I started freelancing when I was 19 years old. I still remember panicking when I filed my taxes after earning a few thousand dollars that summer.
What do you mean I owe THIS MUCH money?!
Self-employment is often glamorized for the freedom and flexibility it offers — and I’ll readily admit that I am currently taking full advantage of these perks. However, there are certain parts of entrepreneurship that tend to get glossed over in these discussions.
Sure, you know in theory that you’ll have to pay quarterly taxes and get your own health insurance and, like, remember to think about your retirement savings once in a while. I knew it at 19, too — my father, a small business owner, warned me that I’d owe taxes on my freelance income. But until you have to sit down and figure out how to live on your earnings, cover your taxes, AND keep chasing new clients, you can’t truly comprehend all the ramifications of self-employment.
If you’re newly self-employed or just thinking about taking the leap, here are five milestones every full-time freelancer goes through that you’ll want to prepare yourself for.
1. Your first freelance check.
There is nothing more exciting to a freelancer than landing your first gig — except maybe getting the check at the end of the project.
My first freelance check was $900 — more money than I’d ever seen on a paycheck at that point in my life. As much as you want to cash it and use it right away, you absolutely NEED to put away at least 25 percent of it for self-employment taxes (I do 30 percent to be safe). I recommend transferring the money to a savings account that you can’t regularly access with a debit or ATM card, so you won’t be tempted to spend it. If you have the money saved up, you’ll have absolutely no problem paying your tax bill every quarter.
2. Your first “missed” corporate paycheck.
On the flip side, if you quit your job to launch a business, you will need to adjust to your new lack of cash flow — even if you already have a steady client base and a bunch of money in savings. It’s probably going to sting the first time you check your bank account on the day you would normally get paid by your employer. If you’re lucky enough to have clients who pay twice a month (or more often), it might not hurt as much, but if you’re like most freelancers who get paid on a monthly basis, make sure you plan accordingly to make that lump sum last you through the month.
3. Your first quarterly tax payment.
If you’re not making a ton of money freelancing, you can probably get away with paying all your self-employment taxes at once when you file your annual return. Once you start bringing in the big bucks, though, the IRS is going to want their slice on a quarterly basis.
Although it really sucks to watch a huge chunk of your money fly out the window, that’s probably the hardest part of paying your estimated quarterly taxes. You just download Form 1040-ES from the IRS, which gives you a worksheet to figure out how much you’ll need to pay each quarter, along with payment vouchers. If you’re keeping good accounting records (an absolute must for the self-employed), you should have no problem forecasting your income and determining how much to set aside for your payments.
Two important things to keep in mind: First, if your business scales up significantly in one quarter, you will definitely need to run your numbers again and adjust your payment(s) accordingly. Second, because the IRS operates on its own wonky calendar, your “quarterly” payments are due in April, June, September, and January. Mark these dates; you don’t want to accidentally miss the payment deadline because you assumed IRS quarters run the same as everyone else’s quarters.
4. Your first client breakup.
Nothing lasts forever, and that includes client relationships. Whether a recurring contract ends, a great steady client runs out of money to pay you, or you decide you need to end things with a toxic client, you’ll eventually go through a professional “break up” with someone who was a regular source of income for you.
This is why it’s critical to a) sign a formal contract with every client (get payment terms and an exit clause in there!) and b) consistently be working on business development. Spread the word that you’re looking for new projects and market yourself wherever and however you can to attract your ideal clients. If you’ve got a steady client base and a pipeline of potential leads, losing one shouldn’t make or break your finances.
On a related note, one very good reason to dump a client is if they don’t pay you in a timely manner. Hopefully you never get a client that ghosts on payments, but it’s a VERY common problem in the freelance world. If someone doesn’t have enough professional respect to pay your invoice, they don’t deserve your time and energy, no matter how exciting the work is.
5. Your first inbound lead
You know you’ve “made it” as a freelancer when a potential client reaches out to you first to propose a project. As challenging as self-employment can be, it is all worth it when you get that email, phone call, or DM from someone who found you and wants to work with you.
It’s those moments that make you feel like you’re in demand; like you’re the best at what you do; like you’re truly living your dream. Hold onto those feelings and remember them when you’re overwhelmed with a project or your growth seems like it’s stalled. It’s all part of the business cycle, and as long as you keep going, you’ll be back on top again before you know it.
Image credit: Brina Blum via Unsplash