One of the best parts of being an independent contractor is owning your time. Full stop. But once the initial relief of being your own boss wears off, it’s time to take the next step to solidify your skills—and business acumen. Going from a serious freelance professional to a business entity formalizes your work in more ways than one. It changes the way you are perceived in the marketplace and could potentially accelerate your growth trajectory. It’s a win-win, really.
The first step is creating a business so that you form a distinct, legally recognized entity for operating that’s separate from you as an individual. It’s important to set up your business correctly, as the entity you choose will determine how you run your company, how you’ll be taxed, and what liabilities you’ll be responsible for. Ever seen Schitt’s Creek? Out-of-touch David Rose, the son of a former billionaire, gets a job at “Blouse Barn” and begins to overhaul the store—and his own home—by buying tax-deductible purchases left and right. When his father asks about the spending spree, he answers, “It’s a write-off!”
David clearly has zero ideas of how tax deductions and write-offs actually work. (“The write-off people will pay for it,” he explains. If only.)
Well, he's not totally wrong. It is possible to find potential tax breaks and write-offs when it comes to expenses like your cellphone and home office set-up, but it’s good to do your research so you know which entity to set up—and how to do it properly. Just don’t expect the write-off people to foot the bill.
There are a number of different ways to structure your business. For freelancers, three of the most common entities are:
Sole Proprietorship – You’re automatically assumed to be a sole proprietor if you launch a business but don’t register as an entity. In terms of taxes, the filing process is simple—your business income is reported on your personal tax return rather than a separate business return. Sole proprietorships don’t offer any protection, meaning your business assets and liabilities aren’t separate from your personal assets and liabilities. If someone sues you, your personal money is fair game, as is your house, your car... You get the picture. Protection from personal liability matters.
S Corporation (S corp) – An S corp protects you personally from any business liabilities. It’s also a “pass-through” entity, so your business’ profits and losses can pass through to your personal tax returns without corporate taxation. However, there are strict regulations around setting up and maintaining an S corp. To start, you have to file with the IRS through a process that’s separate from registering with your state. Corporations require compliance with more formalities (like creating by-laws and holding board and shareholder meetings), as well as extensive record-keeping and reporting. This might not be the best option when you’re just starting out.
Limited Liability Corporation (LLC) – An LLC offers legal protection from personal liability, so in most cases personal assets like your car, house, and private accounts are not at risk. Like an S corp, it’s considered a “pass-through” entity, so all income and expenses can get reported on your personal income return as a business operator without having to face corporate taxes. An LLC is one of the most common types of entities, as it’s the easiest to set up and maintain, making it a great choice if you’re setting up a freelancing business for the first time.
Each type has its advantages depending on the situation. Ultimately, you have to do your research and weigh the potential benefits and drawbacks to decide which entity will be the best fit for you, your business, and your goals.
You get to enjoy the sweet freedom of being your own boss, deciding what projects you take on and what hours you work. However, it also means that you have more accounting logistics to pay attention to (compared to a regular employee). Because an employer isn’t taking out taxes from your paycheck, you have to manage your own bookkeeping. It’s a good idea to set aside at least 25% of your taxable income each month, especially because you have to pay quarterly taxes throughout the year to make up for the lack of withholding in your pay. A common misconception is that if you miss a quarterly payment, you can just pay one lump sum at the end of the year. But if you’re even a day late, you can incur penalties and interest fees.
If keeping track of your finances seems daunting, it’s worthwhile to invest in a seasoned accountant. And before you head straight to Turbotax to do it yourself, know that an accountant might help you find certain deductions and offer valuable business consulting that will pay off in the long run.
For monthly bookkeeping, there’s no shortage of accounting software available, like Quickbooks—designed to streamline the process for you. As always, efficiency is key in freelancing, so you want to take advantage of systems that will simplify logistics. After all, you started freelancing to do more of what you love, not to get caught up in all of the administrative details.
As with accounting and finances, it’s crucial to stay organized with all of your projects and remain on top of your to-do list. Falling behind on tasks can lead to dissatisfied clients—leaving you feeling overwhelmed and burned out. As you grow your business and bring in more clients, finding the right project management software will streamline various communications, deadlines, and tasks, keeping you organized and enabling you to work through your projects with ease.
Here are few options to get you started:
Monday.com – Offers simple and visually intuitive layouts that make it easy to follow workflows and collaborate with a team. Choose from ready-made templates with elements like spreadsheets, kanban boards, lists, timelines, and charts—or create and customize your own.
Trello – If you’re a design professional and like easily viewing the design elements within your project, Trello is the perfect choice. Projects are organized on fully customizable boards, so you can see everything and collaborate with both internal team members and external partners on daily work lists.
Notion – Part project management tool and part note-taking app, it’s an effective task manager that allows you to create new pages and subpages to stay organized. You can even share pages of your Notion board with clients so that they’re part of your hub. The customization options here are limitless.
Toggl – A simple project planning solution that allows you to track all your projects, tasks, and teams (should you start bringing on other freelancers to work with you) using timelines and boards. The company also offers a widely used time-tracking tool.
Now that you have to pay self-employment taxes, private health insurance, and subscription costs for your software apps (ie. Adobe Creative Suite, website hosting, etc.), you need to make sure that your rate aligns with your overhead costs. Learning how to manage your money is the best thing you can do for yourself. You want to know where every single penny goes so that you know the minimum amount of money needed to stay afloat.
In addition to maintaining knowledge of your business budget, finding the right rate is key. It’s important to understand how valuable your services are to enterprises, as doing so can allow you to use value-based pricing instead of charging an hourly rate. For example, simply creating an email flow could transform your client’s engagements—helping them generate thousands of dollars. Know what the market rates are, but stay flexible and give yourself options to charge clients differently depending on the scenario, the level of work, or their industry.
Generally speaking, freelancers typically charge more than an employee would—and you should, too. As a freelance professional, you have to consider taxes, health insurance for you and your family, and even retirement. You take on an individual risk that regular employees are shielded from. And if you specialize in a particular niche, that expertise is worth a higher rate. Essentially, charge what you're worth, and then add tax!
The freelance space fluctuates. You never know when you might gain a big client...or lose one. That’s just part of the job. It’s always good practice to save accordingly and make sure that your baseline is taken care of personally and professionally.
You can take some of that money and reinvest it in your new business. You could use the funds to hire a virtual assistant and boost your productivity, or you could put the funds towards building better branding materials in order to increase the professional profile of your company. Investing in yourself and your business will help bring in future profits. And if you want to invest elsewhere, you’re in the right place. With Rise, you get access to Decentralized Finance protocols to make your income work for you.
Regardless of what you decide, you’ve put in the effort to be the boss of your own business, so you get to be the boss of your own money, too.
Ready to keep growing your freelance business? Rise is the best place for driven freelance professionals. Low fees allow you to maximize your revenue. Blockchain technology and smart contracts make payments and project management frictionless. The marketplace is now live, which means that companies have the opportunity to scout professionals just like you, so start creating your profile today!