?
We are wrapping up the 31 Day Courier MBA series with a section on employee relations. Here's the deal folks: Every business, including the independent contractor business, has a responsibility to take care of their employees. (Don't get me started on companies that dodge that responsibility by using the independent contractor designation!)
You are self employed. So guess who your employee is? You have a responsibility to that employee. It makes sense to start with talking about benefits.
Benefits as an advantage to employment
One advantage a traditional job has over being an independent contractor is the benefits that may be available. Is the lack of benefits a deal breaker? Is there a way you can make up for the lack of benefits?
In Episode 6 on the podcast and the related blog post, we talked about how your earning power as an independent contractor bringing in $18 per hour is generally about the same as someone working a $12 per hour traditional job. The disparity can be even greater when that job offers additional benefits such as insurance and retirement.
Does Your Employee Need Benefits?
I think you need to start with this question. We all have different situations and so we all have different needs. Because my wife already has a good benefit package with her work, I'm fortunate enough to have more flexibility. If this is your only gig and you don't have benefits through another source, your situation can be very different.
Some benefits are extras, but some may be more necessary, depending on your situation. We'll look at some of the benefits that are out there and if they can apply for us who are self employed.
Paid Time Off
Personally, I think this is an important one to take into account. I believe strongly that you should be offering your employee some paid time off.
So how do you do that when there IS no paid time off as an independent contractor?
Let me put it this way: If you were working a traditional job, your boss isn't getting any money to give you paid time off. It's a part of the cost of employing someone. It doesn't just cost them the $12 per hour (in the example we mentioned above) but there can be sick days and holidays, maybe even paid vacation time. They pay extra for that.
And here's the thing: You NEED to do that for your employee. There will be days that your employee (you) needs mental health time. You really should be providing vacation time. Maybe holidays are better days for working, that's a business decision you have to make. The problem when you are self employed is you have to scramble to make up for lost income when you take time off.
A good employer is going to set aside money to pay their employee for some time off. So rather than scrambling after the fact, the best thing you can do is to take some money out each week and save up for future time off. The more you rely on the income for this work, the more you need to do this.
Personally, I set about $40 a week aside into a paid time off fund. That way, I can take a couple weeks vacation without having to worry about the lost money. If I need a sick day or mental health day, I'm covered. We'll talk a bit more on Wednesday about how you can calculate this.
What about insurance?
One of the huge problems being an independent contractor is, you are completely on your own for insurance. If you are hurt, you have no coverage. If you get sick, you have no coverage. Here are a few types of insurance to think about:
Accident and Disability Insurance.
I'm not sure this really should be in the benefits discussion, to be honest. This should just be a must. Here's the deal – worker's compensation insurance is required of any employee to cover injuries while you work. It's not a benefit, it's a requirement. You are not covered by worker's comp. If you get hurt doing deliveries, what do you do next? What about if you have an issue that keeps you from driving for an extended amount of time.
This used to be a real issue for self employed people, more so than now. Prior to the Affordable Care Act, getting an individual insurance policy if you were not part of an employment group was much more difficult. There are options now though they may not be the most affordable. Many platforms have arrangements with insurance providers that might have more affordable options due to group affiliations. If you do not have health coverage through another employer, you do need to find an option.
Do you need life insurance? The best way to answer that is, is there anyone else that relies on your income? Basically the benefit of life insurance is to replace your income if something were to happen to you. If you have dependents, you need to think about some form of life insurance to make sure they are taken care of. Term life is very expensive and does exactly what you need it to do. Dave Ramsey has a good article on helping you decide if you need life insurance.
Here's the question: Is Social Security going to be enough when you retire? Is Social Security going to be around when you retire? A lot of employers offer a 401K with or without employer matches to help people save up for retirement. Now as a self employed person, you could probably say EVERYTHING you put into retirement is going to be an employer match. Contributions are often tax deductible and there can be a lot of added deductions or credits when self employed. Obvously, you want a tax pro to help you figure this out.
So what's the purpose of looking at all this?
There are two takeaways from this discussion.
The first part is, if you want to compare what you are doing with a traditional job, it's important to understand the actual value of these benefits. Shop around, find out what it costs to cover yourself with the proper insurance. A lot of times you find out your earning power as a self employed person is FAR less than as an employee once you account for these benefits.
The other reason this is important is, you have to really take a look at each of these types of benefits. You have to ask yourself, are any of them NECESARY, and are any of them just really important to have?
I recommend you find a good insurance agent who is as involved in educating as they are just selling products. Look around Dave Ramsey's site because he does a lot of vetting of agents he recommends. Understand what you are covered for. Find out what it will cost. Ask a lot of questions: What happens to me if I'm hurt while delivering? Will my health insurance try to get out of it since it's work related? What about lost income?
Ask yourself the hard questions: What if I'm hurt? What if I die? How does that impact anyone? How does that impact me (well, okay, maybe not the what if I die part, you already know the impact there)? Is your self employment leaving you at a greater risk than you need? Which of these things do you absolutely have to have? Determine what of these benefits you need and start figuring that into your business planning.