Newbie Freelancing Thoughts

Everyone who has does any freelancing or independent consulting will say DUH, but here are my thoughts on freelancing so far:

» Need to get better at estimating the time required to finish a job, including any hiccups that are bound to occur.
» Need to improve my contracts to outline time requirements and outline exactly what is and is not included.
» Need better metrics on proper pay rates. Don’t just try to undercut everyone. My time is valuable, and each job I take has to be worth it considering both pay and experience gained.
» Need to do more research on minimizing taxes.


  1. My buddy is a big-time Web developer. He builds Web training sites. He says (and I quote):

    “After the initial excitement, you will learn quickly that $5000.00 jobs take as much time as $50,000.00 jobs.”

    As such, value your time highly. Are you worth $80/hour? If so, then bill at that rate (estimate the hours of construction). If you run out of time and the deadline is looming large, contract out some help – pay them $40/hour – and you’ll still come out ahead.

  2. If you will do this side stuff regularly and continue to expand, consider an S-Corp. This will allow you to save a bit on payroll taxes by paying yourself a salary and taking the rest as distributions/profit. FICA taxes (the 15.3% you mentioned here previously) only apply to salary.

    Your salary can’t be zero (some have tried), but at $25k salary on $75k in profits is not at all unreasonable. Using this example, you would save $7,650 in FICA.

    To me, independant is the way to go. Many argue that they stay full time for the retirement plans, health care, and safety. I would definately disagree. I believe that I have better retirement and health care benefits now than I ever did at the large consulting firms I worked at (who had decent packages). Regarding safety, as an independant, that’s up to you. I’d rather have it that way versus being at the mercy of some corporate zombie. Annual review time is a breeze!

  3. “Need to improve my contracts to outline time requirements and outline exactly what is and is not included.”

    For website design, make certain you have a list of deliverables. Draw up a basic one, then help your client add whatever else they want to it. Give them a price for what is on that list.

    That’ll keep you from becoming an ongoing webmaster when all you thought you were being hired for was a web design.

  4. I’ve been doing regular free-lancing for about three years now, and I’m finally getting the hang of it.

    – Don’t be afraid to say no to a job, and always be sure to allow yourself the most possible leeway if you don’t want to say no. I’ve gotten into the habit of giving worst-case scenario for turnarounds, so that way if I come in under, then all is good.

    – Well, I’m not sure what type of work you’re doing, but surely you can find similar work and base it upon that. I set my fee three years ago, and I plan to raise it in the new year to account better for the increased value of my time. I came upon the price after reading an article in Money for determining the value of your outsourcing; I reverse applied it to my needs.

    – As for taxes, two words: SEP-IRA. Typically for the self-employed, SEP-IRAs can also be used for free-lancing income. They’re similar to 401(k)s and you can put in a quarter of your free-lance income, up to a certain figure if you take in a lot. Please check for yourself, but I’m reasonably certain this could be an option.

  5. Mr. Green’s comment about the SEP-IRA got me thinking, as I have some freelance income as well, which I don’t look forward to paying taxes on. It appears that you can put in 20% or $42,000 (certainly doesn’t apply here) of self-employed income in it. Even better, it looks like you can withdraw without penalty for higher education expenses or a first home purchase. I have no idea about whether it conflicts with a Roth IRA or other investment vehicle, so I’m looking into it.

  6. Don’t forget about Solo 401(k)s as well, I’m try to research my tax deferral options too.

  7. I went the SEP route last year, but this year I went with a Self-Employed/Solo 401(k) with Fidelity. In years past this was really an options because of the costs, but now it’s the same as an IRA (no annual fee, pay for trading costs, etc.).

    My reason for this route is that is allowed me to defer more, alot more, more than double versus a SEP. I am incorporated and I pay myself a very modest salary to minimize FICA taxes. The SEP limit (in my case, not for true self employed) is 25% of W2 wages (not total income). So I’m not technically self-employed anymore, I work for my own company. Anyhow, the 401(k) allows the full employee deferral ($14k for 2005 assuming you had $14k wages) PLUS up to a 25% profit share (25% of W2 wages).

    So it worked out better for me, allowing me to defer more. Check out Fidelity’s site, they have excellent, detailed info. And for once, calling an 800 number actually connected me to a well informed individual.

  8. Christopher says:

    I have a question for you guys. I have 2 companies one which pays me an ADP processed check. The other I have setup as a partnership and will pay taxes on it based on its earnings. I contributed 25% (40k) into a SEP-IRA based on my combined income from both companies. An earlier post said that your SEP-IRA contribution has to be based on w-2 earnings. Is that true?? I dont have a w2 for the partnership business income. What can i do??

  9. I made the comment about the SEP limit being based on W2 wages but this only applies if you are incorporated. So if you are setup as a sole proprietor, the SEP limit is based on your income from the business as you wouldn’t have W2 wages.

    To me it sounds like you have two entities. The first is some sort of incorporated entity that pays you W2 salary (the ADP check). The second is your partnership. Your limits would be 25% of your wages in the first entity + 25% of the partership profits attributed to you.

    The best thing to do would really depend on your situation and how much you make from each. Check out IRS publication 560 at the very least or talk to a tax person. I say tax person because the CPA desination has nothing to do with taxes… and you don’t have to be an accountant to be an astute tax person.

  10. Christopher says:

    Thanks for clearing that up Jim. I have two different tax guys and they usually tell me two different things – not good 😉

  11. This is a little more rudimentary than the helpful discussion above about tax-deferred savings vehicles for freelancers, but I find it helpful to have an ING account or similar set up to save for taxes. When I get a check for one of my small, irregular freelance gigs, I put a third of it into my tax savings account right off the bat. Then, when I pay my taxes (in my case yearly, altho many freelancers have to file quarterly) I have the money right there. Every year so far, I haven’t needed all that money, so I have a little extra savings lump to move into my investment account, short term savings account, or whatever savings category I haven’t been able to add to recently.

  12. Nathan Whitehead says:

    I would try to charge more than competitors. When you position on the high end, you get better jobs and will end up making more money with less work. Between jobs focus on adding skills; this pays off much more than yet another job (plus it’s more personally satisfying).

Speak Your Mind