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Updated on Monday, February 22, 2016
There’s a whole lot to love about being a freelance employee. From the flexible schedule to working in your PJs, being a contract worker is not only more cozy, but studies have actually shown that performance is higher in people who work from home, with home-workers clocking in more productivity per minute than those who work in an office environment.
So that’s the positive. The downside, of course, is that there are oh-so-many benefits that companies tend to set up on behalf of their employees — meaning that when you’re all on your own, toiling away on your home office computer, you have to think about these things all by yourself.
Here are five common ones that any would-be freelance or contract worker should consider before cutting the corporate cord.
1.Research your retirement options
Once you become a freelance worker you can say buh-bye to that cushy employer-sponsored 401(k) with the match and hello to a whole new world of retirement options. Retirement can become slightly more intimidating when you’re forced to plan for it completely on your own — or it’s more exciting, depending on how you chose to look at it. When you are self-employed, the following are some of the more common retirement plan options that you should look into:
- A Simplified Employee Pension Individual Retirement Arrangement (or SEP-IRA): If your business includes you and you alone (and not employees), then a SEP may be your best bet. Sole proprietors, S and C Corporations, and partnerships and LLCs all qualify for this type of plan, which allows you to contribute 25% (up to $53,000 for 2016) of your net earnings, based on certain stipulations. These contributions are tax-deductible, and investment earnings grow tax-deferred.
- Savings Incentive Match Plan for Employees (or SIMPLE IRA): Business owners may put all their net earnings from self-employment up to $12,500 into the plan, along with either a 2% fixed contribution or a 3% matching contribution option. Find out more about the SIMPLE IRA here.
- Solo 401(k): With a Solo 401(k), the business owner has the option of contributing to their retirement plan as both an employee and an employer, optimizing the amount of money he or she can sock away each year. For example, as a self-employed 401(k) holder, for 2016 a person could contribute 100% of earned income compensation up to $18,000 ($24,000 for those 50 and over), as well as 25% of compensation as the employer non-elective contributions, up to a certain amount. Total contributions for 2016 to a Solo 401(k) cannot exceed $53,000. Click here for more on the Solo 401(k) plan.
Whichever plan you decide to go with, retirement doesn’t go away just because you’ve gone into business for yourself — if anything, planning for it may have just become a bit trickier.
2. Save for taxes
Remember how awful it was to get that paycheck at work and come face-to-face with how much money was being deducted for taxes? Well, when you’re self-employed, that whole “tax” issue becomes even harder. The amount of taxes that you’ll owe as a self-employed person will vary greatly by income (which means this could change each year as well, depending on the type of work you do) and state, and it’s one of the most important things you’ll need to consider — and plan for — as a freelance worker. It’s probably best to chat with an accountant ahead of time about what your expectations should be come tax time based on how much you plan to earn (plus the fact that you’ll most likely be expected to pay quarterly taxes, as opposed to yearly, if you don’t want to incur added fees) — that way, you can start setting money aside from that very first (well deserved!) freelance check.
3. Get a health care plan
Health care is, for some reason, the Great American Debate. No matter what side of the political coin you fall on, if you’re self-employed, finding a health care plan that works for your income and needs is entirely up to you. You can get started at healthcare.gov to shop around for affordable options based on where you live and your answers to certain lifestyle questions, and remember that if you can afford health care and decide not to get some, you’ll be charged what’s called the “individual shared responsibility payment” fee, which will be charged when you file your federal tax return for the year you didn’t have coverage. (Find out more about the fee here.) While open enrollment for 2016 closed on January 31, certain lifestyle factors (such as a change in employment) may qualify you to enroll outside of the normal period. Click here to find out more.
4. Determine whether you’ll need to set up a corporation or an LLC
Once you’ve decided to take the plunge into self-employment, you should consider yourself a full-fledged business entity, and with that comes some hard questions, such as whether to incorporate, what type of corporation to become, or whether to just leave well enough alone as the sole proprietor of your business. Incorporating can help your business in many ways, not the least of which is the appearance of legitimacy (you take your business seriously enough to actually file it as a true business with the government), and it may even help reduce certain personal liabilities or alleviate income taxes. Of course there are downsides (such as added fees) as well. For the ins and outs of each type of option, read this.
5. Figure out your system for tracking invoices and payments
Last but not least on our list, becoming a sole business owner means that it’ll be up to you to track the growth of your business from month to month and year to year, including things such as invoices and payments, due dates, and tax deadlines. Take some time at the beginning to do a little research on the different software and servicing options available to freelancers (such as Freshbooks to track time spent and invoicing, and Dropbox to keep files safe), and ask around to see what other self-employed gurus have used. Developing a successful freelance business will require more than just the creativity and ingenuity that drew you to the idea in the first place — the best freelancers are also wizards at keeping up with the mundane details of day-to-day business, such as tracking expenses and write-offs, and following up on missing or late payments.