According to Wingspan, a company that provides freelancers with a range of resources in one place (think invoicing, benefits, and bookkeeping), 68 percent of freelancers say their life has improved since making the transition to freelance. So, it should come as no surprise that freelancers will account for the majority of the American workforce by 2027. While becoming a freelancer has its perks, there are many factors to think about before leaving your full-time job behind. From healthcare to taxes and beyond, here is everything you should know about before handing in your two weeks’ notice. “Unlike full-time employees, your income won’t be withheld for taxes. As a freelancer, you will be required to estimate your annual earnings and pay your taxes quarterly,” Jacob Dayan, CEO and Co-founder of Community Tax and Finance Pal explains. “If you estimate too little, you may be subject to a tax penalty on Tax Day. If you estimate too much, you will receive the excess in your tax refund, but overpaying can leave you short on cash. On or before the quarterly deadline, you can pay your estimated taxes on the IRS website, using form 1040-ES.” Freelancers should begin to pay quarterly taxes if they expect to owe more than $1,000 on the tax deadline. It’ll help to have a separate business account to streamline your expenses and income. But freelancers also have to pay what’s called the self-employment tax—a tax consisting of Social Security and Medicare taxes, which withholds 15.3 percent of the first $147,000 of income you receive, plus 2.9 percent of anything you earn over this amount. Companies will pay for half of the SE tax, leaving employees to pay about 7.65 percent of their income. Most accountants suggest to set aside between 25 to 35 percent of your taxable freelance income to cover your estimated taxes. Even though it seems like freelancers owe more taxes than salaried employees, freelancers are able to claim much more in tax deductions, which can level out the cost of SE taxes. “Consult with a professional accountant to find out just how much you can deduct. On the bright side, the visit will also count as a tax deduction,” Jim Pendergast, senior vice president of Small Business Financial Institution, explains. “Finding affordable healthcare is one of the biggest challenges of freelancing. There is no one-size-fits-all solution to this,” Charlotte Robinson, a freelance software engineer and programmer, explains. “So, I recommend freelancers choose from the following options based on what suits them the best: coverage under the Affordable Care Act, choosing short-term health insurance, or association-based insurance plans if your profession has any such guild/association.” Health insurance plans also depend on where you live—some states have more affordable options than others. “The Health Care Exchange in your state can connect you to private plans that are right for your situation. You can work with a healthcare broker too to get the best plan for your family,” Jess O’Connell, an editor and entrepreneur, explains. “My accountant mentioned it was time to consider looking into other tax options that could potentially save money in the long run. We decided that operating as an LLC taxed as an S-Corp would be the best option because it provided me with some protection and had greater tax benefits than continuing to operate as a sole proprietor,” Toni Okamoto, the founder of Plant-Based on a Budget, explains. As with your taxes, you should consult with an accountant about which business type is right for you. Freelance writer Kat Boogaard, for example, sells customizable contract templates drafted by an experienced attorney. Plus, the templates include a companion guide that breaks down the legal jargon into plain English. “All of these things can feel overwhelming or complicated at first, but when you familiarize yourself with the process, you’ll find it’s just a different way of doing things—and can provide many benefits for you and your family to go freelance,” O’Connell says. Once you gather the resources available to you, and consult with other freelancers and experts (read: Hire an accountant!), you’ll start reaping the benefits of #FreelanceLife.
