It has been nearly 18 months since I started up my freelancing career — I can hardly believe it! When I first got started, I thought I had an idea of how things would evolve. In some ways I was right and in some ways I was wrong. You can read about the early days of my freelancing in my first and second posts on the subject. In those blog posts I was just starting out and getting my feet under me. I still had many questions and, in fact, said I would write a new post after some crucial milestones (ahem, paying my first year of taxes). So in this post I am looking to fill in some of those gaps that I couldn’t answer a year ago. But I also have learned a lot of unexpected things over the past several months, particularly as I have met with more people who are either already freelancing or are considering it. So I wanted to capture that information as well.
How We Got to Where We are Today
In December of 2023 I launched my own “solopreneur” business. There we are a lot of reasons I went this route. Perhaps the biggest of them was that the job market at the time was pretty terrible (and it is even worse as I write this article). I had been looking for a new job for several months, but nobody was hiring. I am a Gen X-er and my generation has been hit pretty hard by tech layoffs and the rampant ageism that is common among tech companies. It was a hard pill to swallow having over 20 years of experience in the field and yet being viewed as someone who could not learn and adapt to the ever-changing tech landscape.
At the same time, I also really wanted to craft a different life for myself. My burnout and stress level in corporate had really gotten out of hand. It had gotten so bad that I had not been able to swallow solid food for months. I would regularly get hives and cellulitis requiring medical intervention, particularly if I had to go into the office. I wasn’t sleeping, I wasn’t doing anything outside of work like hobbies (because I was always at work and even when I wasn’t, I couldn’t unplug), and my mental health had really taken a nose dive. I knew something needed to change and, for a long time, had bought into the fallacy that a “change” would be to find a different company to work for. However, in interview after interview across my career, I discovered it was pretty rare to find a place that shared my views on work and its relationship to life. I work to live, meaning work is the thing that I do in order to afford my life. I do NOT live to work. Some people do. Some people are happy being completely chained to their desks, having themselves and their existence tied to their jobs. Some people just really enjoy working on a problem morning, noon, and night. I am not one of them. I have a family that needs me, friends I like to hang out with, and I have hobbies I enjoy. And I wasn’t getting to do any of that. After one particularly bad day at work, I came to the realization that I could actually create that work environment I was looking for rather than trying (in vain) to find it.
Another factor that kept me tied so long to corporate work was the fact that I am the primary (and sometimes sole, since my spouse works a seasonal job) breadwinner for my family. So there was certainly fear in going into this. I viewed working for a company as being the only possible stable income. And yet we have recently seen corporate layoff after corporate layoff in order to try and save the company a little more money and make the shareholders happy. (Brief aside: do you remember when Wall Street used to punish companies who did that??? Ah, the good ole days.) We have even seen the historically incredibly safe US government jobs become plagued with layoffs. So I humbly suggest that this view of corporate employment as being “safe” is just an illusion.
So in discussion with my spouse, we decided that I would go solo. I created an LLC to take on work and reached out to my network via a LinkedIn post to let them know what I was doing to try and drum up business.
Fast forward 18 months. I have been happily employed in the freelance world with a small handful of clients. Working with my network, I was very fortunate in that I was able to easily replace my corporate salary. Better yet, I am doing it on my own terms. The things I hated about working in corporate (meaningless performance reviews for a raise less than the increase in the cost of living, ridiculous required “don’t stare into the sun” trainings, asking permission to do the most mundane of things like buy a book for my continuing education or attend a conference that I had been asked to speak at, etc.) are now long in the past. Good riddance! And I am also pleased to report that I did manage to get my health (mental and physical) back in check. It took a few months, but I began to be able to swallow solid food and started living my life again.
Health Insurance: The 800 lb. Gorilla in the Room
What follows is going to be a very US-centric perspective on freelancing. I envy those of you who live in countries that provide you with health insurance. Here in the US, where I am presently based, we are not as fortunate. Health insurance is expensive. And, in fact, its cost keeps many people from freelancing.
We are fortunate in that my spouse’s seasonal job offers us health insurance during the season (the winter ski season). However, that season is only 7 months of the year. This means that we had to figure out what to do for the other 5 months. During my first year working as a freelancer, I had to have knee surgery while still on that insurance. This meant that I had reached my maximum out-of-pocket (OOP). We decided that we would put the family on COBRA during the off season. For those not familiar with COBRA, it is a US law that allows people to temporarily stay on their health insurance following the end of their employment so long as you pay your full monthly premiums, including the portion paid by your employer. We had decent insurance through my spouse’s company…certainly not C-suite level insurance, but pretty good. For our family of 3 (my spouse, myself, and my teenager), this came out to $3000/month. Yes, you read that right. It made sense at the time with the above logic, but had we really sat down and calculated out how much it saved us by me being at my maximum OOP, it really wasn’t the right decision.
This year, we decided to go onto the open market, which you are allowed to do outside of the open enrollment period with a qualifying life event. (The end of my spouse’s seasonal job is considered to be one of those.) This brings our monthly bill to about $1000/month for the whole family.
While it seems obvious that this would be the better choice, there are actually a lot of things to consider with this decision. For example, while the monthly premiums are less on the open market, the coverage is nowhere near as good as what we have during the season. Should you find yourself in this situation, I strongly recommend talking with an actual insurance broker to go over the pros and cons of each approach. Also, it is very important that said broker be located in your area. We talked with people in the closest major town (which is 2 hours away) who had no idea which healthcare providers really accept certain insurance in your area. Pro tip: just because the insurance provider’s webpage says a certain doctor is in network doesn’t make it so! These webpages are frequently out of date and are marketing tools: they know you want to see that a whole ton of doctors are covered in your area, even if they aren’t accepting that insurance anymore! Ask me how I know…
Taxes
Let me begin this section with the important caveat: I am not an accountant or an attorney. Everything I am about to say here is based on my experience and is my opinion. And, again, this is all going to be coming from a US perspective. DO NOT PURSUE A CAREER FREELANCING WITHOUT TAKING TO PROFESSIONALS IN BOTH OF THESE ARENAS!!!
OK…now with that out of the way…
I cannot stress strongly enough how important it is to set up your business properly so that you can get paid and pay taxes as you need to do. In discussion with my tax accountant and attorney back when I was getting started, we decided that my company would initially be set up as a single-member LLC. Let’s break that into pieces.
First, let’s look at the most common business structures for freelancing work: LLCs and S-Corps. It is important to consider setting up under one of these structures because they give you legal liability protection. The last thing you want is some upset client trying to come after your personal assets because they are unhappy with your work!
There are tax implications on which of these options you choose involving what portion of your income is subjected to self-employment tax, which is around 35%. Generally speaking though, LLCs are easy to set up and do not require corporate formalities like board meetings, corporate resolutions, etc. S-Corps require more formality, but the benefit there is that you only pay the self-employment tax on your salary, not on distributions. (Again, consult with the professionals to learn the ins and outs of that bit!)
I decided to go the easy LLC route. But regardless of what you decide, here are the things I learned from now having actually done my taxes for a year in this modality.
- You will need to file quarterly estimated payments on your income. When you are in corporate, your employer takes taxes out of every paycheck. When you work for yourself, that is not true. You need to make payments 4 times per year. Your accountant can help you work out what those payments will be.
- ALWAYS keep your business finances 1000000% completely separate from your personal finances! This means you will want to have a business banking account and you will pay yourself (called “taking a draw”) from that account. Have a debit card associated with that account. Do not use that card for anything other than business expenses! Do not use your personal accounts for business expenses. Trust me: this will save you a TON of time at tax season!
- Get whatever bookkeeping software your accountant recommends and give them access to your books. In my case, my accountant prefers Xero. This software allows full adjudication of the books.
- Your accountant will be preparing a 1040 Schedule C (“Profit or Loss From Business”) for you. The correct software choice from #3 will help them do this. Essentially, what you are preparing in this is a complete accounting of your business’ income, expenses, cost of goods sold, etc. With the proper software linked to your business banking account (and assuming that the only thing you do in that account is business related, right???), this is essentially prepared with the click of a button.
- Keep. Receipts. For. EVERYTHING. Your business expenses are tax deductible. So is what you are paying out of pocket on health insurance. If you get audited, you will absolutely need these things. Get in the habit of just doing it.
Bear in mind that as your business becomes more complicated, so do your taxes. For example, I stated that my business is a sole proprietorship LLC, meaning I have no other employees. Over the past year I have had several people reach out to me asking if I could hire them into my business. There are significant tax implications in doing so and, as usual, I recommend talking with your accountant about them.
If there was one piece of advice I would have to get started right it would be this: I really can’t emphasize enough how important it is to keep your business and personal finances separate. The only time money should mix from your business bank account to your personal one is when you pay yourself. This will make your tax life infinitely easier when your accountant doesn’t have to try and create Schedule C from a whole series of bank accounts, weeding through what were actual business expenses and what were personal. And trust me…you want to keep your accountant happy!
Concluding Thoughts
There are many ways to start freelancing. You might be fortunate in finding a way to get started as a side hustle where you don’t have to worry yet about finding insurance yet or needing to fully replace your salary immediately. Or, like me, you might get thrown quickly into it full time. Regardless of how you get there, these are two of the biggest hurdles you must overcome to becoming successful in freelancing.
The insurance question is potentially going to be changing soon due to the politics in the US right now and the uncertainty around the open market. As for taxes, I recommend quickly adapting the mindset that you are an official business, especially if you are going to go all in and freelance full time, and establish business formalities when it comes to finances immediately.
I have been very fortunate in that things have been taking off for my business as I learn more about the needs of those interested in contracting with me. So hopefully I will have an update soon about some new ways I am looking to grow my business!
