The weak job market is forcing a new career path for many. Many on the unemployment roles are shedding the traditional career path and striking out on their own as independent contractors, a.k.a. freelancers. Wikipedia defines a freelancer as “somebody who is self-employed and is not committed to a particular employer longterm. Freelancers may charge by the day, hour, or page or on a per-project basis.” Many will undoubtedly enjoy this new career while others will miss the structure of working for a single employer.
The most important key to success will be the ability to find customers and deliver value to them. However, this is just step one in the equation and does not guarantee success. If you are thinking about becoming an independent contractor, here are seven additional things to consider for success:
Continuing Education – To be successful as an independent contractor, you need to provide as much value as possible to your customers. The only way to do this is to continue your education in your field. Ideally you want to be considered a leader. I do not mean that you have to go back and pay for overpriced, dubious classes at a university. My experience is the return on this kind of education is poor. Education can come at a much less expensive price and in areas which you want to focus. I can not stress enough that people should read for at least a half hour everyday to learn more about their skills and craft. One hour a day and you will receive twice the return. Getting books at the library or buying them on Amazon costs next to nothing financially and the payoff will be huge. The real investment is the time and most people don’t do it. If you commit to this level of continuing your education, you will be much more successful than your peers.
Budget – Another key to success in going solo is having a financial budget. As an independent contractor you will no longer receive a regular paycheck. More than likely your weekly income will fluctuate, especially in the early years. Some weeks you will be paid very well for your efforts, and some weeks you will not have any income at all. Financial discipline is needed to deal with this type of fiscal uncertainty. You have to make sure the weeks you are paid well can also carry you through the weeks that you have limited income. Set up an annual budget. Determine what you need for living expenses as well as business related expenses.
Estimated Taxes – Over the years, I have run into many independent contractors that get in hot water over failure to pay their taxes. As an independent contractor, you will no longer being paying your taxes involuntarily through payroll withholdings. Instead, you are required to remit payment of taxes every quarter to the IRS and state. This is more complex than it sounds as it requires you to accurately estimate your taxable income for the year. From this you pay your estimated taxes. Pay too little and you may be subject to penalties from the government. Another thing to mention; as an independent contractor your Social Security taxes will effectively double to 15.3 percent. As an employee of a company the employer pays for half of your Social Security tax. As an independent contractor, you will be required to pay the full freight on this tax. Work with your tax advisor to set up estimated tax payments and ensure that you do not have to pay a huge sum of money on April 15th.
Location –The thought of getting out of bed, turning on the coffee maker and working in one’s pajamas at the dining room table sounds appealing. For most it will not be feasible. On the rare occasion I try to work from home, it is usually spent side tracked with my daughter and constant trips to the refrigerator. The home office is not conducive to my personality or my current living situation. For those of you in the same boat, you may need to rent a small office outside the home. Additionally, having an office lends you credibility. Rightly or wrongly, potential customers are not likely to be impressed by your home office. It is like getting an email from a business and they are using an AOL as their primary work email. It lacks credibility, which is required when you are seeking new customers.
Network – I do not mean going to networking events, which in my experience are usually a waste of time. What you want to do is find a community of other independent contractors to communicate with and assist. In this community, you can share successes, failures, marketing proposals, office space, overhead and most importantly sales leads. If an engagement is too big for one person to handle, he can bring in others from his / her community to help complete it. Having a good community to work with will be highly important to your success.
Health Insurance – One thing you need to consider in your new endeavor is how you will obtain health insurance. Here in Massachusetts you are required to carry it, so skimping is not an option. A plan for a single person runs around $7,000 per year and a plan for a family is over $14,000. It is a lot of dough. If your most recent job paid $75,000 and you received health insurance for the family as well, you will now need to have over $90,000 to have a comparable financial income.
Bookkeeping – Now that you have started your own business you want to learn some basics about bookkeeping. Bookkeeping will help you determine the financial success of your business. Furthermore, you will need this to prepare your tax return.
If you have any questions about this article, please contact Jamie Downey at 800-849-6022 or JMDowney@DowneyCoCPA.com.
