Being your own boss gives you more flexibility and control, but doing it right requires a smart strategy
For a growing number of U.S. workers, the traditional 9-to-5 job is out, and self-employment is in.
Millions, in fact, are choosing full-time freelance employment over traditional jobs. According to a 2017 study commissioned by Upwork and Freelancers Union, the number of U.S. freelancers has reached 57.3 million, representing $1.4 trillion in collective earnings — a 30-percent increase from 2016 — in fields such as graphic design, web development, copywriting, editing, accounting, tutoring, social media, and marketing.
Everybody Wins
The freelancing trend delivers benefits both to workers and employers, says Nick Loper, chief side hustler at Side Hustle Nation, a consulting business for freelancers. For many, full-time freelancing provides much greater flexibility than a traditional gig, as well as more control over your work environment. For employers, hiring freelancers means having a convenient rotating talent pool.
As full-time freelancers now make up 36 percent of the U.S. workforce, the arrangement seems to be a good fit for an increasing number of workers. But if you really want to leave your traditional job and become your own boss, you should be sure not to overlook these very important details.
Getting Ready for Tax Season
One of the most important elements of a successful transition to freelance work is understanding your new tax obligations. For traditional employees, employers withhold estimated taxes from paychecks, which cover federal, state, and local levies. However, these taxes aren’t withheld from payments made to freelance workers.
If you are a full-time freelancer and you haven’t prepared to pay these taxes, receiving a hefty bill during tax season can be quite a shock. An accountant or banker can help you prepare for the tax implications of transitioning to full-time freelance work, including the self-employment tax of 15.3 percent to cover Social Security and Medicare taxes.
The good news, Loper says, is that the tax code contains numerous provisions to help small business owners break even. Freelance workers are eligible for valuable tax deduction that can reduce their tax liability significantly. Among these are deductions for your home office, education, and certifications, equipment such as computers and supplies, as well as meals, lodging, entertainment, and travel expenses related your business.
“Don’t be afraid to file these deductions,” Loper says. “They’re written to help businesses grow and reinvest.”
You’ll Need a Plan
In addition to understanding self-employment taxes and deductions, a smooth transition from a traditional job to full-time freelancing requires a well-designed plan to address several key issues such as insurance coverage. Many employers offer health and even life insurance coverage to full-time employees, but this benefit doesn’t extend to freelancers, who must seek coverage on their own. Liability insurance, which can protect you from some lawsuits, also may be worth exploring.
If you decide to go the route of the independent worker, you should also look into a retirement plan — either an individual 401(k) or a Simplified Employee Pension Individual Retirement Account (SEP-IRA). The money you put into these retirement accounts isn’t taxed until you withdraw it, but the amount you may contribute each year is capped.
Many freelancers seek help from a financial adviser for this as well as the potentially complicated tax matters. “If this stuff really intimidates you, it may make sense to hire some outside help,” Loper says.
Ultimately, full-time freelancers may enjoy freedom and flexibility that traditional jobs can’t provide. But to make it work, you have to understand what you’re getting into ahead of time.
Not sure how self-employment may impact you during tax season? Learn more.
