Five Ways to Protect Yourself Financially as a Freelancer

As freelancers we don’t have the same employee benefits, perks and security as our employed contemporaries, but our lives can offer a lot more freedom and flexibility. And with a little forethought, we can at least put things in place to protect ourselves financially.

If you’re new to freelancing, here are some of the things you need to be thinking about.

Consider Your Legal Status

The moment you start freelancing you are officially in business, but what kind of legal business entity are you? If you haven’t made a decision or taken any steps to actually set up a business, you are — by default — operating as a sole proprietorship. There’s nothing wrong with that per se, but it may not be the best choice for you.

Look into the different ways you can set yourself up as a freelancer, which all come with pros and cons. Things to consider include:

• How you would protect yourself in terms of a legal dispute
• Tax liability and benefits (which will depend on the tax jurisdiction you live in)
• Expenses, procedures and compliance issues

State laws can impact freelancers hugely — and sometimes suddenly — as happened when California developed laws to protect freelancers (that actually ended up having unintended negative consequences for many). So it’s well worth taking legal advice on this, tailored to your business and the place where you live.

Read Your Contracts

Never take on work without a contract, whether it’s provided by the client or drawn up by you. My experience is that my clients tend to provide the contract, and I tend to read every word to make sure there’s nothing that will trip me up.

Make sure you know your rights and responsibilities. And that your contract clearly states:

• Your role and the scope of your work
• How and when payment will be made
• Whether you retain ownership of the produced work
• Any restrictions on how you can use that work in the future

As a freelance writer, for example, I usually retain copyright of any article I write, but often the client will have exclusive rights for a specified time. I can’t repost that article elsewhere until that time is up.

Know Your Tax Situation

Freelancers need to file a tax return and pay all applicable taxes, and again this will vary depending on where you live. Generally speaking, US freelancers will need to pay federal and possibly state income taxes at a rate which will be based on total annual income, and will usually need to make quarterly payments.

In the US, you’ll also need to pay Social Security and Medicare taxes on your self-employment income, and if you don’t have health insurance through your job, spouse or family, you’ll need to cover that as well. It’s essential to consult a tax advisor to make sure that you’re paying everything you should (and of course deducting anything you can).

I’m the first to point out that the common practice of overpaying tax (and later getting a refund) is an inefficient use of your funds, but when freelancing you definitely don’t want to risk underpaying, as that could lead to a big and unexpected tax bill later on, which you really don’t want when you’re on an unpredictable income.

Consider Agency Work

A big chunk of my freelance writing work is done through an agency. It’s not the most interesting or fun part of my work schedule but in many ways it’s the easiest.

The agency finds the clients, liaises with them over briefs and timelines, and collects payments (including chasing them for any late payments or collecting payment in advance and holding it until I’ve completed the job to the client’s satisfaction).

Each job I complete gets automatically added to my invoice and all work is paid for on the first of each month. While there are pros and cons to agency work compared to working with private clients (they generally don’t pay as well apart from anything else, because of the agency’s commission) I definitely derive a certain amount of financial security from regular agency work.

Plan for Retirement

I’ve written before about how important it is to plan for retirement as a freelancer, especially given that research indicates 77% of freelancers believe they’ll have to rely on their own savings (as opposed to a pension plan) to fund their retirement, with 30% predicting that they’ll never retire.

There’s really no need to wing it at this level just because you don’t have an employer sponsored pension plan. Options for full-time freelancers when it comes to retirement planning include a solo 401(k), a Roth IRA, or a Simplified Employee Pension (SEP) IRA.

Which will work best for you depends on your circumstances so it’s always worth consulting a financial planner who specializes in helping freelancers.

Freelancing comes with risks when it comes to finances and security, but putting things in place from the start will help mitigate those risks while allowing you the freedom that many have to wait for retirement to enjoy.

Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen