Freelancers and Solopreneurs: How Much Are You Really Losing in Employee Benefits?

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Just How Much are Employee Benefits Really Worth?

Perhaps the one thing that hinders people from becoming Freelancers and Solopreneurs are the cushy Employee Benefits that come along with a full-time job.  But how much are Employee Benefits really worth?  First we explore how much in financial terms it amounts to and then we explore the real costs borne by freelancers and solopreneurs.

I’ve been an independent contractor for the last few years.  It wasn’t something I chose; rather it was a situation that happened after I got laid off in 2014.  Luckily, I was able to find contract work shortly afterwards.

For the first, year or so, I didn’t even think about replacing the benefits I would’ve received from an employer in the past.  If you are like me, being a independent contractor in the same field as you were full-time in the past, means you likely are being paid more than your pay-check as an employee.  Likely, the employer or client is paying you that sum of money to compensate for the lack of employee benefits, which means you will have to take care of this yourself.

 

Defining Employee Benefits

For the sake of discussion, let’s lay out what Employee Benefits we are talking about (typical for a 9-to-5 employee):

  • Health Insurance (e.g. Dental, Doctor Visits, Hospital Stays)
  • Medical Insurance (e.g. Drugs)
  • Travel Insurance (both for professional and person, depends on your plan)
  • Life Insurance (typical for most employee benefit plans)
  • Paid Vacation Time (for the sake of this discussion, I’ll include this as a benefit as well)
  • Paid Sick Leave or Short Term/Long Term Disability (should that happen)
  • Bonuses or Profit Sharing (e.g. year-end lump sums)
  • Stock Options (no explanation required)
  • Pension-related contributions (e.g. 401k or whatever equivalent in your country)

Those are the key tenets in a typical employee benefits plan, though there may be other more lucrative ones you are giving up.  I started this list from memory and actually had to go back to my previous employers benefits list to remember the rest.  It surprised me just how benefits there are with being an employee and how potentially beneficial it is to be remain one.

A Short History in Employee Benefits

It might be good at this point to understand a bit more of the history behind employee benefits.  A short one. 🙂  Employee benefits started at the turn of the 20th century.  As the Industrial Revolution was well underway, the relationship between employers (mainly factories at the time) and employees was becoming imbalanced.

The employers would often hold the upper hand, the working conditions were not that great.  There were instances of employees were being physical injured while working.  Of course when time when on, we figured out that people could be mentally-damaged too, but it really started with cases where employees were working in terrible conditions.  Out of these instances came Labor Rights.

Over the 20th century, with the UK and the US taking the lead, employee benefits slowly became a standard part of the employee compensation package.

More importantly, employee benefits became a regulated legislation as part for the Labor movements. This is especially true of the portion that concerns pensions, for workers to save for their retirements.

So, with that said and armed with a knowledge that employee benefits are really created to protect employees and ensure fair compensation, let’s try to figure out how much we are giving up when pursuing a Freelancer, Independent Contractor, Solopreneur dreams.

 

Employee Benefits: Monetary Value

If you search for this on the internet, what you’ll likely find are rule-of-thumbs values for how much you should account for when considering an offer from an employer.

Let’s explore some of the more reputable calculators and their formulas out there:

A Bankrate.com article on The Value of Employer Benefits, says that “Benefits combined are worth about 30 percent of your total compensation package, according to the U.S. Department of Labor.  They cost employers an average of $8.81 per hour worked in December 2008.”

If you’re working a typical 40-hour week and you work full-time throughout the year, you’re benefits should have a monetary value of $18,324.80 or thereabouts.

I dunno about you, but that seems like a lot of me.

Let’s take a look at another reference from Monster.com.  Since they are a job-posting website, their primary stance from this article is to support job seekers in picking the best compensation package between two jobs — but it’ll work in our favor too in determining what the monetary value of employee benefits are.

The main thing from Monster.com’s article is to be sure to consider the retirement plan benefits too.  These retirement plans often require both employee (yourself) and employer contributions and do add up over time.  Aside from the health, dental, medical benefits etc. retirement contributions from the employer’s help with growing your retirement nest-egg much faster and more reliably and incentivizes you to save, too.

Most employers contribute between 3.5% – 11% of your base salary.  The average Freelancer or Solopreneur makes about $30,000 in a year.  That might be enough for you to live on indefinitely provided you take into account inflation, but what most people don’t consider is the amount they will be pocketing and saving for the future personally and for their business.  In this particular case, let’s say you make $50,000 in your job.  If you employer contributes 6% of your base salary, that’s already $3000 dollars of tax-free money that you are contributing to your retirement which is 10% of what an average freelancer makes in a year.  That’s definitely something to take into consideration before you make the leap from an employer to a freelancer.

This article is not to dissuade you from being a Freelancer and living the life you want; rather it’s to help you make an informed decision/

The two key questions are:

  1. Can you cover the costs for health, medical and hospital benefits extended by your current employer to get private insurance on your own?
  2. With the extra money that your employer contributes on your behalf in a retirement plan, bonus and stock options, would you miss them or need to be compensated in another way before you can truly be self-employed?

 

Employee Benefit: Emotional Value

Beyond the strict dollar value that comes with employee benefits, there’s often an overlooked value that comes with having these benefits.  Like all types of insurance, the benefits provide a safety net for when the unexpected happens.

Certainly, this is most true in the case of health-related benefits.  If you’re a young, healthy 20-something or 30-something then it’s likely you will not be using the full extent of the benefits, but there always is a question of “what-if”.

What if there is this emergency I have that requires hospitalization for a couple days?  The fear of the unknown is said to be one of the most scary things any person can experience.  The insurance is really an EN-SURANCE in many ways — to be there when something wrong happens and it inevitably does from time-to-time.

So there are many benefits to being an employee but being a freelancer means that if having this peace of mind is important to you, you should factor that in — not unlike an employer would when hiring someone with a full employee benefits package.  Work out what insurance you need or if your spouse/partner can extend benefits to you with an extra charge.  Do this before you make the leap into self-employment and reflect on how much it matters to you.

Secondly, there is no way to adequately cover for the loss of stock-options, profit sharing and retirement plan matching.  It’s all up to you to known how to allocate your capital, profit and revenue you earn on your own to balance what needs to be spent today and what needs to saved for tomorrow.

As a freelancer, I would say that the best place to start is to take the employers’ rule-of-thumb.  If you can save 3.5%-11% of your profits for your OWN retirement plan, that’s an amazing place to start.  But keep in mind that there needs to be enough money left-over for reinvestment (if your business needs it, and even for sales, marketing).

While it’s a good rule-of-thumb to save between 3.5%-11%, you should also consider the worst case scenarios.  What if your current client contract ended abruptly?  What if your backlog of work dries up beyond what you currently have?  It’s definitely important to consider these scenarios and determine what is the adequate level of reinvestment and savings for yourself.  After all, being self-employed, means you are now the employer — so start thinking like one!

Tell us what you feel about your employee benefits!  What do they mean to you?  Also, if you want to guest point about your experience both as an employee or as a Freelancer, we’d love to support you and publish here.  Drop us a comment below.

 

 

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