Going Freelance: 7 Things You Need to Know

Going Freelance: 7 Things You Need to Know
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Whether you're ready to leave a traditional full-time job and solely run your own business or you'd like to experiment with part-time tasks alongside a day job, freelance work has become an increasingly popular option with an estimated 59 million Americans taking part in 2020. But before you take the leap and become a freelancer, you'll want to make sure you know the benefits and drawbacks of this flexible career option as well as get an idea of the financial and business considerations involved in a freelance business. From finding health insurance and clients to handling invoices and taxes, going freelance requires careful planning. A successful freelancer also must meet the needs of several different "bosses" at one time. Here are seven things you should know before you start your freelance career.

1. Understand Freelancing Pros and Cons

Going freelance can appeal to you if you like the idea of being your own boss, setting your own rates, working where you want and having more control over your clients and workload. You can get the chance to do tasks that are meaningful to you, work with a variety of people and get personal satisfaction from running a business.

But at the same time, be aware that freelancing is hard work that can require more effort and investment than a full-time job, especially when you first startup. You also take on all the responsibilities of your business – whether you're marketing yourself, handling accounting or hiring help. So, you'll need flexibility and good time management to have a good work/life balance, profitably run your business and meet deadlines for clients.

2. Prepare Yourself Financially

While you might do some types of freelance work from home or on the go using your laptop, other freelance positions might warrant travel, new supplies or even an office space that adds to your startup costs. So, you'll need to consider whether you need to take out a loan or tap into your savings for such expenses. When choosing a loan, you'll need to make sure that your credit and income qualify you and that you can afford the loan payments later.

At the same time, you'll want to have several months of living expenses set aside in your emergency fund, especially for the early freelance days when you still need to build up your client base and workload. This money will come in handy during dry spells or emergencies since freelance income can be less predictable. Without substantial savings, an aspiring full-time freelancer might instead opt to keep a day job for a while and do part-time freelance work as they stash away some cash.

3. Consider Your Health Insurance Options

Unless you can maintain coverage through a day job, spouse or parent, you'll need to consider where to find health insurance that fits your budget and needs as a freelancer. A popular choice is getting coverage through the Health Insurance Marketplace since freelancers may be eligible for benefits like subsidies that reduce costs or even qualify for a government program like Medicaid depending on earnings. You can also consider buying insurance privately or consulting an organization like the Freelancers Union to find options. In most cases, you'll get to deduct the health insurance premiums when tax time comes around.

4. Know How to Find New Clients

Depending on the type of freelance work you do and the areas you want to reach, you have several ways to find potential clients. If you do hands-on work locally such as doing home repairs, you might advertise your business through local groups, hand out business cards and flyers and share the news through word-of-mouth advertising as well as online avenues like LinkedIn and other social media sites. Freelancers who can work remotely have even more options that range from using bidding sites like Upwork and Freelancer.com to joining industry-specific job boards where businesses seek professionals in your field. Having a business website and networking can go a long way toward helping any freelancer find clients.

5. Consider Your Rates and Invoicing

Some big decisions you'll make as a freelancer involve how to set your rates so that you get paid fairly and how you'll get paid for your work.

You'll want to look at the standard rates for your type of freelance work along with the experience you have, competition in the industry and the amount of money you'll need to meet your income goals. You might opt to charge by project if the work is relatively predictable and clear, while an hourly rate might work if the amount of effort and the complexity of the task widely vary or if that pay structure is standard in the industry. For example, a freelance designer might charge every client $50 for a simple logo, while a freelance computer technician may charge by the hour.

Your invoicing method and payment methods can vary by the client, type and location of work and your preferences. Some clients may have a specific billing platform they use and may pay you directly through a service like PayPal without any invoice created on your part, while others might require you to draft an invoice to send in and then give you a check or send a direct deposit. If you work locally, you might opt to accept cash, checks and cards and create paper or electronic invoices to give directly to clients.

6. Prepare for Tax Time

As a freelancing professional, you will have to handle determining your income taxes and setting aside the money due. Considering that you'll need to pay self-employment tax that totals ​15.3 percent​ of your net business income – plus federal and any state and local taxes required – you can face a large amount due with your tax return without careful planning.

To be safe, you can consult a tax calculator online for an estimate based on how much you plan to make, or you can use a general guideline like putting aside at least ​20 to 30 percent​ of your income for taxes. The IRS will require you every quarter to make estimated tax payments, and you can do this online using a bank account transfer or even a credit card.

You may receive tax documents such as 1099-NEC or 1099-MISC from clients around tax time, and these will report the money they paid you and the information will go on your tax return. In other cases, you'll need to look up payments received and calculate your earnings and expenses to report. When you file your tax return, you may end up with taxes due plus a penalty if you don't pay enough quarterly, or you might get a refund for paying too much.

7. Avoid Possible Issues for Freelancers

A freelance career can sometimes involve stressful issues that range from not getting paid by clients for your work to suddenly losing clients and needing to reevaluate your business. To avoid disagreements over your work that may lead to nonpayment, always make sure that you have a written contract for your work and research any freelancer protection laws that apply in your state so that you can take action. To better deal with uncertainty over your workload or the stability of clients, you'll want to diversify your income so that you don't rely too much on one or two clients. Diversifying means continuing to market your business and even learning new skills to stay competitive and increase your value.