Do you know the true cost of being a freelance worker?
Working for yourself and earning money from home are becoming more popular with the advances in telecommunication technology. However, managing your finances can be tricky when you are an entrepreneur.
No Steady Paycheck
While employees can depend on their paychecks weekly, bi-monthly or monthly, freelance workers typically work project to project. This can mean weeks or months without an income. To avoid financial stress, it’s best to have a nest egg to endure periods without pay.
Entrepreneurs have to pay a higher percentage of taxes than employees. Whereas employers cover a portion of each of their employees’ required FICA taxes, self-employed individuals need to pay the entire amount. FICA taxes include:
- Social Security, which is a total of 12.4% of the annual wage.
- Medicare, which is a total of 2.9% of the annual wage.
If an employee’s salary is $50,000, then he or she, as well as the employer, will each pay $3,825 in federal taxes. Employers typically subtract employees’ tax responsibility from their wages and compensate the federal government on their behalf in addition to paying their financial responsibility.
Contrary, a freelance worker who earns $50,000 will need to pay the full $7,650 his or herself. Unlike employees, entrepreneurs need to pay estimated taxes quarterly or risk late fees.
However, entrepreneurs have more deduction options than employees. For instance, freelancers can deduct home office expenses from their annual earnings. While there are two methods, simplified and regular, for filing for these deductions, some deductible expenses can include:
- Office space.
- Electrical and other utility bills.
- Internet, telephone and cell phone bills.
- Business losses.
In addition to paying a higher tax rate, self-employed workers also lose out on many other employee perks, such as:
- Health insurance.
- Paid time off.
- Worker’s compensation.
- Unemployment insurance.
- Retirement plans.
For instance, freelancers will need to cover the full cost of their health insurance. Individual plans can be more costly than employer-paid group plans. Furthermore, employees’ premiums are paid with pre-taxed funds, which reduces the total gross income and means less tax responsibility. However, self-employed individuals can deduct insurance costs.
Unlike employees who may have paid time off (vacation and sick time) as part of their benefits package, freelancers who do not work, do not get paid. Self-employed individuals need to set a rate that will cover periods when they cannot or choose not to work.
Likewise, self-employed individuals cannot rely on employer-paid benefits like worker’s compensation or unemployment insurance. If at any point a freelancer is too sick, injured or otherwise incapacitated, then he or she will not have a financial backup besides his or her savings.
When it comes to retirement, freelancers will need to set up and contribute to an Individual Retirement Account (IRA). While employees may receive employer-matched contributions, self-employed workers are on their own.
Why Choose Freelance Work
Although there are many economic considerations, self-employment has monetary benefits. For example, a reduction in transportation costs like car payments, auto insurance, and public transport expenses. Similarly, freelancers can spend time normally used commuting on working.
Those who work from home also spend less funds on business or professional wear. Parents can also cut childcare costs if they freelance from home.
Since freelancers can work when and where they want, freelance work can supplement other income from an employer-based job. Self-employed workers choose their workload and can enjoy their time as they please. To many, working as a freelancer is worth the financial insecurity since their time is priceless.