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Small Businesses and Independent Contractors Can (and Should) Financially Prepare Themselves for the Future Even if you work for yourself, you can still make sure someone is looking out for you.

By Fady Edited by Chelsea Brown

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Opinions expressed by Entrepreneur contributors are their own.

For most small businesses and independent contractors, the notion of 401(k)s or health insurance options may seem daunting. This hit home for me as I met with stylists and salon workers to find out what popular or trending industry interests were — they were all eager to learn how to financially prepare themselves for the future. If your small business doesn't yet offer savings options, or if you haven't begun saving as an independent contractor yet, it's important to understand the larger influence these financial planning tools can have on your business and your future.

Regardless of whether the benefit you're offering is a 401(k), health coverage or something else, people will assign a value to that benefit. But the potential or perceived monetary value often far outweighs the actual cost of the benefit. The best example is health insurance, which all businesses with 50 or more workers must provide. On average, employers pay $6,227 per year for single coverage and $15,754 for family coverage. Compare that to the cost of a single surgery, which can range anywhere from $16,000 to $170,000. Employees think about this gap when assessing what a perk is really worth.

Good options reduce stress and ground the business

Benefits can also have non-monetary value to employees. Let's say you have 10 workers participating in a 401(k) program. The administrative cost for those workers is less than $1,000 a year. Participants can have peace of mind knowing that their employer is handling that administrative work on their behalf, and more importantly, they're automatically saving and investing money.

When businesses offer financial and health coverage to their employees, the team will ultimately feel less stressed about the "what ifs" of their future. With less stress, employees can often work more productively and collaboratively. What's more, they're less likely to jump ship, even if other companies offer higher pay. A recent study showed that 80% of respondents would choose an employer that offered better benefits with a lower salary. This bodes well for businesses that aren't in a position to offer high salaries; competitive benefits packages can still attract and retain valuable employees.

Related: 8 Ways to Get Health Insurance When You're Self-Employed

Small businesses can work their way up

When a business starts out, it may not be able to offer the same benefit options as larger corporations. If that's the case for you as a business leader, don't assume you're stuck. Looking just at retirement benefits to prove this point, you can lay a foundation with multiple types of accounts:

  • Traditional 401(k)s, where employee contributions are taxed at the time of withdrawal

  • Roth 401k(s), where employee contributions are taxed before investing

  • SIMPLE IRAs, where employees make tax-deferred contributions through payroll deductions

More importantly, some employers avoid offering retirement solutions because they can't match contributions when, in reality, contribution matching is not a necessity. At the same time, you can select an account type where employees have autonomy over how much money they put forward. So, do what you can now, and as you grow, you can choose to offer more benefits where possible. As you get started, consider implementing HR software to help manage employee payroll and benefits.

Related: The Retirement Plan Strategy Small-Business Owners Need to Know About

Independent contractors have options, too

Even before the pandemic, the gig economy and the number of independent contractors were increasing. Part of why the gig economy is growing is pure numbers, with many people working side hustles or temporary jobs to make some extra money. Other individuals contract because they like the freedom and flexibility those arrangements offer. Regardless of motivations, independent workers are interested in and need benefits like health insurance and retirement savings options. And fortunately, they have several account choices like their permanent, payrolled counterparts do.

Most independent contractors can set up traditional or Roth IRAs on their own, although Roth IRAs can be better initially when you're likely not making much money. But if you're self-employed or a solopreneur, you can also look into Solo 401(k)s. Solo 401(k)s let you contribute as both employee and employer, increasing the amount of money you can tuck away. Defined benefit plans are another option that essentially lets you build your own pension. They take a big yearly funding commitment and can be expensive to administrate, so they're better for people with a higher income. Finally, consider SEP IRAs, which are designed for self-employed individuals or those with just a handful of employees.

For insurance, one of the biggest supports for freelancers is the Freelancer's Union, which you can join for free. You can go through the union to sign up for an insurance plan under the Affordable Care Act. The union also helps with dental, life or disability plans.

Related: Did You Just Become a Gig Worker? Start Saving for Retirement Now – Or This Might Happen

Benefits play powerful roles in reducing stress and stabilizing businesses. For these reasons, even though benefits can serve as differentiators, it's more important now than ever that everyone, including independent contractors, has access to them. To prepare yourself or your team for the future, identify short and long-term lifestyle and health goals. Then see which plans or accounts you can set up as soon as possible that support those goals. Many plans or accounts are flexible or can be transitioned to other options, so don't be afraid to make changes as you develop to maximize your results. With benefits becoming more critical, find options that fit your goals now.


Founder and CEO of Vagaro

Fady "Fred" Helou uses creative solutions to solve common problems and has built Vagaro into a business that helps more than 150,000 service providers annually.

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