The Benefits Battle: What's a Contractor To Do?
More companies are hiring full-time consultants instead of employees. Here's how to protect yourself if you aren't on a W-2. Last in a series.
The situation wasn't ideal: A few hours after his wife gave birth in the wee hours of the morning, Jim walked to a local diner and whipped out his laptop. First, he emailed friends and family to spread the good news. Then he started responding to dozens of requests waiting in his inbox.
As a communications consultant, Jim didn't get any time off for the birth of his child-a plight more contractors and freelancers are experiencing as companies hire them in droves to supplement their own workforce. Simply stated, contractors save companies money. By avoiding paying benefits (like parental leave), it costs a firm 30% less to hire a contractor than a full-time employee. Indeed, 42% of human resources professionals surveyed recently by Korn Ferry said they plan on hiring more contingent workers in the future to save money.
It costs a firm 30% less to hire a contractor than a full-time employee.
"Companies usually pay contractors a higher rate than staff because they aren't paying you benefits, so they must supplement in wages," says Tom McMullen, a Korn Ferry senior client partner and a leader in the firm's Rewards and Benefits Solutions practice.
Despite the fact that 20% of the workforce now sit outside the norms of regular employment-a number that is expected to rise to 50% in the next 10 years-laws ensuring perks like maternity leave, retirement savings, and disability insurance haven't evolved fast enough.
To be sure, some states, like California, have already developed more stringent requirements to provide safety nets for the independent workforce. But for the time being, most responsibilities for healthcare and retirement still falls on contractors. It's about making sure you have "layers of protection," says David Rowan, a financial advisor in Pennsylvania. Here's a look at how to build that base.
You might be eligible for some perks.
Before you freak out about healthcare premiums or retirement savings, first make sure your client isn't on the hook to pay for some perks as well. If you're a full-time contractor where the company provides the technology-like your computer-and office, while also restricting your ability to take on other clients and setting your hours, then there's a chance you should actually have full-time employment classification as a W-2 employee.
Ask your supervisor or the company's HR department about adding health insurance or gaining access to the 401(k)-particularly if the requirements of the position don't provide any opportunity to diversify your client base.
Buy disability insurance ASAP.
As an independent contractor, if you're not working, then you're not getting paid. That's why having disability insurance is vital. Most plans will cover you if you get sick or injured and are unable to work. The plans vary, but will kick in if you can't work for 30, 60, or 90 days, depending on the policy. If you have savings that could cover a month without an issue, then looking at the 60-day or 90-day plans will reduce your monthly payment.
What should the plan cover? Expenses like mortgages, cell phone bills, and potentially even student loan payments. These plans "can cover quite a bit of income," Rowan says.
Explore parental leave options.
We've all heard about the difficulties new moms go through, as the United States continues to be among the few countries that don't require employers to provide maternity leave. But it's even worse for contractors. If you expect to get pregnant in the future, career pros recommend buying a short-term disability plan to help cover expenses while you're adjusting to life with your new child.
For fathers, that isn't an option. Instead, if you want some time off, start creating an emergency savings fund-beyond the three to six months that financial planners suggest you have-in order to cover the weeks that you plan to use as your paternity leave. Or, if you work from home, you can adjust your schedule to help your significant other with some of the daily care while still remaining on the clock.
Set up a retirement account.
We know, you're probably sick of hearing about needing money for retirement when you're trying to tackle day-to-day finances. But options for contractors are actually one of the few perks you may have over regular employees, so you should consult an accountant to discuss specific circumstances. Generally, while you won't get the additional boost of savings by having a company match a certain percentage of the money that goes into a 401(k), as an independent contractor, you can open what's known as a SEP IRA. Unlike 401(k) plans, which cap the amount you can add each year to $19,000, a SEP IRA allows you to add the lesser of 25% of your income or $56,000. It's a great option "if you're a highly successful contractor," Rowan says, "both as a way to cut your current tax bill and save."
Expense everything you can on your tax forms.
One of the most unique perks independent contractors have over employees is the amount of expenses they can deduct against their income. Obviously, you should first check if your client will pay for some expenses-which you should discuss with them prior to signing a contract-and then talk with a tax professional about what types of expenses you can deduct. This can include a percentage of the rent or mortgage for your home office if you use the space specifically for work, or gas, car payments, insurance, and car maintenance if your job keeps you on the road. While how much you can expense depends on whether you use the car exclusively for work or not, it's a tax benefit that a regular employee can't take advantage of.