Want to be a freelancer or contractor? Here's what you need to know.
Approximately 57 million Americans were freelancing in 2017, and if trends continue, over half of American's will freelancing by 2027, according to an article in Forbes. Some of those are full-time freelancers; others are still holding down a 9-5 job, but doing side hustles in their free time. The proliferation of such part-time and freelance work has people talking about a new kind of labor market: The Gig Economy.
Interested in joining the gig economy and earning money outside the context of a full-time job? Here's what you need to know about freelancing.
What Is Freelancing?
When it comes to alternative work situations, there are many terms thrown around such as freelancer, contractor, telecommuter and more. While similar, there are some differences.
A freelancer is a self-employed person who offers services to clients. These services are often, though not necessarily, are offered to businesses, though the proliferation of sharing economy apps like TaskRabbit and Mechanical Turk. However, individuals can offer their services directly to clients, without third-party resources that often take a cut of the pay.
Nearly every type of service needed by most businesses could be provided by a freelancer. Some of the most common freelance opportunities include:
Some freelancers focus in general ares, such as those listed above, while others focus on specific industries, such as real estate assistant, or niche skills such as PPC copywriter.
Freelance income varies depending on the skills offered, your experience, and the market you're targeting. In general, freelancers earn anywhere form $10 to $75 per hour. Skills that require more education or experience, such as accounting or website coding, generally pay more than skills that don't require as much.
Ask yourself what you're good at. What is it that you do better than just about anyone else? In what areas do you excel? Can businesses or individuals use your skills?
The Advantages of Freelancing
Freelancing can be a fast and affordable way to get started working as your own boss, often from the comfort of home. Other perks of freelancing include:
- Set your own hours. Freelancing is flexible. You can often work full- or part-time on projects of your choice.
- Work where you want. If you'd like to be location independent in your career, freelancing is great portable option for those want to be a lifestyle entrepreneur.
- Be an independent contractor. Although clients can—and usually will—set specifications for the work they want done, a freelancer is still an independent contractor, not an employee. You'd be free to control how the work is completed. Of course, if your clients don't like the final product, you might find yourself out of a gig.
- Get paid what you're worth. Freelancing allows you to set your own price for your services, which is often higher than what you'd make as an employee doing the same work. Make sure you charge enough to cover your overhead and to compensate you fairly for the time it will take you to do the work.
- Affordable to get started. If you have the ability to provide a certain service, you most likely also already have the equipment or software you need to deliver it. You shouldn't face steep startup costs.
- There's a high demand for help. Although the freelance marketplace is competitive, the need for quality, reliable freelancers is growing. Many businesses don't have employees these days. They rely upon a team of freelancers instead. Currently, this trend is growing as freelancers cost less to businesses than employees do, even if they pay a higher rate because they don't have payroll fees or benefits.
- You can pick and choose your clients. You'll probably want to take on any client who will hire you when you're starting out, but you also have the option not to take on difficult clients, especially as you grow. You can even fire them.
- You might pay less in taxes. The IRS treats employees and independent contractors quite differently. Thanks to recent tax law changes, employees can no longer deduct unreimbursed work-related expenses—but independent contractors can. You can deduct business expenses from your earnings on IRS Schedule C to reduce your taxable income.
- Increased work/life balance and overall happiness. When you can pick and choose what you do and when you do it, as well as what you're paid and who you work with, you feel more balanced and happy in your life.
The Disadvantages of Freelancing
Freelancing isn't perfect for everyone, and not everyone is suited to it. Here are a few of the downsides:
- Your clients have schedules, too. Yes, you can set your own hours for the most part, but if a client can only see you at dawn on Tuesday, you'll need to get up with the crows. You likely will need work within deadlines as well.
- The work isn't always consistent. This is particularly the case if you're offering one-and-done services, like creating a certain product. You turn the finished product over to your client, and that's the end of it—you have to find a new client who wants your product so you can create another one and be paid for it. More seasoned freelancers can avoid this issue by finding clients with a substantial volume of consistent work, and impressing them so that they become regular vendors or service providers. A freelance writer, for instance, might have a client that requires an article twice a week on an ongoing basis.
- You probably won't be super-successful overnight. Getting enough clients to support yourself and your family through freelancing can take a while, and many freelancers experience an ebb and flow in their work. You'll have to plan for lean times and be ready to work hard to deliver work on time when work is plentiful. Breaking in with lower costs might be necessary, but find clients willing to pay for quality as quickly as possible.
- Managing multiple clients and projects can be a challenge. Although some people like the variety of working on several projects at once, others might find it difficult to keep track of deadlines. You have to pace yourself to produce and deliver quality work on time. Great time management systems and organization are key.
- You're in charge of all aspects of your freelancing career including invoicing, bookkeeping, marketing. In essence, you need more skills than just the ability to the work you're freelancing. Unless you can hire people to take care of these tasks, you need to take care of them on top of delivering your service.
- You'll have to pay for your own benefits. You'll lose out on perks like employer-sponsored healthcare and retirement plans. Depending on the work you do, there might be professional associations that you can join to get group health insurance rates.
- You'll have to pay self-employment tax. This is the flip side of paying taxes on less income. When you work for someone else, your employer pays half your Medicare and Social Security taxes, but now you effectively are your employer. You'll have to pay both halves. This is commonly referred to as the self-employment tax.
Getting Started as a Freelancer
Getting started as a freelancer can be as easy as visiting one of the freelance sites to find work and networking within your current sphere of influence to find your first client. Consider using a freelance site, such as Freelancer.com or Upwork to find work. They might pay less than you want, but this can be a great way to get your name out there and to get testimonials and referrals.
Beyond using freelance sites, to set up a freelance business you should:
- Decide what services you'll offer. Will be you a gereralist in your area or specialize? For example, will you offer social media management on most platforms or focus on one, such as being a Pinterest marketing manager.
- Determine your target market. Who needs what you have to offer? This is the time to decide your brand and your unique selling proposition. This is also the time to decide if you'll focus on a specific industry. For example, will you offer virtual support services to Realtors, or will you offer your services across industries.
- Decide your rates. Setting the right price is a balance of getting what you're worth while being attractive to clients. Price too low, you may suggest your work doesn't have value and you might not earn enough. Price too high, and you may not have people willing to pay you. While you may have an hourly charge, many freelance projects may be one-offs (a single time limited project) in which the client will want an estimate of the total job. Other freelancers have ongoing clients that pay a regular rate or retainer. For example, a freelance writing might write 8 new articles for a blog for $400 per month or a virtual assistant can provide 10 hours of work a month for $200.
- Create an online portfolio. Build a profile that promotes what you have to offer. Eventually, you'll want to invest in business-building tools, such as a website that can offer you more customization and flexibility, but LinkedIn is free and it's a great online resume that can help you promote your service. You might also consider Portfoliobox, SquareSpace, and Journo Porfolio.
- Market your services. There are many low cost and free ways to market your freelance business and attract clients. Some options include networking on social media, offering a free consultation, asking for referrals, and email marketing.
Taxes, Insurance, and Money Issues
When you've got a job, most of the "money stuff" is taken care of. Your get a regular paycheck without having to ask; your taxes are deducted automatically; and insurance is likely also taken care of through your employer.
Things are different when you're on your own.
Taxes: Independent contractors don't have their taxes deducted automatically, but they still have to pay them. Usually when you sign on with a new freelance client, you'll need to fill out a W-9 tax form so that your client can report what they paid you to the government. You should also be keeping track of your earnings over the course of the year, determining roughly how much you owe in taxes as the year goes, and then making those estimated tax payments on a quarterly basis.
On the bright side, being a business owner means that those expenses you incur as part of your business operations can be deducted from your taxable income. This includes things like your Internet service or any tools and resources you need to do your freelance work. If you work from home, you can be eligible for the home office deduction that allows you deduct some of your mortgage and utilities as part of doing business. Talk to an experienced tax preparer about how you can deduct those costs on your return.
Getting paid: This can be one of the more frustrating and time-consuming aspects of freelancing. When you start a new gig, in most cases you'll want to have a contract specifying the terms of your relationship with the client, the deliverables, and the compensation, If the client doesn't have a standard contract for their vendors and service providers, you might need to draw one up yourself.
This will likely also involve negotiating the rate you'll be paid. Some businesses will have a standard rate they pay to their contractors; some contractors will have a standard rate they charge clients. If those numbers are far apart, then be prepared to negotiate. And be prepared to walk away if they don't meet your standard.
The work doesn't end when you agree on a rate and draw up a contract. In many cases you'll need to produce and send an invoice for all the work that you do, either on a monthly basis or every time you submit work to the client. Because there are dud clients, you'll want to have a system for getting payment from clients that are late or don't pay.
Insurance and benefits: If you're a full-time freelancer, then you're on your own for benefits. While you can get get lower cost insurance through associations you may belong to, they're not deducted from your paycheck as you have in a job. Note, there self-employment health care deductions that you might be eligible for.
You're also on your own for setting up your retirement, but there are special self-employed retirement options.
What it all comes down to is that being a freelancer and working in the gig economy means taking a lot of responsibility for your own finances, whether that's negotiating your pay, finding insurance, or paying taxes. But if you love the freedom, flexibility, and earning potential that comes with being independent, then freelancing is an ideal situation.