How to Deal with Finances as a Freelancer

Picture this: Waking up naturally around 8 am, setting out your laptop and making coffee and eggs while you start to do research and lay out your day. You’re in your bunny slippers and robe. No alarms. No hectic rush hour commute. Best of all? No cubicles!

Freelancing is a lucrative side hustle, but it can also be a satisfying career. About 57 million Americans work freelance gigs — and nearly 30% are doing it full-time. If you joined them, you could potentially work where and when you want, and only as much as you can handle. Ahhh…. Feel more relaxed yet?

By 2023, the gig economy is projected to yield $450 billion a year.

There’s a lot to love about the freelance lifestyle and the freedom that it affords. If you want to be successful at it, there are also some important financial adjustments you’ll need to make. Before you take the leap into freelancing, here are some things to know about your money, taxes and more:

1. You’ll have to do math.

It doesn’t matter that you’re a graphic designer, an IT pro or a freelance writer — you’ll still need to tap into those 10th grade math skills you thought you’d never use. Hate calculators? Many freelancers track their income and savings with a QuickBooks® spreadsheet or a budgeting app like Toggl.

2. Start saving now.

Freelancers don’t always have a steady paycheck. There may be a lull in-between gigs, and depending on a company’s invoicing process, it can take 1-2 months until you receive a check. If possible, save up several months of income so that you have a buffer in those lean times.

3. Don’t spend your whole paycheck.

As a freelancer, you’ll get paid for exactly what you make — before taxes, Medicare, Social Security, 401(k), health insurance payments, etc. But don’t go spending it all! Set up a separate bank account for your tax payments and health insurance to make sure that you don’t end up in a financial hole when the government comes knocking.

4. Know your tax rate.

The self-employment tax rate is 15.3%, which doesn’t seem so bad until you realize that’s on top of the income tax you pay. Luckily, freelancers make more per hour, on average, than 70% of US workers. This higher hourly income helps to offset the costs of self-employment. Do your research on freelance taxes to make sure you file correctly, and consult a tax specialist with any questions.

5. Say goodbye to W-2s.

Instead of receiving W-2s for your work around the beginning of the year, you’ll likely receive a 1099-MISC form from each employer that you did work for during the year totaling at least $600. The good news is that this form is pretty easy to understand. If you want help, or if you don’t receive a 1099 for your gigs, consult a tax professional. If you feel comfortable completing the paperwork yourself, TurboTax® offers a self-employed version to help you get the job done quicker.

6. Benefits are your responsibility.

While some freelance contracts come with health insurance options, the majority of freelancers must purchase health insurance privately or through the Affordable Care Act Insurance Marketplace.

Keep in mind that insurance costs aren’t counted in the 25-30% of your income that you’ve (hopefully) set aside for taxes, so you’ll need to save a little extra.

7. Don’t forget retirement!

If you want to hang up your freelance bunny slippers someday, you’ll want to plan ahead. As a freelancer, you have many retirement planning options including 401(k) plans, IRA, saving certificates, and investments. Remember that without company matching, you might need to put a few percent more into a solo 401(k) plan to equal what you’d be saving for retirement with a traditional employer.

Blockchain, Java Development and Marketing are among the most desired freelance skills.

The tradeoff for doing all of this extra prep work is that at the end of the day, you’re your own boss. You have more control over the amount of money you make, which projects you’ll accept, and how and when you work.

If you’re considering living the freelancing life, try easing into it by accepting a few side gigs while keeping your day job. Contact people in your social network to ask about freelancing opportunities. Check sites such as Fiverr, Upwork or Guru for gigs.

Follow our financial tips, see what hourly rate your skills command, and do the math to see how many hours you’d need to work each week in order to cover your expenses. With a little research and a lot of hard work, those freelancer bunny slippers could be on your feet in no time.

The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.