Thinking of becoming a freelancer? Here’s a few things you should know.
2019/01/22
On January 8th of 2018, I was laid off. It wasn’t all that unexpected with the current climate of the company and I had been looking to give full-time freelancing a try for a while. So with my severance in hand I embarked on giving full-time freelance a go. Fast-forward a year and things are still going rather well, knock on wood. And these are some of the things that have helped me through my journey so far.
Know how to price yourself
I always go by the saying “Work for free or full-price, but never cheap.” This applies to when you’re trying to set the rate you’ll charge for your services. Whether you work in an industry where per hour or per project estimates/invoices rule. You still need to have a base per hour set so you can have a better sense of “OK, this is how much I need to bring in to support myself.”
First start by calculating what you need to survive for one year. Food, rent/mortgage, gas, car payment, etc. Once you have that number, multiply that number by 30%. This is to account for taxes you’ll owe through the year. So if you need $100,000 to live, you would need $130,000 to cover that wonderful tax payment to Uncle Sam. Please note: this percent will change depending on how much you make, but 30% has worked for me so far.
After you’ve figured out how much you need to make per year. Divide it by 1500 hours. This is how many billable hours I account for in a given year. Yes, I know the typical work year consists of 2000, but this is to account for any slow periods you may have as you cannot bank on a steady paycheck.
Once that is done. Take a look at your industry and see what the typical going rate is for what you do and the experience level you’re currently at. If the industry standard is higher than what your per hour rate, charge that. If people are accustom to paying X, but you’re below that, why not. Plus its always easier to decrease your rates than increase them.
Set up a LLC
Set up a LLC. This will help you when it comes to any legal or banking items you may have to tend to down the road. There are several different ways to do this and numerous resources out there to help you get things set up, Legal Zoom, a local lawyer, etc. I personally prefer a LLC because a LLC provides you greater protection legally than the other two.
This boils down to company assets are separate from personal assets in an LLC, which helps insulate your personal belongings if things were to go wrong. Where if you do business as a DBA, company and personal assets are considered one in the same.
Set up a business checking account and pay yourself like an employee
Being a freelancer means you deal with everything from providing your service, to making sure you deliver on time and, the biggest thing, handling all monies that come in. When you’re the one handling the money it’s up to you to be fiscally responsible when that big pay day lands. It can be rather tempting to go out and spend that 10k check all at once, but I implore you to not do that.
When you’re setting up shop, go to your bank of choice and set up a business checking account and put any and all payments into that account. Then set up a bi-weekly or twice monthly deposit into your personal checking account. Doing this will help keep you in check of spending any money you bring in all at once. It will also help you weather any slow periods with little to no money coming in.
This will also help in not getting flagged by the IRS by depositing a large amounts directly into your personal checking account. This is because the IRS keeps track of large deposits, multiple large deposits under $10,000 within 24 hrs or anything over $10,000, and will assume you’re dealing with illicit items such as drugs. They can also, without warning, pull money from your account if they suspect any such activity. So please do your homework on this part.
Saving for the tax man
Taxes are one of the biggest things you need to account for when freelancing. This is because you are solely responsible for saving for and paying out any taxes you owe. And if you’re not wise about setting money aside throughout the year for taxes. This could land you in a tight spot when taxes are due because they are due one way or another and if you do not put enough money aside you could be looking at a bill that could be in the tens of thousands of dollars.
One easy way to help with this is to set up a separate savings account specifically for taxes. Once it’s set up, anytime you receive payment from a client/vendor/etc. Put, at least, 30% of the payment straight into that savings account. That way you have less of a chance accidentally spending that money before taxes come due and it’s more of an “out of sight out of mind” deal. Again, that 30% may fluctuate depending on how much money you make in a given year.
Quarterly taxes
Another thing you’ll end up having to do is pay quarterly taxes. Without being a W-2 employee, there’s no company there to take out taxes and pay them for you through out the year. That responsibility comes down to you to pay taxes throughout the year in 4 yearly, quarterly, payments.
Now if you still have a full-time job that comes with a W-2 you don’t need to worry about your quarterly taxes as much as what your company withholds counts as your quarterly tax payments, but still set aside at least 30% of any money you bring from freelancing because you’ll still need to pay out any taxes you incur from freelancing. Worst case, you have extra money at the end of the year once your taxes are done and paid.
The omnipresent feeling of not having enough money coming in
The one thing you probably won’t ever shake is that feeling of not having enough money coming in. Whether you’re waiting on $8,000 of invoices to pay out, you have a dry spell of no work or you’re still relatively new and trying to grow your client base. There’s always going to be a feeling of “Am I doing enough to bring in enough money?”
I’ve also found that if you stress and worry too much about where your next check is coming from. It doesn’t help in finding new work as you can’t think straight because you’re thinking more of where your next check is going to come from vs focusing on that new client.
And going back to paying yourself like an employee. If you do find yourself in a situation where you may not have any money coming in for a time. You’ll probably have a small buffer of some kind will help offset that fear of not having enough as you’re not spending every single dollar that you bring the moment you have it in hand.
Conclusion
Now, do you need to follow everything I just stated as a bible? Absolutely not. As the saying goes “Different Strokes, Different Folks.” So there’s no one size fits all when it comes to being a freelancer. So some of these things may work for you, some may not. Either way I hope you were able to take away at least one morsel of knowledge.