Handling benefits as an independent contractor
September 04, 2015

Independent contractors have to do their own accounting and and payroll. They are basically their own business. While this means they have to do a lot of things differently when it comes to taxes, it also means they don't have employer-provided benefits like healthcare, a retirement plan, a paid vacation policy and paid sick leave. Some people rejoice at having total control over these parts of their life, but others are terrified by the thought of having to provide these things themselves. Here's what independent contractors need to know about:

Health insurance 
Everything with health insurance for independent contractors changed when the Affordable Care Act passed. According to the ACA?, independent contractors are required to have health insurance or pay a penalty on taxes. If an independent contractor has a spouse who is employed, coverage through  his or her plan is possible. The independent contractor has to sign up on his or her spouse's plan and the cost of the health insurance will be deducted from the spouse's paycheck. While this is simple, depending on the spouse's plan and the independent contractor's income level, it might not be the best option. 

According to Healthcare.gov, self-employed people can get healthcare through the individual Health Insurance Marketplace. If a self-employed person has even one employee, he or she may be able to get healthcare through the SHOP Marketplace for small businesses. In both cases, he or she will have to fill out a Marketplace application and provide all of the information that it requires. Then he or she is able to choose the level of coverage needed. In some cases people may qualify for free or low-cost coverage, depending on income and home situation. 

The right retirement plan for independent contractors can change depending on the retirement goals. Different people will find variable types of plans better suit their individual situation. 

Here are some different retirement plans to consider:

  • Simple IRA
    According to Zacks, a financial group, Simple IRAs are good for people who want to contribute more than 25 percent of their annual income. While there are caps on how much can be contributed, if an independent contractor makes less than $50,000 a year it is worth considering. 
  • Simplified Employee Pension
    An SEP is a plan that allows independent contractors to contribute up to 25 percent of their annual income. Their contribution will go toward what is called a SEP-IRA. These follow the same investment, distribution and rollover rules as traditional IRAs, according to the IRS
  • Solo 401(k)s
    The IRS defines a solo 401(k) as the same thing as a regular 401(k) program but just for a single individual. Contributions to the plan can be made both as an employee and an employer. This provides a lot of flexibility, and makes Solo 401(k) plans appealing to many independent contractors. 
  • Defined Benefit Plans 
    Zacks describes defined benefit plans as the least flexible and most expensive to get started. However, these plans are guaranteed to payout. This is very enticing to some independent contractors. 

It is best to discuss individual needs with a financial advisor. They will be able to help choose a plan that is right for an individual's situation, and they can also help set up and manage whatever plan is chosen. 

Paid vacation is nonexistent for independent contractors. They have to work to get paid; however, there is nothing stopping them from taking a vacation should they wish. There is no one telling them to only take 10 days of vacation time per year. Independent contractors should develop a plan so that they can budget for the entire year and still take some time off. 

Sick Leave
The same goes for sick leave. Luckily the company or individual who hired an independent contractor is usually only worried about the finished results. This means that if a day or two is missed due to an illness, it usually doesn't matter as long as the work is done by the deadline. It can be a good idea when negotiating contracts to add in some room for issues, should they arise. For example, consider setting a deadline that allows for an additional day or two than is really needed. Also, remember communication is key for independent contractors, so if an illness will delay delivery, make sure to let the proper people know. 

Nexus: G-WEBCD4