Freelancing is a great opportunity to take control of your income and your schedule. But with all of the freedom and flexibility comes costs that can eat away at your bottom line. Some of these costs may seem obvious, but others are hidden in the trenches of running your own business.
Follow me as I take a closer look at the costs of being a freelancer, as well as other things you should be aware of before you walk down the path of working for yourself.
The 12 hidden costs of freelancing you should know about
The cost of taxes and tax help
One of the biggest expenses of freelancing is paying your taxes. When you are self-employed, you are responsible for paying all of your taxes yourself. And trust me, it’s a lot harder than it sounds. As a freelancer, tax payments can easily end up costing several thousand dollars each year (or each month, depending on your income) and missed payments can come with steep fines from the IRS. This is why it is smart to use a business bank account like Novo, where you can keep your business and personal money separate.
The good news is that you might be able to lower your tax burden with the help of deductions. Since you are running your own business, you can write off your business expenses. The distinction between business expenses and household expenses can get blurry if you are working from a home office. So if you don’t know whether or not you can write something off, it is a good idea to consult with a tax professional, like a CPA.
Although working with a CPA could cost you several hundred dollars, a knowledgeable CPA could potentially save you more. Beyond the potential tax savings, working with an accountant gives you the peace of mind of knowing that you are making the correct tax payments. That will help you avoid surprise tax bills or penalties at the end of the year.
If you choose to avoid working with a CPA and decide to file your own taxes instead, there is still help out there for you. I highly recommend using the TurboTax Self-Employed software. This tax software can help you file your tax return with minimal hassle. The best part is that it was built with freelancers in mind.
When you aren’t working with a traditional employer, you won’t be able to sign up for an employer-sponsored healthcare plan. With that option no longer available, you’ll need to dig around for an insurance policy that works for you and your budget.
As you are considering your options, you’ll notice that healthcare coverage can get expensive quickly. A good place to start looking for coverage is the health insurance marketplace, but you may not qualify for any affordable options. At that point, industry-specific groups and healthcare sharing ministries may be a good solution.
Another way to find somewhat elusive, quality healthcare as a freelancer is to check out eHealth. The company allows you to comparison shop for health insurance coverage without the hassle of applying for individual quotes. With the help of this tool, you can find a variety of healthcare options to suit your needs.
You can learn more about the ins and outs of finding healthcare as a freelancer in MU30’s full guide.
Potentially higher household expenses
Since you will likely be working from home, you should consider that your household expenses may increase. A few expenses to watch out for include:
Utilities. With more time spent at home, the cost of your utilities may increase. From the electricity that is required to charge your laptop, to the gas that you use to make your lunch, it all adds up.
Internet. Although you probably already have an internet plan, you may need to upgrade if you are working from home regularly.
Snacks. You may find that you meander towards the kitchen for a snack more often. This is a challenge that I combat every day!
Toiletries. When you are spending more time at home, you will also spend more time in your bathroom. With that, you might use more toilet paper and hand soap than you normally would. While it may seem like a small expense, it does add up quickly!
Unexpected outings. Unfortunately, many of us are faced with power or internet outages. When that happens, you may need to run to a local coffee shop to finish out your workday. That can lead to extra spending that you didn’t anticipate.
Office supplies. If you worked for a traditional employer before starting your freelancing journey, you may be used to having your supply of pens and paper magically replenished. As a freelancer, you’ll be responsible for the costs of your office supplies and the gas it takes to get to the store.
Comfy clothes. If your wardrobe is mostly professional attire and pajamas, then you may want to invest in a happy medium. A shopping spree for comfy, but appropriate, work from home clothing can add up quickly.
These are somewhat unavoidable expenses. Although you could choose to work outside the home to reduce these costs, it may not be the best option. For example, let’s say you choose to work at a coffee shop instead of your home. You might spend more on coffee and treats than the increased household expenses would cost you.
My solution is to work where I am most productive and accept the costs as a part of the bargain. For me, that is my home and I choose to accept the cost of stocking my kitchen with healthy snacks.
To cut back on the cost of my expenses, I like to use Trim. Trim can save you up to $645 a year by analyzing your spending patterns and looking for opportunities to save you money. They do this by negotiating bills, like your internet and phone, down for you. Trim can even find those pesky subscription services that you forgot about and free up more of your money by canceling them for you.
The cost of setting up your office
If you are working from your home office, then you may need to purchase some items to make the space productive.
The first expenses are the equipment you need for your freelancing business. That might include a computer, camera, printer, scanner, or anything else that helps you do your job. Additionally, you may need to purchase a desk and chair to work comfortably.
Luckily, you can find most of the office items you need cheaply on Craigslist or Facebook Marketplace. You might be able to score a desk and chair for under $50, or even less if you pay a visit to your local thrift store. For other equipment needs, make sure to shop the sales and seek out deals and coupons to lower your equipment costs significantly.
Business set up costs
In some cases, you may choose to register your freelancing services as an LLC. With that, you’ll need to fill out some paperwork with your state. Plus, you should expect to pay a fee, which varies significantly from state to state. Once you’ve set up your LLC, some states will require that you file an annual business report and also pay a fee to do so.
Depending on your state, these business set up costs can be several hundred dollars. In addition to recognizing your business as a legal entity, it may be smart to invest in some business liability insurance. The cost of this insurance will vary dramatically based on your business model, but you should expect to pay at least a few hundred dollars each year.
Marketing your services
Now that you are in business, you’ll need to find paying customers. Marketing your services can get expensive, but it is absolutely necessary for success. Otherwise, the valuable customers that you seek may never find you!
Here are a few marketing ideas that you may want to consider for your new freelance business:
Creating a website. You should expect to pay between $100 to $300 to set up a basic website. The website’s ongoing maintenance cost can vary, but you should expect to spend at least $100 on your website.
Purchasing business cards. The costs of business cards can range between $0.10 to $1+ each.
Advertising. Advertisements can be another effective way to market your services. The costs will vary dramatically based on your business and target audience.
Even if it is costly, don’t shy away from effectively marketing your business. Effective marketing can mean finding the right customers to grow your business and make more money.
As you build a freelance career of any kind, you’ll likely run into knowledge gaps along the way. With a fast-paced world, it is important to keep up with the changes in your field. If you have an outdated approach to your business, you could potentially lose customers.
You want to offer the best services available. With that, continuing education costs are a vital part of staying ahead of the competition.
Here are a few ways that improving your skills could add an expense to your business.
Skill-building courses. There is no shortage of self-improvement courses aimed at business owners. You might choose to boost your industry knowledge or learn more about effectively running a business through a course. Depending on the content, a one-off course could range from a few hundred to a few thousand dollars.
Certifications. In some fields, certifications are a critical part of attracting clients. You may need to take courses to keep, or obtain, your certifications. Unfortunately, in most cases, this is not free.
A degree. The cost of a college education can be very high. You might easily spend thousands of dollars each semester to obtain a degree. Depending on your business, this could be an important part of your success.
Books. Books can offer a deep look at a single topic. You might find helpful books are worth the minor upfront cost. You might spend $20 to learn a skill that boosts your business income.
Depending on your freelance business, travel may be a large portion of your expenses. You may only need to travel once or twice a year to attend conferences or other networking opportunities. Or you may need to travel on a more regular basis to meet with your clients in-person.
For example, a wedding photographer specializing in destination weddings will rack up more business travel expenses than a freelance website designer who attends one conference each year.
Take a realistic look at your business and consider what travel expenses you might incur. If you have a considerable amount of travel to cover, then consider taking advantage of travel rewards credit cards such as the Chase Sapphire Preferred® Card. You’ll earn an impressive 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That’s $750 in travel when you redeem through Chase Ultimate Rewards
In a traditional nine-five, your employer may have offered some retirement saving assistance such as matching contributions. As a freelancer, you can no longer enjoy that luxury. But you will still need to save for retirement.
Start by taking some time to create your own retirement plan. You can do this by considering when you’d like to retire, your current net worth, and savings projections. As a freelancer, you’ll need to set up your own retirement accounts. You do this easily with the help of Betterment.
With Betterment, you’ll have the help of a fully managed account to guide your portfolio towards your retirement goals. You don’t need an initial balance to work with Betterment, so it is a good place to get started even if you don’t have a large retirement nest egg.
Once you have a better idea of how much you should be saving for retirement, you should treat this savings goal as a necessary expense. Even when times are tight, make the effort to build your retirement stash. Your future self will thank you!
Unpaid time sinks
Part of being a business owner is that you’ll be responsible for overhead tasks that you may have never thought about. Many of these tasks can be unpaid time sinks that take your time away from paying customers.
A few include seeking out new customers, sending out invoices, and client phone calls that could have been an email. As you calculate your freelance rates, make sure to factor in some expected overhead time costs.
A cost that is easy to overlook is the downtime that may become a part of your freelancing business. Downtime is when you don’t have any paying work on the calendar so you are stuck without an income opportunity.
Depending on where you are at in your freelancing journey, you may have quite a bit of downtime on your hands. Instead of letting this time slip through your fingers as you scroll through your favorite social media platform, use it to further your business goals. You might brainstorm ideas for new services or brush up on your skills with the educational material that you’ve been meaning to read.
Any time spent away from your business is time that you will not be paid for. If you are used to taking paid vacations, this can come as a bit of a shock. But careful budgeting can help to offset the costs of taking a much-needed break from your business.
Common myths about freelancing dispelled
Now that you know a little bit more about freelancing costs, let’s tackle a few myths that you’ve probably heard.
Freelancing isn’t reliable
Personally, I heard this myth the most from well-meaning naysayers. Many have told me that freelancing is an extremely unreliable way to make a living.
However, I’ve found that freelancing provides a reliable income stream since I have several different clients. With enough clients in the mix, you will likely find that some months are busier than others. Although different clients may have different opportunities each month, you’ll likely have enough work flowing your way.
With that said, you will probably see some ups and downs in your income throughout the year. The freelancing services that you offer are likely more in-demand in different seasons. With that, you should plan your expenses accordingly. Plus, a healthy emergency fund can help to put your mind at ease as you ride the highs and lows.
Freelancing is isolating
As a freelancer, you will likely have the option to work from home. For some, that is an exciting proposition. For others, it can be an isolating experience.
Although it can take more effort to be social, freelancing itself is not an isolating career choice. You will need to stay social to build your network. Plus, you can go out of your way to interact with people that are interesting to you. For example, you have a flexible schedule which will allow you to meet up with old friends for the occasional lunch.
Freelancing isn’t as stressful as a ‘real’ job
Without a traditional boss, you may feel that freelancing would be less stressful than a “regular” job. However, as a freelancer, you’ll be juggling several projects with several different clients. That means that you are answering to several different people with different requirements and deadlines. With that, it can get stressful at times.
But since you are in charge of your working hours, you can make adjustments to reduce your stress levels. For example, you might take a morning walk or a long lunch to make your day more enjoyable.
Is it cheaper to be a freelancer than a W-2 employee?
The answer will depend on your unique situation.
As a W-2 employee, there are perks. You may have access to employer-sponsored healthcare, retirement packages, and lower tax obligations. But you will need to factor in the costs of being a W-2 employee, including your commute, professional wardrobe, unpaid time, child care, and more. Plus, an inflexible schedule could cause wrinkles in your personal life.
As a freelancer, there are the costs that I discussed above. But you will save on commuting costs, clothing, and all the expenses that come with a traditional job. Plus, you will have the benefit of a flexible schedule.
It may be cheaper to freelance if you have high commuting costs or childcare costs that could be avoided by working from home. But you’ll need to run the numbers of your situation to decide.
How to manage your personal finances as a freelancer
As you can see, the costs of freelancing will eat into your bottom line. With that, it is important to carefully manage your personal finances when you enter the world of freelancing.
The best way to safeguard yourself from a swinging freelancing income is to build a solid emergency fund. With a solid emergency fund, you can weather the ups and downs with minimal financial stress.
When it comes to storing your emergency fund, having a bank that understands your business needs is vital. Novo, a free business checking account, makes your banking life easy with no fees, whatsoever.
In addition to an emergency fund, using a money management app like MoneyPatrol can be extremely helpful. With MoneyPatrol, you’ll be able to pull your personal finance details into one user-friendly dashboard. You can create a budget, receive alerts to track your expenses, and set up bill reminders.
Why freelancing is a great option despite the costs
Freelancing may come with hurdles that you never had to face in the traditional job market. But it also comes with unheard-of benefits. You’ll be able to set your own schedule and build a business from the ground up. Plus, you can set – and meet – your income goals.
Personally, I love the freedom and flexibility of freelancing. Not only has freelancing allowed me to meet financial goals, but also expanded my horizons. I couldn’t see myself returning to a traditional office arrangement anytime soon!
As you build your business, make sure to keep these expenses in mind. With your eyes wide open and a little bit of budget planning, you won’t be unpleasantly surprised on your freelancing journey.