Thursday, December 16, 2010

Be Your Own Boss By Freelancing

Traditionally, most people took a job with a single company at age 20, worked there their entire lives and eventually retired from that same company 40 years later, often with a nice gold watch. Now, the gold watches are gone and multiple career changes are almost expected over a working lifetime. This has given rise to the professional freelancer, someone who works without long-term commitments to a single employer. They hop from job to job, selling their swords to the highest bidder.

While the idea of being your own boss and enjoying the variety and freedom of the freelancer's life sounds great, these perks come at a cost. In this article, we'll help you decide if freelancing is for you.

To Be Bossed?

First, let's delve into why you might want to keep your nine-to-five job versus taking the free road to working in your PJs sitting on your living room couch.

1. It's Easier Come Tax Time

Employees have the advantage of knowing that their employer is responsible for the mailing of W-2 forms at the end of each calendar year with all of their tax information on it. The employees then will take the information on that form and enter into the appropriate box/line on their tax return (1040), which again is easily laid out.

Freelancers don't get off that easy. In fact, they are required to compile all 1099 forms from domestic employment, document the raw checks they receive from international employers, as well as keep accurate track of the many deductions and expenses they would have incurred throughout the tax year. This can be very difficult and time consuming. It also requires that the freelancer be extremely well organized, and either understand the basics of what is deductible or be able to afford an accountant who does. (To find out how to deduct your home-based business items, check out Don't Overlook These Broker Deductions.)

2. Retirement Accounts/Matching

While not every employer offers employees 401Ks and/or other retirement plans, it has been estimated that some 440,000 companies do, based on research by the Profit Sharing/401(k) Council of America. A good number of these employers also provide employees with some sort of matching contribution that usually vests over time. Freelancers typically do not get to enjoy this benefit seeing as they are not officially an employee of the company. (To learn more about matching contributions, see Introductory Tour through Retirement Plans, Making Salary Deferral Contributions - Part 1 and Part 2.)

Those who work for themselves may be permitted to set up Keogh Plans or Simplified Employee Plans to help fund their retirement, however they can be costly and time consuming to administer. Plus the contributions come from the employee's pocket. In other words, there is no "free money" to be had or matching programs available. (To find out how to establish your own plans, check out 401(k) Plans For The Small-Business Owner, Plans The Small-Business Owner Can Establish and Tax Credit For Plan Expenses Incurred By Small Businesses.)

3. Health Insurance

Based on a 2006 study by the Kaiser Family Foundation, roughly 60% of businesses in the United States offer their employee's health coverage. And while not every company absorbs the full cost of that insurance (some require employee contributions), the majority of the burden does traditionally fall upon the employer. This is a huge benefit for the average employee, given the rising cost of health care. (To read more on this subject, see Fighting The High Costs Of Healthcare and Five Insurance Policies Everyone Should Have.)

Freelancers typically must go into the open market and purchase their own insurance for both themselves and their families. Unfortunately, this can cost the freelancer thousands of dollars in after-tax money each year. The bright side is that the cost of insurance (co-pays and the like) may be deductible.

4. Set Hours and Stability

Full-time employees generally have set hours, which is great for guaranteed income and job stability. From a future employer's perspective, it also looks better if you have worked consistently at one company for a period of time, hopefully advancing in the position. There is very little room for a freelancer to edge out employees in this aspect, so if you aren't sure you could pull off freelancing, it may hurt more than your current bank balance.

Freelancers, though able to work whenever and wherever they are, generally end up doing just that - working more hours than intended on weekends, evenings and holidays. These non-traditional work hours can wreak havoc on family or personal time. In addition freelancers often have peaks and valleys in terms of work flow. They will either be incredibly busy for a time or be incredibly slow for a period of time. It takes a long time to find a common ground with a workload that will pay bills and increase a portfolio.

Or, Not to Be Bossed?

Now, let's take a look at what benefits there are to be found in branching out on your own.

1. Numerous Deductions

Freelancers who work from home are permitted to deduct expenses that they incur while performing their duties. This means that they may deduct the cost of computer paper, a computer, laptop, BlackBerry, cell phone, travel, and a myriad of other expenses that employees would not typically be permitted to deduct. If the items are used for personal and professional duties, then only a portion of the items will be deductible.

This benefit can run into the many thousands of dollars and can help to offset some of the federal and state income taxes that would otherwise be owed by the freelancer. (To get started, see How To Qualify For The Home-Office Tax Deduction.)

2. Variety and Flexibility

Employees are usually given a task or duty and then asked to repeat again and again, often for what can seem like eons. There is very little flexibility. Plus, these people rarely have the ability to branch out and learn new things.

Freelancers don't have such restraints. While they may work in a particular field such as finance, they usually have varying duties and deadlines and interact with a number of different people. As a result, they are much less likely to be pigeon-holed in a particular position.

3. Compensation

While it is not true in every case, the majority of freelancers (especially in the financial world) tend to be paid more per hour than their full-time counterparts. A major reason a company will pay a contractor a higher rate is that it doesn't have to provide health insurance coverage to its freelancers or generally pay their taxes for them. Freelancers must learn to budget in their income taxes into their requested rates so that come tax time they aren't paying out of pocket for work already completed and paid for.

Companies also offer higher hourly rates to get freelancers interested in their projects. Competent individuals don't come cheap, especially for short-term projects (three to six months) .

4. The Commute - or Lack Thereof

Many freelancers these days telecommute. All they have to do is flick on their computers from the comfort of home, and technically, they are at work. When it comes to the commute, freelancers usually have the advantage over employees who must hit the road during crush hours and spend valuable time, money and energy combating this nasty traffic. (Keep reading on this subject in, Extreme Commuting: Is It For You?)

Bottom Line

There are many advantages and disadvantages to being a freelancer. Being your own boss is great, and working from home is a big bonus, but before you take the plunge its imperative to carefully weigh the downside. Varying workloads and a lack of employer-funded healthcare, insurance and retirement planning can quickly destroy the benefits of "pajamas 'til noon".
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