When I left my full-time job in 2017 to become a full-time freelance writer, I didn’t listen to naysayers who told me how hard it would be. I listened instead to my friend, Allie, who’s been freelancing full-time for several years.
Over time, I’ve learned from Allie’s freelance experiences, especially when it comes to money. Thanks to my friend’s mentoring and my own research, this past year of freelancing wasn’t the bumpy ride it could have been.
If you want to work for yourself as a freelancer, sole proprietor or other independent contractor, here are 8 things you need to know before you take the leap.
1. It’s tougher to get a loan (at first)
While I still had my full-time job, I checked into buying a home if I moved to a new city. With my full-time job and good credit, getting a loan to purchase a new house would have been easy. Not so as a freelancer. Banks generally want to review at least two years of freelance income for a mortgage loan.
When I checked whether I could qualify for a car loan if self-employed, one banker said he’d need to see two years of full-time freelance income. A loan officer at my own bank said the same but added, “there are ways around that,” since I’d gotten car loans there before and have good credit.
2. Deducting income taxes is painful
It’s a lot harder to deduct your own taxes when there’s no employer to remove that money in advance. It’s easy to make the dangerous mistake of keeping it all “just this once” repeatedly. Then you end up owing taxes later. Consult an accountant or tax advisor on how much you should set aside, especially when figuring the additional self-employment tax and the new tax law enacted in 2017.
3. Pay your estimated taxes
As an independent contractor, you’re required by the IRS to make estimated tax payments every quarter. I’ve known freelancers who didn’t make quarterly payments, owed more than $10,000 at tax time and had to set up a payment plan with the IRS. You don’t need that stress. Sign up here to pay quarterly estimated taxes.
4. Pay off credit card debt first
If you have credit card debt, pay it off before you set off on your own. Money will be tight at first, and you may need that credit card to pay a bill or two. Then always pay the balance off each month.
5. Health insurance is expensive
If your employer is currently paying a portion of your health insurance, you’ll be shocked by how high premiums are when you purchase insurance on your own. If you’re married, get on your spouse’s insurance but if you’re single, shop around and compare. Contact an independent insurance broker for rates. Check out the Healthcare Marketplace to see whether you qualify for a subsidy on health insurance.
6. Don’t rely on one client
Even if you make a ton of money from one client, always have several others. Any client’s needs can change suddenly, drying up that income until you find a replacement. It’s not a matter of “if” that happens. It’s more like “when.” Always have several income streams.
7. Freelance part-time first
I freelanced part-time for three years while working a full-time job, which was grueling but allowed me to get a feel for freelance gigs and build a small clientele. During the last six months at my former job, my part-time freelance income allowed me to save an additional $8,000 so I could begin freelancing full-time.
8. Save enough to live on for several months
You’ll have to scrimp and save and maybe work an extra job for a while but it’s worth it later. You’ll have slow periods, especially during the first year, along with unexpected expenses. To be on the safe side, save enough to live on for six months without any income. I saved a bit less but had clients and work already lined up.
During my first year freelancing full-time, I’ve paid all my bills without falling behind, thanks to careful planning. If you want to strike out on your own, take some time to make sure you’re prepared. Your patience will pay off, especially when your old boss fades to nothing more than a blip in your career-view mirror.
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