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It’s Hard Out There for a Freelancer—Three Challenges and Solutions

Written By Jacki Sturkie | Nov 24, 2015

Freelancers don’t play like full-time employees. We’re way out of “the box,” otherwise known as a cube. We work wherever we want, whenever.

Nearly 54 million freelancers contribute $715 billion to the economy each year.

But there are big costs for that freedom, like paying double taxes, living without safety nets and having to eke out a living.

Freelancing is not a hobby; it’s a growing “gig economy” of hardworking professionals. According to The New York Times “Help for the Way We Work Now,” nearly 54 million freelancers contribute $715 billion to the economy each year. Yet the system makes it so difficult for freelancers to earn a living, it seems like the government would prefer every citizen work full-time.

Challenge: Taxes

Freelancers pay double
If freelancers could clone themselves, double tax would be totally fair.

The IRS considers freelancers as “employee” and “employer.” That means paying the self-employment tax rate twice, which comes to 15.3 percent (12.4 percent for Social Security, 2.9 percent for Medicare).

By comparison, W-2 employees pay 7.65 percent for Social Security and Medicare.

A portion of the self-employment tax is deducted from your net income (income after expenses), so that’s a bit of a break.

“Estimated” taxes are impossible to estimate
Unless you’re a freelancer with an annual project, like a catalog, it’s difficult to predict your income so you can pay quarterly taxes on it.

The system requires that freelancers pay quarterly tax based on the prior year’s estimated tax liability. In a “project-by-project” economy, you might have all-new projects, or none at all. You are allowed to reduce the amount you pay if you think you’ll earn less. Either way, you’ve got to pay enough estimated tax, or face a penalty and interest.

Solution: Vote for the freelance-minded
The election is brewing, and get this, 86 percent of freelancers are likely to vote. Heads up candidates, 62 percent of that freelance vote can be yours for the low-low hanging fruit of supporting freelance issues. Keep your ears open for candidates who support the self-employed and small businesses. That’s us.

Challenge: Freelancers’ time is worthless

Most freelance businesses operate on either the “cash method” or “accrual method.” Cash basis businesses count income when it is received. Accrual methods count income when it is billed to clients.

Let’s say you’ve done a ton of work for a client, but the client never pays. What recourse do you have at tax time? None. You can spend thousands going to court, but you can’t claim the loss on taxes. With the cash method, the income wasn’t technically “received” yet, so, your loss.

Solution: Join the Freelancers Union
We’ve got a new advocate; the Freelancers Union. Right now, they’re tackling wage theft. That’s when clients don’t pay you for your work.

Joining the Freelancers Union is free. Don’t worry; it will not require you to charge certain rates. They’re representing the interests of freelance professionals, so I’m happy to support their efforts any way I can.

Challenge: Benefits

No safety nets
While not all W-2 employees are guaranteed unemployment benefits, many are. Part of the payroll taxes employers pay goes towards unemployment. If a full-time employee loses their job, they can apply for benefits. (Unemployment benefits are also taxed, by the way.)

Freelancers get nothing. If a freelancer gets sick, it’s game over for income. No work, no pay.

“You have to plan for a rainy day,” Tim Downing, CPA and partner at Portland-based Lovett-Corzatt accounting, told me.

Retire-meant?
Since W-2 employees get a steady paycheck, diverting funds to retirement is easier. Freelancers have access to retirement plans, but not steady income. It’s nearly impossible to tuck away money, even during the some of the fattest freelance years, because you’re usually busy getting caught up from the slim years.

Charging for all-of-the-above
How can you charge enough to make decent take-home pay, cover double self-employment taxes, healthcare, retirement, survival when it’s slow, rainy day savings and still keep your rate competitive? In some cities, clients might not blink over high rates. In Portland, they balk and hire someone cheaper.

Solution: Rethink rates and budgets
Budgets aren’t just for groceries. Downing recommends factoring saving for retirement into your budget, along with taxes, healthcare and rainy day backup money.

Once you’ve figured out how much you need, adjust your rate accordingly. If clients object, Downing said to educate them about why you’re the best one for the job. Maybe reminding them that they don’t have to pay your benefits will do the trick.

Tim Downing is a partner at Lovett & Corzatt LLC in Portland, Oregon. Email Tim at tim@lovettcorzatt.com.

Jacki Sturkie is a copywriter, brand strategist and comedian in Portland, OR. Her book, Sass Mouth, is now available on Amazon.

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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