I quickly signed on for my first contract gig right out of college. What an exciting feeling it was to be one of the few who started work immediately after walking across that stage! I was paid in full bi-weekly, responsible for setting aside my own taxes each paycheck and keeping track of any expenses – everything from internet bills to gas mileage. This went on for about four months, then my job was done – the client and I moved on.
There are some things that came before, during and after my very first contracting job that I was not expecting. Unfortunately, this made for a slightly more frustrating experience. Don’t get me wrong, I still learned a lot and valued the experience, but there are things I just wished I known ahead of time – many of them tax-related. I’m here to share those life lessons with those of you still fairly green to the freelance game.
1. Know your tax forms and classification.
There is a big difference between a W-2 form that you would fill out for fulltime employment and a 1099-MISC, often a required form for freelancers being paid $600 or more for their work. Do your research, talk to a tax professional and absolutely make sure the client is providing you the right tax form for the work you will be performing.
The misclassification of workers is alarmingly common. In 2011, a federal study noted that 3.4 million workers are incorrectly classified as independent contractors instead of employees. It is often an honest mistake due to the lack of education surrounding the classification of freelancer, but some times employers will try and avoid certain fees directly tied to fulltime employees (FTE) including unemployment compensation taxes and workers compensation insurance. If you feel as though you are a misclassified worker, it’s important to take steps to correct the issue. Start by talking to your state’s Department of Labor.
2. Write-offs add up. Do not neglect keeping track.
I remember my client telling me that write-offs were going to be key come tax season. For the first month or so, I found myself blowing it off. Keeping track of all the expenses was overwhelming. However, once I saw how much money was coming out of my own pocket for work-related items, I quickly saw the value in keeping track.
I often found myself making office and client visits and traveling to special meetings or conferences. For any job-related travel, I implore you to track to your expenses. I kept a spreadsheet that included the travel dates, miles traveled, addresses of locations that I was going to/coming from and my reason for travel. I also kept all my receipts and bills for office supplies, computer hardware/software, electricity, cell phone and Internet.
Are you spending the majority of your time working out of your home office? Did you know that you can write-off a portion of your rent? That’s right. It just requires a small bit of math. First, I calculated the amount of rent I was paying per square foot (Total Rent/Total Square Feet). Then, I measured the square footage of my “office”. In my case, this included a large desk, chair & printing station. I was paying around $55 in rent each month for my office, but come tax season I was able to include this in my deductions.
3. Oh, you have a cold? Do not expect a paid sick day.
I am sorry to get your hopes up, but unless you have a really excellent deal with your client, you will be not getting paid for sick days like your FTE friends. Freelancing has a ton of perks, but paid sick days are not on the list. Consider putting a little bit of money into a savings account each month to act as your safety net so you can afford to take the sick days you need. Just don’t forget to keep your clients in the loop about your absence and get the rest and fluids you need so you can get back to work.
4. Do not forget to pay your future self with an SEP IRA or a Roth IRA.
Due to the nature of freelancing, saving for retirement is an independent venture and your personal responsibility. There is no match offering available like you would find in a traditional 401K plan offered with fulltime employment opportunities. Instead, I would recommend an IRA– either a traditional Roth IRA or something called a Simplified Employee Pension (SEP).
An SEP is designed for those at least 21 years old, having earned a freelance income for three of the last five years. It’s typically more appealing than a traditional IRA because the contribution limit is much higher. With SEPs, you have the ability to contribute up to 25% of your income or $53,000 (whichever is less), not to mention these contributions are tax-deductible. I do recommend you conduct your own research, but planning for retirement is one of those things you’ll be thankful for starting now.
So there you have it. Those are the top four lessons learned I wish I knew when I started freelancing back in 2012. For those who have been in the game even longer than me, I encourage you to leave your tips in the comments below. For those who are just starting out, belonging to a network of freelancers is a great resource to get the ball rolling. OnForce is always looking to expand its network of service professionals and pair them with clients who have new work needs. Sign yourself up today to kick start your freelance career.