My Guide to Becoming a Freelancer

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In February 2008, I decided to take the leap and quit my job to become a freelancer. Now that it's been a couple years, I think it would be a good time to write about the good, the bad, and things you need to know before becoming a freelancer.

First, I just want to start by reminding myself, why did I ever want to go freelance in the first place? I think I can sum it up in a single sentence. Have you ever seen the movie Office Space? Some people have an amazing tolerance for settings like this, some do not. I will try not to rant too much about what I dislike about office jobs, I do have a lot of respect for the companies and co-workers of my past jobs, but it's good to be free now.

When I was thinking about becoming a freelancer, here were the reasons that enticed me:

  • Be my own boss.
  • Be able to choose which projects I take.
  • Make more money.
  • Work when and where I choose.
  • Have time for my own projects.

Be my own boss.
That's a good thing, right? In your job, have you ever had to stay at work late, working unpaid overtime because of problems outside of your control? Overly aggressive deadlines, assets not getting to you on time, or unrealistic expectations can cause you to need to work nights or weekends to compensate. As a freelancer, you have the power to almost completely avoid this.

Be able to choose which projects I take.
This is generally a good thing. To be able to turn down projects you aren't interested in, or capable of doing, is a beautiful thing. As an employee, you don't have the say on whether or not your company takes on 3 months of banner ad work. They will take whatever pays the bills. One word of caution though -- don't turn down projects because you aren't comfortable with a certain technology. Your skills will become stagnant and less versatile.

Make more money.
Well, I definitely don't make more money than I used to. It would certainly be possible for me to do so, but I'd recommend not switching to freelance if this is your biggest reason. I'll get into freelancer expenses, taxes, and the like later in the article.

Work when and where I choose.
If you are a freelancer, or thinking about becoming one. Find usergroups or other events to meet other like-minded people. I think it's important to have co-workers and the ability to collaborate on ideas related to your trade. I often have people over to work in my home-office and go out to theirs. Besides being more fun, it's vital to network in order to get the work you want.

Have time for my own projects.
I love it. Now that I'm a freelancer, this is the most important thing to me. To be able to experiment and spend time on exactly what I want. I think I go a little overboard in this area, which is cutting into the "Make more money" reason, but I wouldn't give it up.
Working on my own projects is what keeps me passionate about my work and opens up doors I wouldn't otherwise have open to me.


Taxes
When making the switch, I knew that I would have to take care of taxes myself, I knew I would have to pay for benefits, office supplies and equipment, software, and anything else related to my business.
What I didn't know, was that as a freelancer, you have to pay an additional 12.5% on your income tax that ordinarily your employer would pay. This is offset somewhat by being able to itemize your deductions and deduct a lot of things you otherwise wouldn't have if you were an employee. One of the biggest questions I had going into freelance was how much money do I need to be paying for my estimated taxes. Unfortunately I can't answer that for you, there are income tax calculators that will help a little bit, but there are too many variables to get this very accurate. I would suggest, for your first year, being extra cautious and paying around 28% of your income towards estimated taxes, and then in subsequent years, adjusting that to figure it out better.
There are plenty of good sites out there to tell you what you can and can't deduct, and other guides as to how to prepare yourself for being a freelancer, I highly suggest you read them, I'm only going to give a few pointers that I wish I knew before going into freelancing.

  • You can deduct your home office. It's based on the square footage % of your entire house.
  • Keep a mileage log of where and when you drive or travel that is business related.
  • Keep a mileage log of your personal driving. (Yes, if you deduct your mileage on your vehicle for business purposes, you also need to track your personal driving.)
  • When you deduct items like computers, office equipment, and even software, you deduct it over a period of several years. I won't try to explain this here, but just know that you can't deduct a $2000 computer all in one year.
  • Business meals and entertainment can be deducted at 50% of their cost.
  • You must keep proof of purchase for everything for 6 years.

Oh, and I should mention. You do not need to incorporate to make all these business deductions as a freelancer. I don't know exactly what the advantages are tax-wise for becoming a company, but I do know that if you are self-employed, the IRS treats you like a company. Your business name is your real name, and you use your SSN instead of an employer ID.
So once you've somehow figured out what % your estimated taxes should be. You need to pay them quarterly. I use https://www.eftps.gov/ to pay my federal and you will have to find out if your state has a site you can pay your state taxes online. I made the stupid mistake of thinking that eftps.gov took care of both federal and state. It's only federal.

Insurance
When I was an employee, I heard all sorts of things about how if I went freelance, I'd have to pay 15-20% of my income for insurance. This varies greatly depending on you and your family, what type of coverage you need, who your provider is, and how many people you need to buy coverage for. Health and Dental Insurance together could be anywhere between $1500-$4000 per year, per person, depending on the level of insurance. Health insurance in the USA can be a deal breaker for people wanting to go freelance, and it definitely is expensive, but don't over-value your company insurance, you can put a price to it. If you have any pre-condition or history with mental health, have ever been in therapy, or think the health insurance company might give you grief for any reason, then secure your health insurance before making the switch. You definitely don't want a gap in coverage, or things will become more complicated.

So referring back to my hopes of making more money as a freelancer, between the extra taxes, covering my own insurance, and paying for my own equipment and software, this is a bit difficult despite making a much better hourly rate.

How much should you charge?
I have often been asked by people how much they should charge. I suggest you find out how much your company charges for your work and then going somewhere right in the middle of what they paid you and what they charged for your time. So if you made 20 / hr, and they charged 100 / hr for your work, as a freelancer it would be reasonable to ask for 60 / hr. You won't be able to go much higher, or your potential clients would just go to a reputable company. Any lower and you won't be able to afford your now heavy business overhead.

If you've never worked in an office, get a real job before becoming a freelancer. There is too much one needs to learn at a real job before going solo.


Collection of tools and sites for freelancers
  • https://www.eftps.gov - Pay your estimated taxes online. (Don't forget that State is separate)
  • http://www.dreamhost.com - Dirt cheap web hosting. If you're a freelancer, two of the most important things for you to do is to have a website, and back up your files. Dreamhost has subversion for backups and version control, and cheap web hosting.
  • http://www.assembla.com - I don't use this anymore, but it is a good site for project management and subversion backup. I really just want to impress upon potential freelancers how important it is to have a regular automated backup system.
  • http://www.vistaprint.com/ - Cheap business cards. Just ignore their pleading for buying all the extra crap, you don't need it. I also think it's foolish for anybody to spend a lot of money on business cards, they're meant to be given away. People will not respect you more if you have a voice activated holographic business card.

I helped some small companies do their accounts after being a stay at home mum and I've to admit its can be a pretty tough getting clients. I was working on mostly referrals from friends now but I really hope to expand this as my clientele base gets bigger. But like what they say, when the going gets tough, the tough gets going... Awesome article, by the way! Cheers, Patty

I have been following a similar trajectory for the past 10 months after I was ripped off by my last employer - an 'award-winning agency', that bounced $5K worth of my paychecks. I would add a couple of things to this really well-written and insightful post:
1. Sales and marketing: I am blessed have 2 really competent website sales execs as associates (and friends)- they bring in - or help bring in - most of my accounts. This saves HUGE amounts of time and effort. I found them by networking like crazy and by keeping in touch with former co-workers.
2. When I bid a small project, hours are obviously the core factor for estimating my costs. On larger projects, I prefer fixed bids, sometimes with escape clauses to take care of cost overruns so I don't go underwater (for the client who goes through 9 design iterations... hasn't happened so far with me, but I've seen this many times in agencies). If there is a 'package' element in the bid, the client will usually be happy with the price (I underbid larger agencies) and my margins can be higher if the project involves some recycling of code/production routines.
3. Good project management is absolutely critical for success - I have benefited both from the examples (good and bad) I have personally seen in agencies and by keeping up with research/reading - smashingmagazine.com recently posted an excellent compilation of resources on project management, etc. I also try to learn from my mistakes - plenty of those to around...
Nice work - and all the best!
Alan Smith