The Best Freelance Income Advice: Start Out on the Right Foot
Freelancing is in
There’s no question that the gig economy is alive and well. More and more businesses are using freelancers as go-to resources to fill gaps in their workforce.
- As of September 2014, 53 million people—that’s more than one-third of the American labor force—worked as freelancers.
- Income from freelance workers adds an annual $715 billion to our economy.
- Experts project that freelancers will make up 50 percent of the full-time workforce by 2020.
Is freelancing right for you?
So how do you decide if freelancing is right for you? And what do you need to know before you start?
What not to do
I’ve been freelancing for a little over three years now, and I’ve had a series of amazing opportunities, as well as some devastating disappointments. Last year turned out to be a banner year for me.
But I certainly didn’t go about establishing my practice in any rational, intentional way. In fact, it was quite the opposite: I jumped straight into the deep end, post-divorce, post-multi-year stint away from the workforce focusing on family.
This column is the freelance income advice I wish I could have given to my newbie freelancer self before diving head first into the gig economy, with benefit of hindsight and the insights of my trusted team of coaches, mentors, and friends to write this column.
Step One: Engage a support team
It’s been helpful to consider these colleagues and friends as members of my “team.” These are people I draw on for advice, ideas, inspiration, brainstorming, confidence building, or simply the wisdom that comes from having already made all the mistakes.
Career Coach Erin Ewart, of Erin Ewart Consulting, agrees that creating your own team is a great first step to embarking on freelance life. “Find a network of people in a similar situation—whether in your city or in an online community like Townsquared—so you have people to bounce ideas off of, and so you gain the benefit of their experience.”
Your team will morph and change over the years, but if you start with a solid foundation of people you trust and respect, you’ll end up with a lifelong cadre of advisors and friends.
Step Two: Learn what to prepare
There are three main areas in which freelancing substantially differs from full-time employment, and where newcomers can be surprised, put off, or even stumble.
You’ll want to know what to expect so you can set yourself up for success in:
- freelance income and finances
- marketing and promotions
- day-to-day experience
Freelance Income: Key tips and takeaways
There are definitely ways to misstep financially when you decide to cut the cord of full-time employment, so it pays, literally, to set your freelance income up correctly from the get-go. Here are a few tips and takeaways to help you get started.
Know your monthly expenses
You need to know your bottom line—what you need to live—so you can build your safety net and set your fees. A quick and dirty way to accomplish this is to track expenses for several months running.
That said, my go-to personal finances guru, Mikelann Valterra, notes that most people underestimate their “run rate” by 20 percent when they calculate their expenses this way. She’s a certified money coach, and she’s seen it happen again and again. That’s because it’s easy for neophytes to miss the inevitable periodic expenses that only hit from time to time during the year, like summer vacation to the coast, repairing that broken alternator, re-upping your life insurance, or dealing with home maintenance issues.
So, if you want to do a back-of-the-envelope calculation, be sure to add at least 20 percent to your total to account for these added expenses.
Alternately, freelancers can set up detailed spreadsheets or track actual expenses on a variety of software packages or apps, including Quicken and Mint. Many credit cards and even online banking interfaces have ways to track spending categories that can help, too.
MoneyMinderOnline is another option which has the unique advantage of enabling you to track past expenses and plan for upcoming ones. It has a feature for adding periodic expenses into the picture as well. I’ve been using it for three years now, and it’s been a lifesaver!
Build a financial bridge
Having a financial cushion is critical to launching a freelance career with as little money angst as possible.
The inevitable ups and downs of freelance income often come as a shock to people used to full-time, reliable employment. Mikelann says that it takes three to five years to grow a business to the point where you can rely on referrals, that is, to build a reliable network of clients. The resultant financial insecurity makes it hard to be creative or to get out there and network with the upbeat, “I am the right person to solve your problems” attitude that you need when you’re marketing and networking.
So, what is an adequate financial bridge? And how do you build one? Mikelann recommends either keeping a part-time position or having three to six months of savings in order to keep you afloat when business is slow.
Michael Stearns, owner of Hybrid3 and an incredible graphic designer, agrees. He started with six month’s of savings before going out on his own 17 years ago. He reserves even more now as a Mayday fund. He likes knowing he can always have what he needs, so he doesn’t live in constant deprivation mode. Plus that makes indulgences that much more delicious.
Separate business and personal finances
It’s important to keep your finances separate, so you have a clear picture of the income and expenses generated by your business.
If you’ve been employed full-time, it can be a surprise suddenly to have to deal with managing your own accounting, paying taxes, and buying office supplies. “One of the biggest mistakes newly self-employed people make,” Mikelann warns, “is to start spending their gross, not their net income. And then they go into debt.”
Keeping a dedicated business account gives you the ability to see what your business actually costs and to keep tabs on how much you bring in.
As a rule of thumb, an average service-based business can expect to keep 50 percent of their gross income. The rest goes to taxes, supplies, and retirement savings.
Remember to deduct business expenses
Now that you’re self-employed, explains Luke Frye, a Certified Public Accountant (CPA) and co-founder of Timber Tax, a tax services firm dedicated to serving small businesses, you can deduct your business’s expenses from your earnings.
Your employer stocked printer paper and sticky notes, but now that’s up to you. And since you can deduct those business expenses, taxes are another reason to separate your business from your personal expenses. Tracking your deductions all in one place rather than mixing everything together makes it much easier when tax time rolls around. “That way you don’t need to remember whether this meal or that parking fee was work related or not,” Luke explains.
The more organized you can be with your receipts, expenses, and bank statements, the more efficient you can be in managing the financial and accounting aspects of your business. And you probably want to spend more time actually doing the work, and less time perfecting your accounting skills.
Protect your taxes
Sock away the money you will owe for taxes, so that you can’t spend it, even inadvertently.
Full-time employees never see the income withheld by the IRS. But freelancers are paid gross wages, so we’re responsible for making our own quarterly estimated tax payments.
How do you keep from spending money that isn’t yours? “I generally tell people to set aside 30 percent of their income for taxes,” counsels Luke. He even recommends opening a separate savings account. “Getting into tax trouble can be a real problem if you aren’t prepared,” he warns, “and it is such a hard hole to get out of.” If you’re someone who needs an added firewall for your own protection, there are online services, like painless1099, that can withhold from your earnings.
Set your rates
Setting your rates is a key step in starting life as a freelancer. As with negotiating your salary, every subsequent increase will be based on your initial rate. How do you calculate this magic number? Mikelann recommends breaking it down into three steps:
- Research the going rates in your field. There is usually an enormous range here, and it has nothing to do with you.
- Make a list for yourself of why you are amazing. This can be your education, results you’ve achieved, honors you’ve earned, and so on.
- Make a case for why you charge the top of the range for your work.
“You also have to remember to include taxes when you set your rates,” reminds Luke Frye. “To cover taxes, set your rate at least 20 to 50 percent higher than when you were an employee.”
If bumping your rate like that makes you feel like you’re pricing yourself out of the market, remember that your flexibility and expertise allow businesses to respond quickly to changing demands without the added pressure and cost of hiring full-time employees. (This can be especially convenient for organizations engaged in client-facing work.) Hiring you, the freelancer, means businesses aren’t paying for the added overhead and staff resources that would be taken up by your benefits and training as a full-time employee.
It can feel intimidating at first, but knowing your rate helps you turn down jobs that don’t pay enough and hold out for the right clients when they come your way.
Stay tuned for columns about marketing yourself as a freelancer (yes, you have to get out there and network), as well as managing the day-to-day realities of freelancing. You could live in your pajamas, but do you want to, really?
If you have ideas between now and then, please feel free to shoot them my way, email@example.com, with the subject line “Freelance Advice.”