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.
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.
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.