The remote work world has realized incredible growth in recent years. As far back as 2018, it was already being reported that a staggering 70% of the global workforce was working from home at least once a week — and that was before the coronavirus sent everyone scampering back into their homes for an undefined period of time.
This increase in the ability to work remotely has led to a correlating desire for many professionals to shift into the self-employment line of business. Freelancing has many wonderful benefits, from basic things like working on your passions and having a flexible schedule to more dramatic advantages like enabling you to work abroad.
Whether you’re temporarily taking up the freelance life as you stay in isolation or you’re considering taking the long-term plunge, you still need to look past the rainbows and unicorns and think about how to protect yourself while you operate in the freelancing world.
Here are a few important things to keep in mind as you go about protecting yourself as a freelancer.
It’s always wise to research any state or local regulations that may impact freelancers where you live. If, for instance, you live in New York and you talk to a freelancing friend in Idaho, you have to be careful before you assume that the way they operate their business will hold up in your own state.
The recent legislation passed in California is an excellent example of this state-by-state consideration. The new laws severely restrict the ability of many freelancers to maintain their businesses, and while adjustments are being made, any freelancer in the Golden State must stay abreast of their own local regulations as they operate.
As a freelancer, you’re on your own. That may sound scary, but really all it means is that you have to fend for yourself with a bunch of mundane yet important tasks.
For example, as a freelancer, you’ll be responsible for setting aside and paying your federal and state taxes each fiscal quarter. This simply requires setting aside a portion of your income and then paying it — usually online — four times a year. You’ll need to figure out on your own how much you think will be taxed, but an approximation should do just fine.
Choosing When to Incorporate, Financially Speaking
Often the question of incorporating is brought up in freelance discussion. Should you or shouldn’t you incorporate your self-employed business? It’s important to point out, once again, that this one is completely a case-by-case scenario.
From a financial perspective, typically if you make under a certain amount of money — usually around $25,000 to $30,000 — the costs of paying extra taxes by reporting your income as a sole proprietor (i.e. not incorporating) are offset by the actual cost of incorporating and paying for things like associated fees and an extra tax return each year.
Once you break that $30,000 mark, though, it starts to become worth your consideration, as incorporating as an S Corp, in particular, can save you a significant portion of taxes.
The other side of the incorporating coin is the question of liability. If you’re incorporated, it can provide an extra layer of legal protection between your business pursuits and your personal life — e.g. a client can’t simply drive off with your car since you failed to pay them.
In addition to incorporating, though, it’s also critical that you pay your taxes properly and on time, and that you get liability insurance. This last one is particularly important, as it often isn’t addressed. However, covering your back with an insurance blanket can be an excellent way to help you focus on doing your job well without being consumed by concerns regarding any unforeseen legal consequences.
Self Employed or Self Exploited?
Another area that a freelancer should consider is the possibility of being exploited by a client. Remember, as a freelancer, an employer does not have the right to control your work. They can only pay for the results.
If they start to micromanage or ask for additional labor, it can quickly creep into the realm of wage theft. For instance, in 2014 the average freelancer lost nearly $6,000 in unpaid work. As a self-employed contractor, always be on guard to make sure that you’re being paid for the work that you’re doing.
Cash Flow and Balances
The concept of “working on-site” is another cost that you should consider, as freelancers must bear the brunt of the potentially expensive costs of setting up a physical office for themselves.
Really, this concern revolves around the larger concept of keeping good cash flow and a healthy balance in your bank account. You can address this by coming up with systems, spreadsheets, invoicing templates, and so on to help you track your income, unpaid income, and your expenses. Keep in mind that there are many apps that can help streamline this work.
Your Benefits — or Lack Thereof
Remember that you won’t have any benefits when you work for yourself. Everything from health insurance to a company cell phone must be paid for by you. Make sure to incorporate the costs of these items into your financial considerations as you take care of business.
If you previously lived off of a $40,000 a year salary with benefits, you may need $45,000 or even $50,000 as a freelancer in order to maintain the same quality of life.
Always Be Learning
As a final encouragement, remember to embrace technology and adapt to the ever-evolving workplace as you go about protecting yourself financially and legally.
Contractors are left on their own to keep up with the “bigger fish.” As such, it’s up to you to research how legal and financial expectations shift over time and what technology emerges to help you handle it. It’s also a good idea to follow that age-old advice to look for an accountant and a lawyer that you trust to provide professional advice as you go along.
If you take the time to cover these basic elements of freelancing, you’ll be able to set yourself up for ultimate success as you follow your passions and dive into the self-employed world.