How do you manage your freelance practice:
What do I need to know about taxes?
In general, freelancers are considered “independent contractors” under federal tax law, and do not have taxes withheld from their earnings, which are reported on Form 1099. That means you’re responsible for setting aside some of those earnings and paying your own taxes. Your freelance income is reported on Schedule C, and you pay a higher tax rate (“self-employment tax”) to make up for the Social Security contributions an employer might pay on your behalf. Very few of us like to pay extra taxes. So, it’s important to keep good records of your work-related expenses, which can be deducted against your income to produce the profit (or loss) for the business for the year. Be aware that while most businesses don’t show a profit in the first year, the IRS prefers that you show one in three years out of five — otherwise, your business may be reclassified as a “hobby.” The IRS has strict rules for claiming deductions for a home office. If you hope to do this, do your research and consider consulting a tax pro (maybe as a barter arrangement for designing a flier or website!).
What do I need to do to set up a basic accounting system?
Sloppy bookkeeping is a major reason why small businesses fail! As the owner of your own business, it’s important for you to keep accurate records — not only for tax purposes, but also so you know which clients have paid, and so you can review your work to determine which clients and jobs have been the most profitable for you. You don’t need a degree in accounting, but you do need a basic understanding of what records to keep. Many freelancers use a simple computer system such as Quicken to keep track of their business income. If you’re familiar with accounting systems, you may be able to do what you need to do with an Excel spreadsheet, but if you’re new to doing your own accounting, your best solution may be to pay for a software package that has a good Help file and free phone support. It may be beneficial to have a financial professional get you set up when you begin your business. You may be able to barter your creative or technical skills for such a service.
What should I think about for a home office?
There are significant tax rules that affect home offices, but before you get into that, it’s important to create a home office where you can work effectively. That means minimizing distractions (including finding child care for at least some of your working hours) and giving yourself the freedom to separate work from home, so that you can renew yourself in your “down time” without worrying about work and concentrate on your work without worrying about unwashed dishes. Other considerations: Be sure the space can be comfortably heated and cooled, and invest in the proper furniture that allows you to work in a healthy position. A good pair of noise-canceling headphones may be a wise investment as well. Finally, a quick summary of the tax rules: A home office should be your regular and exclusive place of work. That means you can’t claim the deduction if you mostly work at client sites. If your home office meets this criterion, you can deduct a portion of your rent or mortgage payments as a business expense.
Do I need business insurance?
There are three types of business insurance you need to consider: — Property coverage. For a home office, this may mean simply adding your business equipment onto your homeowner’s or renter’s insurance. If you use your vehicle for business purposes (other than simply commuting to and from work sites), this use may also need to be insured. — Liability or professional indemnity: This may not be necessary for your particular line of work, but it is important if you are in a position to be sued for breach of professional duty (for instance, if a client is unhappy with programs you wrote for a key system), breach of copyright, libel, or slander. Obviously you wouldn’t commit any of those acts deliberately, but if your work takes you close to the edge (for instance, if you are a freelance investigative journalist), you may wish to talk with an insurance agent who specializes in this sort of protection. — Business interruption or “keyman” coverage. You are the business, and if you suffer an injury or disability, you will be unable to meet your business commitments. This coverage doesn’t help with your personal expenses, but does help with loan payments and other fixed business expenses while you recover.
How should I cope with business cycles?
Most freelancers find their business goes in cycles. If you have the luxury of time to plan your freelance career, it may be wise to have a plan for what you’ll do during the startup phase (when paying work is likely to be sparse) and during any subsequent “famine” phases. While you’re scrounging up those first few clients, you may also want to start planning for what will happen when you have too many jobs! Yes, it can happen, and if you overcommit yourself you’ll wind up burning yourself out and disappointing your clients. A few suggestions: — Keep good records so you can tell which clients are wasting your time or providing insufficient profit for the energy you invest in them. — Stay on top of what your competitors are charging, and raise your own rates when you start attracting bottom feeders. — As you network and market yourself, build relationships with others who are in your field, and take note of those who seem trustworthy and intelligent. You may want to subcontract work to them later!
What do I need to pay a professional to do for me?
Running a business takes a lot of expertise. You already have expertise in actually doing the work, and along the way you’ll probably learn the basics of accounting, marketing, advertising, sales, and various other skills. However, there are some things you should leave to the professionals, and others that are simply not going to be worth your time to do yourself. Lawyers are expensive but when you need one, you need one, and it’s not generally a good idea to try to take care of those needs yourself. Your networking activities may also put you in touch with other professionals and businesses can also help you — bookkeepers, web hosting companies, site designers, insurance agents, tax pros, copy centers or computer repair shops. Your local chamber of commerce may be a good place to start finding some of the help you need. Don’t forget that each one of these people is also a potential contact for new work. Treat them well, pay them on time, refer other clients to them, and ask them to refer their contacts to you.
How can I best manage my time?
By far the most abundant resource most freelancers have is their time. Unfortunately, it’s also the one that’s easiest to mismanage, either by taking too great advantage of your freedom to spend the afternoons watching reruns or by overbooking yourself to the point of exhaustion. Maybe you’re not too energetic in the afternoons but you get a second wind toward evening. In that case, watching television during your least productive time may make perfect sense. You know yourself best, and one of the beauties of freelancing is that you don’t have to follow anyone else’s schedule. You may not function well with a strict schedule — maybe that’s why you wanted to be a freelancer in the first place — but you can look over the things you did in the past week and the ones you have planned for the week ahead. You need time to work. You also need time to market yourself. You need time for administrative tasks, family responsibilities, health-related activities, and social life. How are you using your time now? What needs more attention? What needs less? One commitment that often gets neglected is time for yourself. It’s easy to feel pulled in a zillion different directions, but some time spent doing nothing (and not feeling guilty about it!) can renew and re-energize your work like nothing else.
How can I get health insurance as a freelancer?
Unless you have a spouse whose employer provides health insurance for you both, you face a dilemma as a freelancer. How do you pay for your health care? Some insurers offer individual plans, but these are often prohibitively expensive. Here are a few creative solutions: — Join a union or other freelancers’ group that has made arrangements for group coverage. Often this is available only in a specified geographic area. — Your college alumni association or local chamber of commerce may offer plans for small business people. — If you work regularly as a freelancer for an agency, you may qualify for their benefits plan.
How does freelancing fit into my personal financial plan?
Why are you freelancing? If it’s just to fill some time until you get another full-time job, you may not need to do a lot of long-range planning. But if this is how you see yourself spending at least the next few years, it’s worth sitting down with your family and/or financial advisors to figure out how freelancing is going to work with your overall goals. For many freelancers, a long-term financial plan involves getting paid for last week’s job and finding another job to do next week. Especially if you have a family, this kind of short-sighted thinking can turn a rewarding career into a bad financial decision. Hard questions to ask include: — Where do I want to be in my career five years from now? — What happens if I become temporarily or perma- nently disabled? — If I’m not making enough money to meet my goals, what do I need to do to make more money? — What are my plans for retirement? — What happens to my business if I die? — How am I going to reach other financial goals (college for the kids, buying a house, etc.)? The answers may not be easy ones. Proper financial planning helps you have enough money to cover all of your expenses and reach your goals. Thinking about these questions and making some basic arrangements and plans gives you an advantage as you make choices about the type of work you accept.