True to its name, the life of a freelancer brings plenty of freedom. Freelancers can take on the projects they find appealing or financially worthwhile and reject the rest. They can pick and choose the companies they work for and dictate how much they feel a project is worth. Freelancers are free to work where they want as well. For many freelancers, home is
where the heart is—and also where the work gets done.
The typical freelancer works for more than one company or client at a time. Instead of receiving a salary, freelancers
work—and get paid—on a per-project or per-hour basis. For example, a freelance editor might agree to review a book for a publisher for a fixed fee of $3,000. Or a freelance computer specialist might provide 20 hours of help-desk
services to a small company at a rate of $50 per hour.
While freelancing can be a wonderful way to earn a living from your home, the freelancing lifestyle is not for everyone. Here, we’ll fill you in on the upsides and the downsides of making a living as a freelance athome worker.
Choosing what services to offer
If freelancing sounds like the life for you, you’ll need to identify some type of work that a company or client would be interested in outsourcing to you. Companies most often hire freelancers for projects that are labor-intensive or require specialized knowledge. For example,a small company might turn to a freelance translator to assist with international agreements, instead of hiring costly bilingual employees.
Companies also prefer to outsource discrete assignments that one person can handle independently, like copyediting or preparing a PowerPoint presentation. Other types of freelance assignments include architectural drafting, bookkeeping, preparing public relations materials, proofreading, writing and editing, illustrating, researching, graphic
design, Web design, and photography. In general, any task you could do from home, without a lot of interaction with other people, is one you could probably handle on a freelance basis.
You go, warrior!
According to etymological dictionaries, the word “freelance” originally meant a “medieval mercenary warrior.” It was coined in the 1800s by Sir Walter Scott, but “freelancing” wasn’t used as a verb until the early 1900s.
Get some ideas. See what kind of freelance work others are doing, or what employers are looking for, by visiting the major freelance job boards: Elance (www.elance.com), SoloGig (www.sologig.com), Guru (www.guru.com), and HotGigs (www.hotgigs.com).
Rolling the dice: waiting for the next project
Perhaps the biggest downside of being a freelancer is the uncertainty that comes with the territory. No longer will you be able to count on a regular paycheck to pay the bills. Instead, you’ll have to hope that you get enough projects to make ends meet.
It can take a long time to get established and develop a reliable roster of clients. Until then, you might be busy one day and staring at a quiet phone the next. Even long-time, successful freelancers can’t say for sure how much they’ll earn in any given month. This unpredictability can be stressful, especially if you’ve got a family to support .
The flip side to this is that the more you work as a freelancer, the more you earn. (This isn’t the case for most professionals, who are ineligible for overtime pay.) If you’re willing to put your nose to the grindstone, you could take home far more than you would have ever made as a regular employee.
Tiny, Home-Based Businesses May Be Your Best Clients
USA TODAY reporter Jim Hopkins found that, fed up with rising labor costs, a new generation of entrepreneurs is launching millions of tiny companies differing from businesses of the past: They don’t want employees.
In place of paid employees, owners harness new technologies to outsource work, often linking up with other like-minded entrepreneurs to get jobs done in a virtual assembly line spanning the globe.
Nonemployer firms are often home-based ventures with no paid employees and generally at least $1,000 in annual revenue. In an analysis for USA TODAY, the Small Business Administration estimates the number of these firms reached the 20 million mark for the first time in 2006.
“Wanted: Nobody; Businesses with 0 employees use outsourcing to get the job done,” by Jim Hopkins, December 11, 2006.
Losing the perks
Say goodbye to paid benefits like health insurance and matching retirement contributions when you strike out on your own. Most clients, however, are willing to pay freelancers much higher hourly or per-project rates precisely because, unlike employers, they aren’t paying you benefits. For example, a company might pay an employee $15 per hour to do basic bookkeeping, but pay a freelancer $25 per hour for the same work.
Before you jump at the chance to earn freelance rates, run the numbers to see how much it would cost you to replace your existing benefits. How much will you have to pay for your own health insurance coverage? Are there valuable
retirement benefits that you will be giving up by working for yourself? (You can still contribute to tax-advantaged
retirement accounts—you just won’t get any matching funds.) Many freelancers enjoy the luxury of self-employment only because they have spouses with regular jobs—ones that come with employer-sponsored health insurance coverage for the entire family.
Doubling your taxes
Freelancers often end up paying less in taxes than employees with identical incomes. But it might not look that way at first glance. From Uncle Sam’s point of view, employees and freelancers are apples and oranges. Employees are taxed one way, freelancers another. Here’s how it works:
- Employees pay 6.2% in Social Security taxes, up to a certain salary amount ($97,500 in 2007). Freelancers, on the other hand, pay twice that: 12.4% in Social Security taxes, up to the same salary limit.
- Employees pay 1.45% in Medicare taxes, while freelancers pay 2.9%.
The reason for the different tax treatment is that employers are legally obligated to match employee Social Security and Medicare taxes. In other words, when you work as someone else’s employee, your employer pays half your Social Security and Medicare taxes. Freelancers must pay these taxes in full. They’re entitled to certain deductions, but still end up paying substantially more in Social Security and Medicare than their employee friends.
This tax hit can be offset by certain tax benefits available to the self-employed, such as the home office deduction and other business deductions, described later in this chapter. Freelancers can also contribute to retirement plans for the self-employed, such as SEP-IRA s, which have valuable tax advantages. And this is another reason employers may be willing to pay freelancers higher hourly and project rates.
Discovering your inner bookkeeper
You’ll have to learn to keep track of your time and your work, and bill your clients accordingly. You’ll also have to record your expenses, such as phone bills, office supplies, and postage, so you can claim deductions at tax time. You’ll even be in charge of making quarterly estimated tax payments to Uncle Sam, to make up for the fact that none of your income is being withheld by an employer.
Collectively, these bookkeeping and tax obligations can munch up a lot of time. And if you let your administrative tasks slip, you might not get paid in full or on time, or you may get into hot water with the IRS. You’ll need to become more organized than you perhaps ever thought possible.