What it Really Costs to Be a Freelancer
Posted July 21, 2010 in Getting Started, How-To
A common misconception is that starting and running a freelance business is free.
Nothing could be further from the truth.
While most freelancers experience lower start up costs than other types of businesses, nearly all freelancers will wind up having to pay some money to start and maintain their freelance business. In this post, we’ll list some of the costs that you might expect to pay as a freelancer.
Types of Costs Freelancers Face
Freelancers typically face at least seven different types of costs. Those costs are:
- Equipment and Tools costs
- Self-employment costs
- Benefits and perks
- Advertising and promotion costs
- Legal and accounting costs
- Training and self-improvement costs
- Living expenses
I’ll go over each of these categories and list some of the expenses you may face in each. While freelance costs vary slightly depending on your field and your location.
Equipment and Tools Costs
As a freelancer, you are responsible for obtaining and maintaining the equipment that you need to do your job. Even if you currently own some of these items, you will need to replace them when they wear out, need upgrades, or become obsolete. Also, remember that you may need more powerful, professional resources to freelance than you probably have for personal use.
- Computer–Get the best that you can afford to buy. Memory and speed will make a huge difference in what you can accomplish. If your freelance work includes a lot of staring at the monitor (which is probably true for most of us), do yourself a favor and get a larger one. I currently upgraded to a 24-inch screen and I can tell you that I don’t regret it.
- Internet Connection–Once again, speed counts. The faster your Internet connection, the faster your downloads and uploads. You will probably want a DSL or Broadband connection although a fast cable modem will work as well.
- Software–The software that you need to work will vary widely depending on what your field is. At a minimum, you will need some sort of email system. You will probably also want something like Microsoft Office or something similar. You may also need specialized software for your field such as Adobe Illustrator or Adobe FrameMaker. Don’t forget to include an antivirus software package.
- Web hosting–As a freelancer you really should set up your own site or blog as a contact point for clients and potential clients. You can also use your website to host your online portfolio. While there are many free website themes available (particularly for WordPress), you may want to invest in something more distinctive such as a premium or custom theme.
- Online resources such as stock photography, Copyscape, and access to professional sites like MediaLoot–Software is not the only thing you need. For many freelancing professions, you will want to subscribe to or use an online resource such as MediaLoot, a stock photography site, or something similar. While buying a stock image or two may seem cheap, if you use a lot of such images those dollars can really add up. Also, don’t forget to include PayPal fees in your expenses.
- Printer–Most freelancers need a good serviceable printer that can produce letter-quality output. Usually these are not terribly expensive. Personally, I have a multi-function printer that doubles as a scanner and fax machine. For some businesses, a color printer may be necessary.
- Desk and workspace–Technically, you don’t need a real desk when you start–although having a desk is nice. A table will do just fine. However, you need to make sure that you have a comfortable chair (since it is likely that you will be spending a lot of time in it) and a well-lit work area.
- Phone system–You need to have some sort of phone system. While a starting freelancer may simply choose to use his or her computer as a business phone, it is a good idea to eventually get a separate business line for your freelancing business. Some freelancers may benefit from VOIP services such as Skype.
- Mobile computing device–There’s a growing need for freelancers to have a mobile computing devices such as a smart phone, netbook, iPod, iPad, or Blackberry. This is particularly true for freelancers who travel or work offsite. Don’t forget that in addition to the equipment you also must buy a data plan.
As you glance over the list, it’s easy to understand why many freelancers spend several thousand (U.S.) dollars in this category each year.
Another area where freelancers must pay more is self-employment tax. In the U.S., most employers withhold a certain amount for federal income tax and pay an additional amount for social security and Medicare.
As a self-employed person, you are responsible for paying both the federal income tax amount that was not withheld and the additional amount (currently 15.3%) for social security and Medicare.
For many U.S. freelancers, this means paying quarterly estimated taxes. See your accountant for details on your specific situation. Non-U.S. freelancers should also check with an accounting professional in their own country.
As a freelancer, you will get no benefits or other perks from your clients. You must fund items in this category yourself.
Here is a list of typical benefits that you should budget for:
- Insurance (medical and life)–While many employers provide or subsidize medical or life insurance, as a freelancer you must find and pay for your own insurance.
- Retirement–Some employers provide a pension while others may offer retirement programs such as matching employee contributions to a 401(k) account (in the U.S.). As a freelancer, you are responsible for creating and funding your own retirement.
- Paid vacation and personal days–Most employers will pay you for a set number of vacation or personal days off as well as for some holidays. As a freelancer, there is no such thing as a paid vacation. Any time that you are not working, you are not earning. It is important to save enough so that you can afford to take time off when you sick or just need some rest.
These benefits do not come cheap, but don’t even think of skimping here. A major illness could cause a significant financial hardship if you are not prepared.
Advertising and Promotion Costs
At some point in their freelancing career, many freelancers incur costs related to promoting their business. Some of those costs can include:
- Print or online advertising
- Business cards
- Promotional items for giveaways or as gifts to clients
- Fees associated with networking (from the proverbial “business lunch” to the cost of joining a professional society)
As you can see, even getting the word out about your freelancing business can cost money.
Legal and Accounting Costs
As a freelancer, you may also have some legal or accounting costs.
First of all, you will need to do your income taxes (freelancing tends to make your taxes more complex). While beginning freelancers may be able to use tax software, some freelancers will want to hire an accountant, bookkeeper, or both.
Also, you may need an attorney’s advice in choosing the right type of business entity for your situation (S-corp., LLC, LLP, etc.)
Trust me, accountants and attorneys do not come cheap…
Training and Self-improvement Costs
As a self-employed professional, it is up to you to keep up with the developments and changes in your field of expertise. In addition, you may which to change fields or add additional tools to your skillset.
Of course, one way to learn is by reading high quality blogs like Freelance Folder. If you can’t find what you need online for free, you may have to invest in one or more of the following:
- Online or face-to-face courses
Last, but certainly not least, you need to have enough money left over to pay your own living expenses (such as housing, food, clothing, utilities, transportation, etc.). If you have dependents, spouse, or other loved one you may also need to cover some or all of their living expenses as well.
Don’t forget to include some money for a few little luxuries and fun items in your budget.
Share Your Thoughts
While your expenses might not match up exactly to those listed in this post since everyone’s situation is different, these are the costs that freelancers typically must consider.
As you can see, freelancing is far from free. In fact, you have my permission to show this post to any client who wonders why your rates are so high. Perhaps after reading this they will understand that freelancing is not free. ;-)
Did I leave anything out?
What is your biggest freelancing expense?
Share your answers in the comments.
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