The lure of setting your own hours, choosing the work you do, working from home and setting your own rates is enough to make many people consider leaving the corporate grind. It's so attractive that 20 percent of Americans are now contractors, approximately 36% of Americans are doing some freelance work, and half the U.S. workforce is projected to be contractors within 10 years.
The many positive aspects of freelancing often outweigh the hassles, but if you aren't prepared for the downsides in advance, it might cause you to re-think your decision to go the contractor route soon after you hang out your shingle.
If you want to maximize the benefits of being a freelancer, stay in control of the following aspects of your business.
Don't Fall for Freelancer Benefit Myths
You can't write off your vacations when you freelance. The IRS only allows you to claim travel, hotel, meals, gas and other travel-related expenses as deductions if the primary purpose of your trip was for work. If you travel to a business-related conference or trade show, you can tack on an extra day or two of vacation, but you'll have to pro-rate your expenses. That means you can't claim your hotel room or meals for those two vacation days. However, if you spent three or more days working, you can write off your airfare or road costs. And if you take a client to a concert or ball game, you can't write off the total amount of the event.
You'll also have limits on how much of a home office you can write off. The office must be your primary place of work. Even if you use the room exclusively for work, if you only use it for work occasionally (i.e. you conduct your business activities in the field, such as at clients' places of business), you can't write off the room. You also can't use the room for anything else, such as a nursery, storage room or workout area.
The good news is, home offices are not "red flags" for the IRS. That's an old myth. There is no computer program at the IRS office that tells employees to audit people who claim home office deductions.
You also can't write off your car if you use it for personal use. You can, however, write off the mileage that's directly related to your work using the mileage rate set by the IRS each year.
Knowing what the legitimate business expenses are for freelancers will eliminate any surprises at the end of year, help you keep the right records and let you pay lower taxes each year. Working with a good CPA will allow you to maximize your financial benefits as a freelancer.
Learn to Sell Yourself
A big part of the job description of many freelancers is marketing director/salesperson.
No matter what type of freelance work you do, you'll need clients. If you're lucky, you'll find one or two big clients who provide regular work you enjoy and pay you a nice wage. Those types of gigs can be few and far between, however, and come with a big downside.
One of the main reasons many small businesses and entrepreneurs fail is that they rely on too much of their income from one or two clients. If you lose those clients, you can lose your business. That's especially true if you've never or rarely had to find work.
Be prepared to become a salesperson if you freelance. If you don't like doing this type of work or aren't good at it, you'll at least need someone who can book business for you, and they'll need a piece of your pie.
Look for trade association or professional society websites for advice on generating business. Subscribe to your industry's or profession's trade magazines and e-zines for more free advice.
Stay in Control
One of the best things about freelancing is the control you have over your life. This includes deciding how you want to work, when and where you want to work and which clients you want to take.
However, once you freelance, you now become very reliant on your clients and your partners.
For example, if you start a public relations consultancy, you are at the mercy of your freelance writers and graphic designers to get the press releases and logos to your client on time. If you're an event planner, you'd better have lots of Plan Bs for the caterers, DJs, photographers and florists who might bail on you at the last minute.
Depending on how reliant you are on your clients, they can change the terms of your gig at any time, and if you don't like it, you can lose your income.
The good news for freelancers here is that you also have the freedom to dump pain-in-the-butt clients and partners at any time. This is important if you want to eliminate the stress that comes with working at a company where you can't control the people you must work with.
As a freelancer, you have to know when to turn down business and cut high-maintenance clients loose, even if they pay well. Remember, one of the reasons you probably became a freelancer in the first place is for a better work/life balance.
Protect Yourself from Sketchy Clients
As a freelancer, you might run into clients that try to put too many restraints on you. This can cause you to become an employee based on the IRS definitions for contractors and employees.
For example, if your "freelance" client requires you to work on site, use their equipment, perform your work in a specific way or keep specific business hours, you're probably an employee. Even if you only run into a few of these requirements, you might be entitled to employee benefits.
This is important to know because if you are dependent on a make-or-break client and they begin taking advantage of you, you might have no other option but to accept their terms. If they then fire you without warning, you might be able to go back and claim extra compensation and/or pay lower taxes on the income you earned.
Manage Your Personal Finances in Advance
If you're a freelancer, you'll have to spend more time planning your personal and business taxes, retirement savings strategy and health insurance paperwork.
You should know that if you end up out of work, you won't be able to collect unemployment insurance, and if you're injured, you won't have worker's compensation insurance to cover you.
You'll also pay higher Social Security taxes and have to make quarterly income tax contributions when you're a freelancer, rather than waiting to pay all of your taxes by April 15th.
On the flip side, you get to keep all the money you charge for your services. For example, if you work for a PR firm that charges a client $200 for a press release, you might only get $50 of that. If you freelance, you can charge and keep the full $200.
One way to lower your taxes and reduce your legal liability from lawsuits is to become incorporated. This will require you to file two tax returns (one for your company and one for yourself).
You'll need to keep accurate financial records as a freelancer, including mileage, office-related purchases, credit card interest tied to business purchases and other costs. It's not a huge hassle to maintain accurate records if you work with a professional and plan in advance, but it's still extra work you'll have to do that you don't have to deal with as an employee.
Plan Your Total Business, Not Just Your Gigs
To maximize the freelance lifestyle, you must plan all aspects of it in advance. This includes having a financial strategy, finding clients, keeping accurate records, managing your clients and staying in control of your business and life.
With a little planning and business management effort, you can create the optimal freelance situation for yourself for many years to come.