August 7, 2017 Freelancer en_US The opportunities in freelancing are better than ever. But, some common mistakes can cause a world of hurt. Learn from the mistakes of a veteran freelancer. 5 Common Mistakes Freelancers Make (and How to Avoid Them)

5 Common Mistakes Freelancers Make (and How to Avoid Them)

By Eric Carter August 7, 2017

In 2010, the recession-damaged economy was producing no jobs—and especially no legal jobs). I had just graduated law school, and payments for a mountain of student loan debt became a reality. After hundreds of job applications proved unfruitful, I turned to freelancing.

Fast forward seven years, and I’ve now been freelancing longer than I’ve ever had a single full-time job. Along the way, I’ve learned some best practices and some pitfalls. Nothing teaches better than personal failure, and I have managed to move through such failures with the help and guidance of other freelancers who were willing to share their stories.

Here are five mistakes I’ve personally committed, each to varying degrees, that I would encourage any freelancer to avoid.

1. Not Incorporating Sooner

Freelancers are tempted to just start working, without formally setting up a company. Clients pay the freelancer directly, so there’s no bureaucratic friction standing between the client and payment. This is certainly the easiest route, and it has the most direct, immediate impact on a freelancer’s income. But even as a trained lawyer, who should presumably understand the benefits of formally organizing my business, I neglected it for several years. This was a mistake. Organizing should be one of the first overhead costs you spend money on for two reasons:

  • Taxes
  • Legal liability

Reason #1: Take Control of Your Tax Liability

Until I incorporated, every dime I earned through freelance work went straight to my ordinary income. While my clients employed me in a sense, they weren’t my employer. Accordingly, my clients paid me the applicable rate with no taxes withheld. Further, I didn’t have the diligence to set aside any portion of the freelance income for taxes. But, come April of every year, taxes would come due on my freelance work. And each year, the amount stung.

Organizing gave me flexibility with taxes. Generally speaking, the options I had were the corporation structure, or the partnership/LLC structure. I elected the LLC/partnership, pass through structure which left me personally liable for any profits that the business made. This allowed me to offset business expenses— things like internet payments, home office expenses, etc.—against the amount of revenue generated by my freelance work.

In the end, I had more control over the taxable amount (i.e. profit). If I would have elected the corporation structure, the business would have paid the taxes on an ordinary basis, and the business would have withheld applicable taxes before any distributions were made to me personally. These only present two of the many more options out there, but the key is flexibility. Organizing immediately reduced my tax exposure, and allowed me to be more strategic with taxes.

Reason #2: Don’t Risk Your Personal Assets

From a legal liability perspective, the most obvious legal liability that freelancers are exposed to is contractual liability. It’s a little embarrassing to admit as a lawyer, but I signed every agreement put in front of me by clients, without any pushback in the beginning of my freelancing career.

If I’m honest, not much has changed as far as pushback goes, but I’m more personally protected now by an LLC. The reality of most client-freelancer relationships is that the freelancer generally has no leverage. The client is often a company, with a contract system in place, choosing from a seemingly endless pool of freelancers. From a negotiation standpoint, the freelancer isn’t going to win any serious battles.

This has certainly been my experience, and most of the time, I’ve had no choice but to sign boilerplate agreements that strongly favor my clients. But that doesn’t mean I can’t protect myself.

Freelancing under an LLC provides me with a shield between my clients and me personally. My LLC bears the responsibility for my actions as a freelancer. Before freelancing for the LLC, my personal assets were all at risk should I have run into problems with a client. My house, my bank accounts, everything I owned was potentially available to the client if I did something that warranted a claim against me. Luckily, I never dealt with an issue, but it certainly weighed on my mind.

When it comes to formally organizing, my advice is to organize ASAP (as soon as practicable). I say practicable instead of possible, because it does cost some money, and it makes sense to get a little traction first. The rule of thumb I propose is as soon as your freelance revenue generates enough to cover organization costs, go ahead and organize.

Depending on your state, your entire organization fees should run somewhere between $200 and $1,000. As soon as you can cover the expense, take advantage of it.

2. Neglecting to Build a Great Portfolio

We are currently in the biggest freelancer economy in history. It’s allowed me to build a solid second income and I could probably scale it into a full-time job. But, I am still a needle in a haystack, just like every other freelancer. It is highly unlikely that companies will seek me out, so I must market myself. Whether it’s freelance writing, artwork, music, accounting, law, or something else, the first thing a potential client asks for is a portfolio.

I neglected building a portfolio for the first few years of my freelancing work. Although I was able to find various gigs through painstakingly repetitive and manual outreach, my ability to find more lucrative gigs never improved.

New freelancer’s may not realize that they can’t always share their work with potential clients without a non-disclosure agreement. Your clients may hire you to write an article, but prefer that their CEO’s name is in the byline. I finally decided to create some work that I could share with potential clients. This means working without pay, but it’s an investment that provides valuable marketing materials.

Today, when I’m asked for a portfolio, I’m able to show a plethora of work. I have a mix of highly structured, short, technical writing that can apply across the board, and longer form pieces that address a specific audience in a way designed to drive traffic. This shows potential clients my range, my ability to adapt, and gives them a better sense of my capability.

Build your portfolio even it you have to do it for free. It will be 10x more valuable than any resume. Clients care much more about your actual work product than they do your employment history. My only regret is that I waited so long to build one.

3. Not Equalizing Your Time

With so many freelancers out there, there are a lot of low-paying gigs. Low-paying gigs aren’t necessarily a bad thing, but you have to be careful.

Today, my most consistent clients pay me dramatically different rates. One pays less than $50 per gig, the other pays around $500 per gig. Does that mean the $500 client is better? No, as long as I pay attention to my time. It would make no sense to spend the same amount of time on a $50 gig, as I do a $500 gig. I use an equalizing process to gauge my time for disparate paying gigs.

First, I determine how much I think my time is worth. As much as the world hates the billable hour of lawyers—I assure you, most lawyers hate them too—the concept is helpful for my freelance work. If I apply my billable hourly rate to my freelance work, I know exactly how much time I can spend on the $50 gigs, and how much time I can spend on the $500 gigs. If my work for either deviates too much from the time appropriated, I need to reevaluate the gig and my work. It’s critical to note that this doesn’t mean the quality of work for a $50 gig is any less. Quite the contrary, it simply means the lower paying job requires more discipline on my part.

I have parted ways with clients because I couldn’t get the work time-to-pay ratio correct. It certainly makes sense to give a new some time to see if you can bring the ratio into proper balance. You will always have a ramp up time with a new client. But, if you spend too much time on work for the payout for an extended period of time, you need to consider other freelance opportunities.

4. Not Diversifying Revenue Streams

We’ve all heard the rule that the average millionaire maintains seven different revenue streams at all times. While seven might not be the lucky number for freelancers, the same concept applies. The more clients I’m able to freelance for, or the more opportunities I look into, the healthier, and less stressful, my freelance work becomes. I apply the concepts in two ways.

Strategy #1: Maintain Multiple Clients

First, I aim to maintain multiple, consistent clients, while keeping my eye out for one-off opportunities. As mentioned, the freelance economy is huge. The resources available to connect clients to freelancers are seemingly endless. Some clients are looking for one-off opportunities for which they need work. Others need consistent work for an area of their business for which they aren’t ready to hire a full-time employee. I like keeping a mix of these two types of client, so I have some sense of consistency without overcommitting myself.

One-off gigs can turn into consistent work. I have landed multiple gigs from the same client that originally hired me for a single gig. While the client didn’t have a consistent stream of work at the beginning, they appreciated my work. The next time the client needed work, they came straight back to me instead of posting the gig online. Remember, while you are a needle in the haystack of endless freelancers, that same haystack can be overwhelming to clients as well. It’s much easier for a client to go directly to a trusted freelancer than to search through the masses.

Strategy #2: Offer Multiple Services

The second way I apply the multiple streams concept is through multiple services. I started my freelance work solely as a writer. My writing business has continued to grow over the years. However, writing is not my only skill set. For 9 to 12 hours a day, I’m a lawyer. It eventually occurred to me, why can’t I do legal work on the side? (As a side note, I’m an in-house attorney, not a firm attorney bound to firm work only.) I started taking a few side gigs on the legal front, and that led to an entirely new and separate freelance revenue stream.

If you are curious about finding a new freelance service to offer, I encourage you to write down 5-10 skills or services you can perform competently. Next, consider how clients are currently obtaining those 5-10 skill sets. Could you potentially save clients time or money by offering the services in a freelance model? If so, you may have a found new revenue stream.

5. Working for Friends and Family

Regardless of your occupation or skill set, friends and family are likely to ask for your services. I found such requests only increased once friends understood that I was freelancing on the side.

I’ve heard mixed advice on how to handle requests from friends and family. On one hand, it’s tempting to say “yes” without hesitation because you want to help your friends. But I’ve heard some freelancers adopt a “no friends and family” policy to completely avoid any tension that might develop through mixing work and friends. I think there is a happy medium between the two extremes, but the only way to make it work is ensuring proper expectations are in place.

After wrestling with a request for legal assistance from a friend, I received a great piece of advice from an attorney mentor of mine. She told me to show my friend what those services would have cost them by giving them a full invoice, and in the “amount due” box, write “paid in full.”

It is very powerful for friends to see the work you actually did, broken out by line item, and how much you would charge on the open market for such services. This approach sets expectations in two ways:

  1. It helps friends think twice before asking for assistance in the future. Again, it’s not bad to do favors for friends, but you don’t want to be taken advantage of, intentional or not.
  2. Second, a friend may decide that he or she does want more services performed, but would like to pay for it.

I’ve seen the second method play out in a few ways. I have friends who continue to ask for help, but make sure they do as much pre-work as possible before coming to me. I have friends who continue to ask for help, but insist that they pay me. I also have friends who will no longer ask for such services, either because they don’t want to pay for the service, or and they don’t want to ask me to work for no pay. All three are equally cordial, as the expectations are clear.

It’s a great time to tap into the gig economy, but making decisions as a freelancer is harder than it seems. Make your goals and your priorities clear, learn from the experience of others and be nimble enough to evolve as your industry changes.

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Eric is the founder of Dartsand and Corporate Counsel for a global technology solutions provider. He is a frequent contributor to technology media outlets and also serves as primary legal counsel for multiple startups in the Real Estate Development, Virtual Assistant and Mobile App industries. Read more