In certain lines of business, people start out knowing they’re going to be self-employed (local plumbers and electricians, for example, or independent cosmetologists or private practice attorneys). However, other people find themselves self-employed unexpectedly, as accountants or engineers or in other fields where they might have expected to be salaried employees.
An increasing percentage of American workers are now freelancers, piecing together their income by contracting with several different companies who need their services on a part-time or temporary basis. Writer Helaine Olen coined the term “gig economy” to describe a situation where a worker goes from one “gig” to the next, with no regular paycheck.
If you find yourself in a “permanent freelance” situation, whether by choice or by circumstance, you’ll face unique financial challenges which require strong financial management skills and plenty of good planning.
You’ll need to charge a higher hourly rate than you might expect. Maybe your old job paid $50,000/year, so you decide to charge the equivalent, which is $25/hour. If you do so, you will find yourself notably poorer than you expect, for a couple of reasons:
You face higher costs. As a self-employed person you pay 100% of your health and disability insurance and 100% of your social security and medicare taxes. In addition, you need insurance related to your business. You may also have additional costs, depending on the nature of your work.
You don’t get paid for every hour. You’ll spend some of your time marketing your services to potential clients, and some of your time handling billing and collections and other administrative tasks. In addition, when you’re sick or take time off work, you don’t have paid leave provided. So the fees you collect from your clients need to cover some of the general time you spend on your business as part of your “overhead costs.”
Without a pension, you’re responsible for your own retirement well-being, and you’ll need to draw from your current income to set aside money to create your own “pension.”
Stay tuned later this week for more key considerations for those who make freelancing a way of life.