Freelancing is often a rewarding career path for those who embark on it. It allows you to work from home (or just about anywhere) on your own schedule and complete projects you enjoy rather than tasks that just pay the bills. For college students, this may seem like a dream come true. Due to the COVID-19 pandemic, more companies are working remotely, making freelance work more attainable than ever. A recent Upwork study on the US workforce found that over one-third of American workers are freelancing during the pandemic—a 22% increase from last year. However, finding success as a freelancer takes planning and discipline, especially when it comes to your finances. With this in mind, here are seven finance tips to help prepare you for a lucrative freelancing career after college.
1. Set a strong rate
If you’re just starting out with no prior experience in your industry, setting your rates may be one of the biggest hurdles. Competitors in countries with a lower cost of living may set drastically lower rates, leaving you to wonder if companies will ever choose you over them. Meanwhile, potential clients may ask whether you charge an hourly or project rate, which can confuse you even further.
If you’re new to this, your best bet is to start off with an hourly rate because it’s simpler to calculate. In fact, companies like Clockify have hourly rate calculators to help you home in on a realistic number. Of course, most companies will also take your work history into account. This means you’ll likely start on the lower end of the spectrum and raise your price as you gain more experience and build a client list. Don’t be afraid to charge what you’re worth though. Even if you’re new to this style of work, you should be compensated fairly for the value you bring to clients.
Related: Beginner’s Guide to Freelancing, Part 1: The Fun Stuff
2. Consider obtaining a business license
Whether you need a license depends on the work you’ll be doing as well as federal, state, and local laws. License fees also vary between state and local governments, with some charging a one-time fee as low as $34 and others charging an annual fee of $200. Even if your state doesn’t require you to have one, licensing your freelance business grants you benefits that unregistered freelancers don’t get. In addition to building brand awareness, you can deduct business expenses from your taxable income and open a separate bank account for your business (more on this later).
Because these guidelines vary so widely, do your due diligence before selling your services to others. Otherwise, you could get hit with a series of hefty fines—which can hurt your finances especially hard when you’re just starting out. A great place to start your search is the US Small Business Administration’s (SBA) Business Guide on applying for licenses and permits.
3. Establish a business bank account
As the owner of your freelance business, it’s important to separate your personal and work finances. Your business checking account is where the money you earn will get deposited, and it’s also the account you’ll want to use to pay for business expenses. Having a separate account for your business looks more professional when you send invoices to your clients. It also makes it easier to monitor your freelance income and expenses, which are important to know come tax time. Most importantly, it proves to the IRS that you’re operating as a legitimate business rather than an individual looking to save money on taxes. The information you need to set up a business checking account can vary between bankers, so check with yours beforehand. However, you can expect them to ask for your Social Security number and your business license at the very least.
Related: 4 Big Questions to Ask When Choosing a Bank in College
4. Make sure you have adequate insurance
Unlike most full-time workers, freelancers are responsible for their own insurance. Organizations like Freelancers Union offers insurance policies specifically for freelancers, including health, dental, vision, disability, and more. For self-employed workers, health insurance typically costs between $300–$600 per month on average. However, you can also try your luck with professional groups and associations in your industry, as they may offer group discounts with lower insurance rates. In addition to conventional insurance plans, you may also want to consider additional policies like individual disability and critical illness insurance.
When you’re self-employed, you don’t have the luxury of paid time off or colleagues to cover your responsibilities when you’re sick. However, these plans can help you meet your financial obligations if you get sick or injured by providing you with a portion of your income during your recovery. All you need to do is pay a monthly premium.
5. Pay quarterly taxes
Here’s where all the effort you put into tracking your business finances comes into play. As a freelancer, you’re required to pay a self-employment tax in addition to your regular income taxes. If you expect to owe $1,000 or more in federal income taxes, the IRS requires you to pay taxes every quarter instead of in one lump sum in April. Even if you’re not sure you meet this requirement, paying a small amount every quarter is more practical than saving up for a large bill once a year. Of course, this also means you’ll need to factor this into your saving habits.
Aim to set aside 30% of every paycheck you get. This number may vary depending on the state you live in and other factors like your income and tax credits, but you can confirm how much you’d pay by using Form 1040-ES from the IRS. Although 30% may sound like a steep number, freelancers also benefit from many more tax deductions than their full-time counterparts. For example, the home office deduction allows you to write off a percentage of your expenses if you regularly conduct business from your home. If this sounds complicated, consider enlisting the help of a Certified Public Accountant with experience working with freelancers. They can shed some light on this topic as well as provide information on any other tax write-offs you qualify for.
Related: 7 Ways Students Can Make Money During the Pandemic
6. Save up for retirement
Only about 20% of all adults in the US have a 401(k) account. As a freelancer, you take sole responsibility of maintaining your retirement fund. After all, as the only owner and employee of your business, you can’t take advantage of employer-sponsored retirement plans or 401(k) company matches—and because you don’t have these luxuries, it can be easy to fall behind in your contributions.
You do have options available though. Individual retirement accounts (IRAs) allow you to put away up to $6,000 every year. Meanwhile, self-employed 401(k) plans can help you stash away even more—these programs allow you to save up to $57,000 a year in employee and employer contributions combined. And as is the case for most retirement plans, both options have the added benefit of reducing your taxable income as well. Set up automatic transfers from your business checking account to your retirement account so your money is safely tucked away before you have the chance to spend it. You may also want to consider boosting this with any additional money you gain during the year, like from your tax refund or an overflow of work from your clients.
7. Set up an emergency fund
Freelancing is notorious for its “feast or famine” cycle. You can find yourself with an abundance of work one month, only for it to all dry up the next. Because of this, it’s important to set aside money for the times you find yourself between work or with unexpected bills to pay. A good rule of thumb is to set aside about six to nine months’ worth of expenses in an emergency fund. If you plan on freelancing right after graduation, this fund becomes especially important to have once your student loan payments kick in. Consider building up your savings now or moving back home after graduation until you find your footing. You may even want to get a part-time job to supplement your income until you find a steady and reliable stream of freelance work.
Related: Beginner's Guide to Freelancing, Part 2: The Not-So-Fun Stuff
Freelancing allows you to conduct your own career, have a flexible work schedule, and do work you’re passionate about. And while it can be a lucrative career choice, you need to be organized and prepared to do it right and give it your best shot. Use these tips to help launch your freelancing career, and good luck with your future clients!
To get you even more prepared for a lucrative job after college, read our article on The Importance of Career Prep: How to Plan for Your Dream Job.
