Deciding to go freelance is a big decision. Your customers will pay you and report those payments to various tax authorities on form 1099. Taking the step to freelance is the just first of many decisions you’ll have to make.
By becoming a 1099 payee, you have eliminated a number of departments that you probably took for granted as an employee.
HR, Payroll and Benefits
There is no employee manual. The people who hire you will not tell you their expectations for your behavior and dress. They will just cancel your contract.
Turn Today’s Data into Tomorrow’s Breakthroughs
It is now up to you to provide for yourself if you are injured or disabled. All those insurances that your employer provided are gone and you have to fill the gap.
Remember that if you are injured or sick and cannot work, you have no income. There is no employer contribution towards health insurance. There is no 401(k).
You still owe income taxes and FICA. There is no employer to make any deductions or report to the tax authorities. That word is plural because you may have to file reports to state and local tax authorities as well as the IRS. You may be required to estimate taxes and make payments on a regular basis during the year.
Your customers will pay you when they feel like paying you, regardless of what it reads on your invoice. Freelancers are routinely paid after everyone else. Your cash flow and your planning for the future needs to take that into account.
The companies and people that you owe money to will not be very understanding. You may need to pay bills weeks, if not months, before the related income arrives. The IRS is especially keen on prompt bill payment.
Insurance and Permits
Are you working from a home office? Does your homeowners or tenants insurance cover that? Does your car insurance cover you for using it in your business?
Does your locality allow you to have a home office? Does your business need a permit or permits from the state or local government to operate? Do you need a license from the state or need to take specific courses?
Freelancing can be a great way to pursue your dreams and do the kind of work that you love. It requires some pre-planning and a commitment to staying organized and focused. You’ll either need to tackle a variety of administrative tasks or find a trustworthy accountant or adviser to help. And having an emergency fund in advance won’t hurt, either. A FAQ on self-employment can be found at the IRS website.