I get at least one email message or phone call from a recruiter almost daily. They want to tell me about a great job opportunity. Would I be willing to become an employee of their company (or in many cases of their client)? If so, they want to talk further and see if I would be a good fit….Sometimes, I get the recruiter who tells me: “But we have a phenomenal benefits package for you.” Yes, it’s true, they might have a great benefits package, but one shouldn’t decide to take a W-2 employee position instead of being a 1099 contractor simply because of the benefits.
I’ve learned that for the most part, I can replicate the benefits of any employee position, and it costs me far less than it would cost the company to provide those benefits to me.
I will go ahead and dissect these benefits one by one. Disclaimer: I am not a lawyer or any kind of tax, benefits or HR professional. I am merely documenting my own experiences and observations here.
I’ve seen companies that note in an annual statement that the family health insurance they are providing has a real cost of perhaps $15,000 or even more. I pay $5,000 for individual health insurance for my family of five. I have a $2,400 deductible to meet ($5,600 annual out-of-pocket limit including deductible), although some things, like wellness visits, are completely covered. I have a health savings account, which unlike a flexible spending account does not have a use it or lose it clause. In any case, even with the $5,000 + the $2,400, it’s still half the price of what some businesses seem to be paying for group health.
Granted the oldest age in our family is 38, which keeps our rates lower than if we were older, and we are all in reasonably good health. Some people may have more difficulty in the short term getting individual health coverage, particularly with chronic medical conditions. Already, there are a number of law changes that will benefit people in my situation (as I understand it, less looking at children’s chronic conditions, wellness visits that aren’t subject to the deductible), and in the relatively near future, the preexisting conditions clause hopefully will no longer be an issue!
That said, in the short term, if you have at least two people working together in a business (at least in Maryland), even spouses, you can get group health for your business, which won’t look at your preexisting conditions, only your ages.
Dental and Vision Insurance
Our health insurance came with vision discounts right off the bat without any preexisting clauses. Not phenomenal vision coverage, but not much worse than I’ve had in the days of being a W-2 employee.
We had several options for dental insurance, group (which you can again justify with at least two people working for the company that can be spouses) or individual. The family group plan was slightly more pricy, but had a higher maximum of coverage and included some orthodontic coverage too, which may be useful in the future. But we could have gotten individual dental coverage without a problem.
There are tons of options for relatively inexpensive life insurance that you can do on your own, and that’s what we did. Granted that if you have serious medical issues from the outset it may be harder, but assuming that you’re in reasonably good health, it seems pretty easy to find.
Long-Term Disability Insurance
Although a little bit of a pain to have to document contractor income instead of employee income, I was able to use tax returns + copies of all the checks that I received (which I’d always recommend that contractors keep!) to document my income and was able to get a long-term disability plan that covered 60% of my income should I become disabled. I had injured my Achilles tendon several years prior (which healed within a few months) so I actually have a (somewhat absurd IMO) clause that they won’t cover disability related to that injury – but this does point to the fact that it’s good to get this if you can while still in good health.
Short-Term Disability Insurance
I found that I shouldn’t even try to get short-term disability insurance. It’s extremely expensive for individuals. For me therefore, I effectively need to self-insure for 3 months until long-term disability kicks in. The decision rule I discovered is that I need to have at least two short-term disabilities of approximately 3 months each to just break even. For myself, I therefore don’t consider short-term disability insurance an essential need.
General liability insurance
For some of the projects I was on, per contractor requirements, I needed to get general liability insurance. While this may intimidate the new contractor, and is effectively an unstated “benefit” provided by larger companies, my policy initially cost $218/year. As I discovered when adding staff, this number has since gone up now because of a necessary workers comp rider.
There are a number of options, and it is easy to open up a retirement plan depending on how you are defining your business structure. I initially set mine up as an “Individual 401K,” which works as long as you (and potentially a spouse) are the only employees in the company that are eligible for retirement benefits. Depending on how you set things up, you can effectively have what amounts to a brokerage account with much more control and many more options than you would get as an employee. While you don’t get someone matching contributions for you on the one hand, the options you have to have your business “match” your personal contributions could be much greater. (If you hire employees at some point, there are some rules about being consistent on this with all your staff). You’re not likely to be able to find a pension plan these days, either as an employee or as a contractor, so I haven’t even tried.
Vacation Days / Sick Days / Paid Holidays
On the one hand, nobody is paying me when I don’t work, be it for a vacation day, a sick day or a holiday. But on the other hand, I will get paid more per hour as a contractor than I would as an employee, so while the impact of not getting paid for non-working is more visible when taking several days off, in the end, it’s more of a personal understanding that this benefit is baked in, that it’s okay to take vacations (very important to accept this!) and that in the end, nobody is looking over your shoulder and counting the days you take off.
Creation of business entity
I filled out the paperwork for my state (Maryland) and paid $100 to form my LLC. Then once I received mail confirmation of that creation, I went to the IRS website and got a tax id within about 2 minutes.
So, particularly assuming that you (and perhaps your family) are in reasonably good health, I wouldn’t recommend jumping at a benefits package just because you are afraid to do otherwise. Instead, I’d suggest weighing not the value that the company says their benefits are worth, but rather the value that it would cost you to get these benefits depending on your particular circumstances, when deciding between a contractor or employee path.