Becoming Self-Employed

Self-employment insurance checklist (10 items)

1. 1

   Replace employer health insurance: ACA marketplace with SEP, COBRA, or spouse's plan

   Losing employer coverage triggers a 60-day Special Enrollment Period (SEP) to enroll in an ACA marketplace plan outside open enrollment. If your business income is modest, you may qualify for premium tax credits that make Silver or even Gold plans affordable. Consider COBRA if your former employer's plan was excellent and COBRA costs less than marketplace alternatives. If your spouse is employed, adding yourself to their employer plan is also an option, though this limits your coverage choice and may affect their premium.

2. 2

   Understand self-employed health insurance deduction and HSA eligibility

   If you're self-employed, you can deduct 100% of health insurance premiums paid for yourself and family members on Schedule 1 (Form 1040) — above the line, before calculating adjusted gross income. This deduction reduces your taxable income significantly. If you choose an ACA plan with a high deductible (HDHP), you can also open and contribute to a Health Savings Account (HSA), triple-tax-advantaged for medical expenses. These deductions make individual health insurance more affordable than it appears at face value.

3. 3

   Replace employer life insurance: buy individual term life portable across clients and income changes

   Employer group life insurance terminates when you leave; purchasing individual term life insurance while you're young and healthy is critical. A 30-year-old in good health can lock in a 20-year term for often $20–$40/month. Self-employed income is harder to document for underwriting, so apply and lock in coverage while you're still employed or immediately after starting your business. Unlike employer coverage, individual policies travel with you through career changes and business pivots.

4. 4

   Replace employer disability insurance: buy individual disability insurance now while employed and healthy

   Employer long-term disability insurance typically ends at separation. Individual disability insurance is underwritten based on your current health status and income — buying after a health decline or income collapse is much harder and more expensive (or impossible). A 35-year-old earning $60,000 might secure a policy paying $3,000/month at 60% wage replacement for under $150/month. Once self-employed with irregular income, individual DI becomes much harder to obtain. Apply while employed.

5. 5

   Set up retirement savings: SEP IRA, Solo 401(k), or other self-employed retirement plan

   As a self-employed person, you can contribute significantly more to retirement than W-2 employees. A SEP IRA allows you to contribute up to 25% of net self-employment income (up to $70,000 in 2024). A Solo 401(k) offers even higher limits and loan options. Many self-employed people underfund retirement because they're focused on the business; starting a plan immediately (even with small contributions) ensures you build the habit and the account.

6. 6

   Add business liability insurance: General Liability (GL) and Professional Liability if doing client work

   General Liability insurance protects you if a customer or vendor is injured on your premises or by your operations, or if your work damages their property. Most business contracts require GL coverage at $1M per occurrence. Professional Liability (or Errors & Omissions) covers claims that your advice, service, or work caused a client financial harm — critical if you're a consultant, designer, developer, accountant, or similar. Costs vary: GL for a home-based consulting business might run $400–$800/year; professional liability another $600–$1,500/year.

7. 7

   Add commercial auto insurance for vehicles used in business; personal auto excludes business use

   Personal auto policies exclude vehicles used regularly for business. If you transport clients, haul equipment, or use your vehicle to travel to client sites regularly, you need commercial auto coverage. A single commercial vehicle might cost $1,200–$3,000/year depending on usage and driver record. If employees or contractors use personal vehicles for business, add hired and non-owned auto coverage to your general liability or commercial auto policy ($300–$600/year).

8. 8

   Consider an umbrella or excess liability policy for asset protection above business and home limits

   Once you have a business with revenue, your net worth grows. An umbrella or excess liability policy adds $1M–$5M of liability coverage above your auto, homeowners, and business liability limits for typically $200–$600/year. It's cheap asset protection that covers gaps and stacks on top of your underlying coverage. If your business generates significant revenue or you have substantial assets, umbrella is worth the cost.

9. 9

   Consider cyber liability insurance if you handle client data, store files, or process payments

   Cyber liability covers breach response, notification costs, regulatory fines, and client lawsuits if your business experiences a data breach or ransomware attack. If you store client financial data, health information, or passwords, cyber liability is essential. Costs range from $1,500–$5,000/year depending on the data you hold and your security practices. Many underwriters offer discounts for multi-factor authentication, regular backups, and security training.

10. 10

    Verify certificates of insurance requirements for client contracts and ensure coverage matches

    Many clients require proof of insurance before you start work, often via a certificate of insurance (COI). The certificate shows your insurer, coverage types, limits, and expiration dates. Some clients have specific coverage requirements — for example, minimum $2M GL, or that they be named as an additional insured. Confirm your policies meet these requirements before signing contracts. Missing a coverage requirement can breach your client contract and expose you to liability.

Related

FAQ

How does the self-employed health insurance deduction work?

If you're self-employed, you can deduct 100% of health insurance premiums (health, vision, dental, long-term care) paid for yourself, your spouse, and dependents on your tax return, above the line on Schedule 1 (Form 1040). This deduction reduces your adjusted gross income and lowers your taxable income. You cannot use this deduction for health insurance premiums for months you don't have self-employment income. The deduction is powerful: a $500/month premium ($6,000/year) directly reduces your taxable income, saving roughly $1,200–$1,500 in federal tax for a mid-income taxpayer.

Do I need workers' compensation insurance if I have no employees?

Workers' compensation laws vary by state, but most states do not require sole proprietors or partnerships without employees to carry workers' comp. However, if you hire any employees (W-2, 1099 contractors in some states, or helpers), most states mandate coverage. Some states also require workers' comp for farm workers, casual laborers, or real estate agents. Check your state labor department website to confirm requirements. Even if not legally required, some clients contractually require you to carry it. If injured and you have no coverage, you have limited recourse for medical bills or lost income.

Should I get an LLC and does that affect insurance?

Forming an LLC provides liability protection — it separates your personal assets from business debts and liabilities. An LLC does not directly affect insurance requirements, but it does change how liability coverage applies. Solo proprietors are personally liable for business claims; an LLC provides a liability shield, though insurance still covers the legal defense and damages. Some insurers offer slightly better rates or terms to LLCs because the entity structure signals professionalism. However, the main benefit of an LLC is the liability shield, not insurance pricing. Consult a business attorney on structure.

Can I write off insurance premiums as business expenses?

Yes, most business insurance premiums are deductible as business expenses. Health insurance for self-employed people uses the self-employed deduction (discussed above). General liability, professional liability, cyber liability, and workers' comp premiums are fully deductible on Schedule C (Profit or Loss from Business) as ordinary and necessary business expenses. Keep detailed records and receipts. Some insurance costs (like homeowners coverage for the business-use portion of a home office) may be partially deductible — consult a tax professional on the details.

How does ACA premium tax credit work with variable self-employment income?

The ACA premium tax credit is based on your estimated household income for the year. For self-employed people with variable income, estimating conservatively is wise. If your estimated income is lower than actual, you'll pay back excess credits at tax time (a reconciliation). If actual income is lower than estimated, you're entitled to a refund. The IRS allows income changes (such as a significant business downturn) to trigger a Special Enrollment Period to adjust your marketplace plan mid-year if needed. Report income changes to healthcare.gov promptly to avoid reconciliation surprises.