With the rise of the gig economy, more people than ever before are choosing to forge their own path as freelancers or entrepreneurs. There are 59 million freelancers in the U.S. as of 2020, 1.56 billion worldwide.
While companies like Uber and TaskRabbit come to mind when you think of on-demand work, all types of skilled workers are beginning to venture into gig work.
In fact, the most popular freelancing skills include programming, web design, accounting, and graphic design. Workers of all backgrounds and skill levels are cashing in on the boom in freelance work.
The benefits are clear: more than half of freelancers reported earning more in the gig economy, and 79% told Upwork that freelancing is better than a traditional 9-to-5 job. It’s a win-win for the overall economy: freelancers get flexibility and autonomy, and businesses reduce inefficiency by hiring workers for specific projects.
There are many good reasons to ditch the 9-to-5 grind for freelance work, but there are also some traps that could cost first-time freelancers a lot of money.
Here’s what you need to do to avoid some expensive mistakes that freelancers often make.
In This Article
Failure to budget
Freelancers often face a feast or famine cycle, especially when starting out. Freelance income can be uneven at best. So, it’s important to set a budget and stick to it. Freelancers should make sure to budget for ongoing expenses as well as any unexpected costs that may occur.
Unlike salaried workers, most freelancers can’t count on a specific amount each paycheck. Be conservative in budgeting for monthly expenses to ensure that any income slow-downs don’t spell disaster.
It’s worth establishing an emergency fund and saving a few months’ worth of expenses in case you hit a dry spell. This can also be important if you rely on your car or computer to make money. If you can’t replace the tools you need to do your job, it might cost you far more in lost income in the long run!
Gambling on healthcare
Many traditional employers provide health insurance to their full-time employees, but freelancers must manage their benefits, including health insurance coverage. While your exact health insurance costs will vary greatly, researching your options and reading resources can help you find a good plan to get the care you need.
Forgetting to save enough for taxes
Traditional W2 employees benefit from payroll withholding, which takes a lot of the guesswork out of saving for taxes. Freelancers, on the other hand, must plan ahead for taxes. Freelancers are also expected to file quarterly rather than annually.
A good rule of thumb is to set aside 25-30% of your self-employed income for taxes until you have enough history to estimate more closely. QuickBooks has a product specifically for freelancers. You should also consider speaking to a qualified financial expert in your state; options such as setting up an LLC might lessen your tax burden as a freelancer.
Poor borrowing choices
Most freelancers consider their on-demand work pursuit the same as starting a business. Like any other business, there are often up-front expenses like office equipment and marketing costs.
Many micro-entrepreneurs will borrow money to get their business off the ground, but not all borrowing is created equal.
Personal loans through Prosper provide up to $50,000 for personal expenses. You can get your money quickly1, have set payments for budget certainty, and there’s no prepayment penalty so you can pay the loan off early when your business takes off!
Not saving for retirement
With the above expenses in mind and the reality that it sometimes takes a while to build a steady base of reliable clients, it can be easy to focus on the short term. However, unless you’re planning to freelance forever, you should be saving for retirement.
You may not have an employer-sponsored 401(k) like traditionally-employed workers. However, you still have access to several different retirement savings vehicles.
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Solo 401(k)
Speak with a financial professional about the best retirement savings options for your situation, and make retirement savings part of your budget.
Not tracking business expenses
As a freelancer, you’re essentially a one-person business. That means tracking your business expenses is a must. Separating business from personal expenses is important at tax time and for monitoring your business performance.
Membership fees to professional organizations, work-specific software, tools for work, and home office costs may all be eligible to count as business expenses. You may even find value in opening a second account for business expenses to make it easier to track.
We recommend you consult a tax professional or accountant to be sure you’re following the most up-to-date tax laws.
Not advocating for yourself with clients
59% of freelancers have had clients that refused to pay for services rendered. Don’t be afraid to advocate for yourself if they haven’t paid you by the agreed-upon deadline. Set expectations before work starts, such as payment terms, the scope of work, clear deadlines and failure to pay guidelines.
Also, know your worth. Save discounts for friends, family, and clients you value. Giving discounts to new clients without reason means they’ll expect you to always work for that rate.
Financial empowerment through freelancing
Freelancing may not be for everyone, but for a generation of people looking to break outside the cubicle farm and explore more flexible employment arrangements, there have never been more possibilities.
By making smart financial decisions and building marketable job skills, you can build a successful freelance business and ensure that you’ll always work on your own terms — and maybe even make more than you would at a traditional job.
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Eligibility for personal loans up to $50,000 depends on the information provided by the applicant in the application form. Eligibility for personal loans is not guaranteed, and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. Refer to Borrower Registration Agreement for details and all terms and conditions. All personal loans made by WebBank.
1 You may receive your funds one business day following your acceptance of the loan offer, completion of all necessary verification steps and final approval. One business day funding is also dependent on your bank’s ability to quickly process the transaction.