Nearly 60 million individuals throughout the United States are freelancers, and that number is expected to continue climbing over the course of the next ten years. Freelancing has many benefits, including working when and where you want and choosing how much or how little time you want to put in.
That said, being your own boss requires attentiveness to important financial details that you wouldn’t otherwise need to think about when working for someone else. Protect your hard-earned money and sustain your financial freedom by finding your financial confidence as a freelancer.
Know Your Health Insurance Options
Choosing health insurance can be challenging, but if you freelance, in addition to working a full-time job, you likely don’t need to worry about this. If you’re able to get health insurance through a spouse or parent’s plan, or you’re also in the clear.
However, if you’re not on a spouse’s, parent’s or job’s health insurance plan, you need to find your own. Not only are you required to have health insurance, as of January 1, 2019, but depending on where you live, some states require you to have health insurance to avoid a tax penalty.
Even more importantly, if you have an emergency or develop a serious illness, you risk being unable to afford the out of pocket costs. In fact, a 2019 health insurance survey of nearly 2,000 individuals in the United States found that more than 80 percent of uninsured respondents who had an emergency either could not afford the costs or required six or more months to pay off the bills.
Find Your Financial Confidence
Work with an agent to sift through and understand the many health insurance options available. Don’t forget that health insurance is tax deductible for self-employed individuals, so you can write off your monthly premiums to lower your total taxable income for the year and potentially reduce what you owe.
Know Your Tax Options
With the various software programs and online tools available, filing your own taxes may seem like the easiest and least expensive option, but there are several nuances that come with filing taxes as a freelancer, like paying self-employment tax, understanding which expenses can and cannot be written off, and more.
As David Cawley, partner at Fraim, Cawley & Company, CPAs, notes: “When someone is a regular W-2 employee, 7.65 percent is taken out of their paycheck for social security and Medicare, and the employer pays the other half. As a freelancer, you have to pay both the employee and employer portion of payroll taxes (15.3 percent of the business’s overall net profit), and that’s before even considering income taxes.”
As a rule of thumb, Cawley recommends paying estimated taxes each quarter to avoid underpayment penalties. Additionally, it is important to track all expenses related to your business throughout the year, such as mileage driven, health insurance paid, cell phone expenses, home internet charges and more. Many of these expenses can be claimed in your tax returns.
Find Your Financial Confidence
Working with a financial professional is key to avoiding fees and getting the most back at tax time. “Enlisting the help of a CPA can not only help lower a freelancer’s current tax liability by educating them on the immediate plans of action, but a good relationship can help grow the business and better plan for long-term goals, like retirement,” says Cawley.
Know Your Retirement Savings Options
There are many benefits to freelancing, but not having an employer-sponsored retirement plan means you need to get this critical financial asset in place yourself. If you ignore this financial detail, you risk hurting your long-term success.
The first step to starting your own retirement account is to understand the many retirement account options to consider:
Individual Retirement Accounts (IRAs) allow you to create an account even if you do not have employees. A Traditional IRA enables you to deduct contributions made to the account from your taxes, but any money you take out is taxed as income. Roth IRAs, on the other hand, do the opposite; you cannot receive any tax deductions for what you contribute, but if you withdraw from the account, you are not taxed on it.
Deciding which is the right solution for you depends on what is most advantageous for you from a tax perspective and whether you expect your income to be higher or lower during retirement.
Simplified Employee Pension Plan (SEP) is a retirement account that is popular among small businesses, whereby you (the employer) contribute to an IRA every year for employees (you). You can make contributions to an SEP in addition to other traditional retirement plans, though there are limits on what you can contribute based on your income.
Find Your Financial Confidence
Working with a professional is invaluable if you’re new to retirement savings. A financial advisor will not only teach you about your options, but ensure that you make the best choice for your financial situation and future goals. It’s also important to understand the tax benefits of investing in certain retirement accounts in an effort to lower your total tax bill while helping you build a nest egg.
Be a Confident, and Financially-Aware, Freelancer
Though you may have made the choice to go the freelancing route alone, you don’t have to take on the financial decisions by yourself. Working with experts in all of these areas will help you learn and gain confidence in the financial aspects of being a freelancer and ensure that you make the right decisions for your business, livelihood and future.
Jessica Thiefels is a freelancer turned entrepreneur. She’s the founder and CEO of Jessica Thiefels Consulting and has been writing for more than 10 years. She’s been featured in top publications including Forbes and Entrepreneur and she also writes for FastCompany, Freelancer’s Union, Glassdoor and more. Follow her on Twitter @JThiefels and connect on LinkedIn.
Apr 16, 2020
Apr 16, 2020
