Employee or Independent Contractor?

Financial planning for independent contractors

When choosing to become an independent contractor, you were most likely attracted to the flexibility and independence associated with contracted work. However, with this new allotted freedom in your career comes unpredictability and variability. As a result, it’s important to be diligent about forming a plan to ensure a stable financial future.

One of the downsides to working in a 9-5 environment can be not having enough flexibility of your time and income potential. However, there are still certain positives to working in a traditional workplace such as the benefits and protections offered. Finding ways to incorporate these benefits into your financial plan can help you succeed both in your business and personal life.

Stick to a budget

When you’re receiving a regular paycheck weekly or bi-weekly as a regular employee, it is easy to budget for your monthly expenses. However, as an independent contractor, you are subject to more fluctuation with your income, especially when first starting out. Start by figuring out your monthly expenses and then determine your average month-to-month income. Since it is possible for this to fluctuate monthly, be sure to set aside additional funds in a savings account so that on the months where you earn less, you can still ensure your bills are up to date.

Determining a monthly budget can become a bit more complicated when you are the owner of your own business because you have to account for your own benefits (which are usually automatically deducted from a paycheck when you’re working for a company).  Additionally you also have to account for your own personal savings as well as any taxes for the business. This is why as an independent contractor, it is important to account for these expenses when determining your rate to charge potential customers.

Determine the benefits you need

After transitioning into an independent contracting position, you will inevitably take on more responsibilities such as setting your own hours, advertising, acquiring customers for your business, and determining the most important benefits to account for to protect both your business and personal financial future. While there are certain perks and benefits in workplaces that are nice to have, not all are necessary and worth obtaining at your own expense. However, some of the main benefits that most companies offer are important to obtain—especially to ensure that you can keep your business running in an unforeseen event.

Health Insurance

Health insurance is no longer mandated by law, however, that doesn’t mean that you shouldn’t look into ways to acquire a plan. Even if you are a young independent contractor with minimal medical bills, it is important to remember that accidents or unexpected circumstances arise and can have devastating financial implications if you don’t have some kind of coverage.

Health insurance coverage is usually less expensive when offered by an employer because they subsidize a portion of the offered coverage. However, there are still certain plans that you can independently find that would at least protect you from major financial loss should you incur a large financial bill. Instead of forgoing health insurance entirely, consider looking into a catastrophic plan or a high deductible plan to mitigate a large medical expense.

However, keep in mind that as a free agent, you independently determine the future of your business so maintaining optimal health is important to ensuring success. This is why it’s important not to skip out on annual checkups, so if your plan does not cover these, keep some additional funds readily available to ensure preventative care.

Life Insurance

Life insurance is another essential safeguard that many companies offer in their benefits package. If your family depends on your income to stay afloat then you need to account for a life insurance plan in your monthly expenses. Since it can be difficult to project your income when first starting out as an independent contractor, consider a term life insurance policy because they are typically less expensive than whole life insurance policies.

When determining your amount of coverage, first consider any debts you may have and guarantee that the policy would be enough to pay these off if you were to pass away. Next, you will want to estimate your projected annual salary and multiply it times 10-12. This would leave family members that depend on your income adequately protected for the foreseeable future. Since your income is likely to change as time goes on, remember to reevaluate your policy from time to time.

Retirement funds

Depending on when you decided to become an independent contractor, it is possible that you already have some funds saved for retirement from previous employment. If you already have a retirement account, look into your options of transferring these funds into a new account. If you have not yet established retirement savings, there are different routes you can take so take some time to do research on the best option for you depending on your personal needs. You can always increase your contributions, so starting out small and then increasing once you have a better grasp on your income potential can help you start preparing for the large expense of retirement in the future.

Separate your accounts

Because you determine your business’ financial needs, it can be easy to combine your personal and business accounts.  As an independent contractor, you may want to throw all of your additional funds back into the business to keep it growing. However, remember that it is key to keep your accounts separate to eliminate any confusion between your personal expenses and business expenses. Being diligent about maintaining independent accounts can give you a better picture of your business needs and true costs. This can also eliminate stress at tax time when you are trying to figure out what you need to write off as a business expense because all of your information will be separate. Additionally, remember not to skip out on paying yourself in an effort to grow the business quickly.

Diversify your clients

Lastly, depending on your industry, it can be helpful to diversify your clients. While it is always a great feeling of accomplishment to have a loyal and stable customer, remember that you don’t want to be too dependent on one type of client by putting all your eggs in one basket, so to speak. If something were to happen to this loyal client, you don’t want to be scrambling to make up for this income that you depend on. This is why it is important to continue to prospect and diversify to keep building your book of business. You might even secure an even bigger contract by looking in new and different places.

Being your own boss and being in control of both your time and potential income is greatly rewarding. With a bit of planning and diligence, you can secure your personal financial future which in turn, allows you to make better long-term business decisions. Best of luck in your new endeavor!

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