The Real Deal About Freelancing and Finances

We gather here today to pay respects to the traditional workplace. It died a noble death, rout with position hierarchy, ownership of information, and allocating time and resources—only when deemed necessary.

Okay, that’s a bit hyperbolic, but there has been a clear shift in the workplace. And one of the causes of that shift is due, in part, to the emergence of freelancers. In fact, 53 million Americans—that’s more than a third of the workforce in the United States—are now working on a freelance basis.

I want to touch on two important points if you’re seriously considering making the switch from full-time employee to freelancer.

freelancer

Freelancer Pay

Your question at this point is probably, “Doug, I hear you, but how can I survive financially as a freelancer?” Legit question! Since leaving a steady paying job to become a freelancer can involve a dramatic drop in income, there are a couple things you can consider doing to get through a period of reduced earnings before your business takes off. The first idea is utilizing a cash reserve. Frist calculate how much money you would need to survive each month without any income. Keep in mind you should probably cut back on discretionary purchases during this time. Now is the time to grind. So, dinner and drinks with friends can wait.  Once you have this figure, multiply it by the number of months you believe you will need to restore your income as a freelancer to a point of not needing to rely on a reserve. If you think putting a time estimate on your success as a freelancer sounds like a lot of pressure, make no mistake about it, it is! However, you have to set reasonable expectations and goals. You can’t shoot from the hip on this. No one said this was going to be easy and, usually, nothing worth doing is.

The second strategy involves maximizing your income and time with a new or existing job. My spirit animal, Gary Vee, articulated this concept perfectly. He says (paraphrasing here) to find a 9 to 5 job that pays the most for the least amount of your time. Then, during lunch breaks and the many hours you have after work (6 to 2), get your freelancing hustle on. (He also rants about not binge watching TV and other time sucks like this – he’s probably right on that). Additionally, it’s not required, but if you’re working a job that’s also relevant to your work as a freelancer, it’s only going to help accelerate the potential success of your new business venture. Once your income from freelancing increases, start decreasing the amount of time spent (assuming you can) on your 9 to 5 job. Apply a ton of hard work and, before you know it, You Inc. is thriving.

Paying Taxes

As Louis XIV’s finance minister, Jean-Baptist declared, “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Most everyone who has to pay taxes can tell you there is a lot of hissing involved when giving money to the government, but usually (if you’re a full-time employee) payroll handles your withholdings for you (remember those tax forms you filled out when you were hired?). Please understand that this is not a one size fits all solution, but this over simplified explanation works for most employees.

However, for freelancers, you’re considered self-employed, which means you have to pay both the employer and employee portion of payroll tax. While there could be an additional tax bite as a freelancer, please know that the largest benefit is being  entitled to deduct all ordinary and necessary business expenses against any business income you earn. Without us getting to far into the weeds on this (because I highly recommend working with a tax professional), just know that the self-employed typically enjoy greater tax planning potential, and therefore savings, than salaried employees do. By the way, If you need information on self-employment tax, visit the Self-Employed Individual Tax Center on the IRS website for more information.

There’s obviously a great deal more to making the transition from employee to a freelancing business owner, but I hope these points start to provide some insights on how this whole thing works. I can tell you firsthand how amazing (and challenging) running your own business is. So, if you have questions, need a financial consultation or just want to chat about it? Don’t hesitate to reach out!

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[CNBC]  How to Juggle The Financial Ins and Outs of Freelancing