The Real Costs of Freelancing

Posted: April 20th, 2010

Image by Dave P. (Flickr)

Image by Dave P. (Flickr)

You’ve seen it everywhere; freelancers are making their presence known, even during rough economic periods. Having been one for about eight years now, I’d say freelancing is the greatest job I’ve ever had. Jump right in!

Well, not so fast.

It takes some time for a freelance business to get wheels underneath it and to turn into a profitable income. What usually makes or breaks a freelancer’s goal of independence, though, are the financial aspects that have to be considered.

In short, the cost of doing business isn’t cheap and can’t be winged. And, no, we’re not talking about having to stick with that 5-year-old laptop and using your coffee table as a desk to cut costs.

These are the real deal costs that every business, freelance or not, has to deal with.

(Note: This post is primarily geared for freelancers in the U.S. )


For freelancers the IRS want you to know about a little thing it likes to call a self-employment tax which is roughly 15% of your income. This is on top of the tax that you have to pay from your income minus expenses and deductions. The worst part is that estimated taxes have to be paid quarterly over the year or you are penalized with additional fees come time to file taxes.

Health Insurance

It’s easy to skip this one but there is always that big “What if I get sick or hurt?” you have to think about. This is often a tough choice, too, having to decide between a huge slice of your income going to pay the premiums or an astronomical slice going toward medical treatment. Here is even more reason to not let health insurance slide by.

Operating Costs

Most freelancers can minimize their expenses by working at home and over the internet. Did you know, however, that the time you put into your business that isn’t income generating (i.e. searching for clients, invoicing) are also costs to you too?

Spending too much time not generating income and less time on actual work and, well, you get the idea.

The Payment Buffer

In a perfect world, all freelance work is paid immediately upon completion. Back on earth, though, there is almost always a lag time between completing work and receiving payment. That lag time is usually a month or more.

Living month to month and desperately depending on those payments, therefore, does not become an option. Not even when starting in freelance.

So What To Do?

This shouldn’t be a discouragement to your venture into freelancing, but financial planning will do you a world of good before taking the leap.

  • Consider freelancing part-time in addition to your job. In addition to having a fallback income, you may be able to hold on to your health insurance if it applies to you.
  • Minimize living expenses and save, save, save. That savings cushion will almost always come back to save you someday.
  • Don’t forget to set aside 20% of all income received from freelancing in a separate bank account for taxes. And don’t skip payment on quarterly taxes which are due on April 15th, June 15th, September 15th, and January 15th.

If you have any other financial advice for freelancers, feel free to leave it in a comment below.

Some Tax Help For All You (U.S.) Freelancers

Posted: March 10th, 2010

Photo by Andrew Whalley (Flicker)

Photo by Andrew Whalley (Flicker)

For those freelancers in the States, there’s a little over a month left to go search out those receipts and get your tax returns filed on time. Plenty of time but, if you have been freelancing a while, you then know that the sooner done, the better.

No, freelancers don’t have the option of filling out that one-page 1040-EZ form either. So say hello to the “long form” 1040. I recently received the 1040 form with instructions by mail, too, just the other day which contains about 200 pages of forms and IRS business jargon.

Fun reading.

Good thing there is a lot of tax information available that specifically apply to freelancers. These have helped me out quite a bit and will help you get the most out of your deductions and reduce your tax liability. Or in other words, save you some cash you can use to replace that broken desk chair.

Filing The Tax Returns

The best option is to utilize a tax service such as H & R Block and have a professional accountant help you out with your returns for a nominal fee. A tax professional will be able to identify deductions that passed you by, and end up saving you more on taxes than the fees of their service. Not to mention, your risk of an audit is drastically reduced.

If you decide to go on your own, there are plenty of online tax services which make this task easy. Did you know, though, that, if your adjusted gross income (income minus expense and other deductions) is $57,000 or less, you can use a number of services for free?

If you qualify, the IRS website has a list of “Free File” websites to do your taxes. I personally recommend TurboTax since it’s incredibly easy to use and includes a check to reduce your chances of an audit.

Tax Deductions

It is almost guaranteed that there are deductions you can take that you probably haven’t considered. Did you know even PayPal fees are one of them? Check out these for a comprehensive list:

  • Freelance Switch: A list of ten common (yet not-so-known) freelancing related tax deductions.
  • WiseBread: Talk about a big list… 101 tax deductions for freelancers and bloggers.
  • ProBlogger: There is a list of 46 deductions here, some of which overlap the above but will round out the possibilities.

The “Making Work Pay” Tax Credit

Every freelancer in the U.S. is eligible for a credit of 6.2% of his or her earned income, up to $400. All that has to be done is to file a Schedule M along with your return. For more information on this credit, visit the page.

Other Tax Resources

For any other questions, advice or general curiosity in dealing with taxes, the following are very helpful in getting the answers you need.

  • TaxGirl: A blog dedicated to just taxes with very informative articles. Try a search for any topic which you have questions on.
  • H & R Block “Get It Right”: A community forum where you can look up tax questions by other users or you can ask a tax professional one of your own.
  • Turbo Tax: Handy tax calculators plus comprehensive guides to taxes.
  • IRS Self-Employed Tax Center: Normally I try to avoid anything IRS related, but there is great information on anything tax related for freelancers here.

Do You Have Other Suggestions?

Have any other tax tips not mentioned here? Leave a comment below and let us freelancers know!

Freelance In 40 Days [Day 6]: Bookkeeping For Dummies

Posted: August 31st, 2009

Photo by Jonsson (Flickr)

Photo by Jonsson (Flickr)

This is Day 6 of the Freelance in 40 Days series where you’ll learn to freelance just by taking it one day and one task at a time. Today’s tutorial will cover financial preparation for your freelance business.

The Favorite Chore of Freelancing

Probably one of most feared and neglected aspects of freelancing is keeping track of all that money coming in and going out of your business. We smile in joy after receiving those nice project checks and grimace when we have to shell out for that little thorn in our side called taxes.

The tendency is to “put if off for later” but, make it a habit, and the more your business can be in disarray as a result. The bottom line is you want to know how your business is doing and making sure you are staying out of the red. Plus, you really don’t want the hassle of  spending hours inventing expense receipts come tax time.

Let’s face it. Keeping up with your finances isn’t fun either. Actually, it downright sucks (apologies to all bookkeepers out there). This is a necessary part of any business though. After all, in order to know how your business is doing, you really have to keep track of:

  • Net Income (or Loss): Are you meeting your income goals?
  • Money Pits: Are there expenses you can cut so your net income increases?
  • Tax Liability: The man has to take a cut. You don’t want to give him any more than you have to.

Start With The Basic Accounts

Luckily maintaining your own finances as a freelancer isn’t as bad as it sounds. First, though, we have to set up the basic financial accounts that every freelance business should have:

  • Checking Account: Instead of using a personal account for expenses and to receive payments, it is far better practice to set up a separate business account for these instead. Income and expenses are much easier to track this way.
  • Savings Account: A separate savings account is also useful for depositing taxes you are liable for as you go. Tax laws vary worldwide, of course, but transferring around 30% of your payments into this account will keep you from having to scrape together a huge payment for a tax bill when its due.
  • PayPal Account: Though there is a fee of around 3.5% to receive and transfer payments to your bank account, it’s major use comes from the ability to accept payments worldwide.

Accounting For Freelancers

As for handling your accounting, unless you are an actual accountant/bookkeeper or can afford one, it isn’t very feasible to hire one for your business since they can be pricey. The alternative is to do it yourself (or “put it off for later” which isn’t recommended). There are two tools I personally found useful,which were from a Freelance Switch article on affordable online bookkeeping for freelancers. I also highly recommend them:

  • Freshbooks: Tracks your income by recording client invoices and payments received. Pricing ranges from free for minimal services, then 19 USD/month on up for expanded services.
  • Shoeboxed: Tracks your expenses by scanning, categorizing and keeping sum of your receipts. Pricing ranges from free for minimal services, 9.95 USD/month for basic and up to 49.95 USD/month for premium services.

The Best For Last: Taxes

Since every country has their own tax laws, it would be impossible to cover every single one here. There is likely some online tax resources for your country that can be found through a simple Google search. It is highly recommended, though, for you to consult with a local tax professional. It is not unheard of that they can sometimes pay for their service through savings on your tax payments.

For those in the U.S. there is a great tool in Outright (also in the Freelance Switch article) which can integrate with Freshbooks and Showboxed mentioned above and is free of charge. Turbo Tax is another easy to use tax tool for those from the States.

One little tip is if you are allowed deductions for expenses, is to have a look at Wise Bread’s 101 tax deductions for freelancers and bloggers. Although these apply mainly to U.S. taxes, it doesn’t hurt to check if these expenses can reduce tax for those in other countries.

Your Homework For Today

It will definitely take you more than a single day to apply everything in this tutorial to your freelance business. It is important to have these in place before you really start your freelance work though. So take the time you need to, but have these all in place:

  • Set up your business checking account.
  • Set up a business savings account for saving 30% of received payments for taxes.
  • Set up a PayPal account.
  • Set up a method of bookkeeping whether hiring an accountant, using Freshbooks/Shoeboxed or another method of your choice.
  • Utilize a local tax service (or use online service for U.S. taxpayers).

Top Ten Excuses For The IRS On Tax Day

Posted: April 15th, 2009

It’s tax day in the U.S. so if you haven’t started, better get to it. In case you do not meet the midnight deadline, here are a few excuses that may get you by:

10. “I decided not to pay that part I owe going to the financial bailout.”

9. “I’ll check the box where $3 will go to the campaign fund. Just let me slide this once.”

8. “I’m still waiting on that stimulus check to foot the tax bill.”

7. “It’s cool. I work at [insert major bank receiving bailout funds here].”

6. “Why don’t we schedule a meeting with my tax advisor, Mr. Glock 45.”

5. “I thought it was ok to take an advance on my Social Security.”

4. “Taxes are an expense. So I deducted them from my taxes.”

3. “I gave myself  a bonus with the tax money I owed this year.”

2. “The check is in the mail.”

1. “I’m still trying to conceive my dependants.”