The term freelancer can cover everyone from self-employed graphic designers and copywriters to drivers for Lyft to people who bid on jobs on TaskRabbit. A 2014 survey sponsored by the Freelancers Union and Elance-oDesk (now Upwork), called Freelancing in America, found that 34 percent of the U.S. workforce did at least some freelance work in the prior year. That’s 53 million workers. Millennials had the highest rate of freelancing (38 percent) and were the most optimistic about the future of freelance work, so the trend appears to be on the rise.
Only five percent of the freelancers in the survey fell into the category of “freelance business owners” who employ one to five people in addition to themselves. However, there are several advantages to treating your freelance work life as your own small business. While some freelancers might think of themselves as free-range workers, here are four reasons they might be better off if they think of themselves as entrepreneurs.
1. Tax Time
Sticker shock on April 15 is one of the most common experiences for new freelancers. If you are used to having your income and Social Security taxes withheld (and partially paid) by an employer, the fact that you have to fork over a percentage of your freelance earnings to Uncle Sam may not sink in until the first time you get hit with a big tax bill. Like any small business owner, freelancers need to pay self employment taxes on top of regular federal and state taxes, and there is no employer responsible for withholding those taxes. Keeping good financial records and paying quarterly estimated taxes will keep you from owing penalties at tax time.
2. Business Planning
Income stability was one of the top barriers to doing more freelancing reported by respondents in the Freelancing in America survey. If you rely on freelance work for your income, you can still take charge of your business income. A freelance business plan can help you define strategies for building your client base over time and plan out the steps you will take to earn the income you desire. There’s no reason why a TaskRabbiter can’t create a business plan that includes marketing strategies, earnings goals, and cash flow projections.
If you have your eye only on the income you get from freelancing, you could be ignoring an important factor that will determine whether you sink or swim financially: your business expenses. Good financial records will help you determine your break-even point. If half the money you make doing freelance projects goes into transportation to get to your clients, you may need to rethink your business model or raise your rates. In addition, keeping track of your business expenses in detail will allow you to take all the deductions to which you are entitled at tax time.
4. Building Your Future
One of the main reasons the survey respondents said they chose freelancing was the flexibility and freedom — which is also a reason many entrepreneurs cite for starting their own small business. When you treat your freelance work like a business and run it on sound entrepreneurial principles, you also start to take a more active hand in shaping your work and business life. When you are able to analyze past performance and project future revenue, you are in a better position to take the actions you need to build a thriving business of one. This can help you achieve the solid financial footing that will allow you to retain that cherished freedom for years to come.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
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