The Business of Freelancing

The freelance component:

For many creative people, freelancing becomes part of their world. Whether as a way to make money while looking for a more permanent position or as a preferred choice of how to earn a living, freelancing offers a lot of benefits. 

A freelancer is someone who works for themselves. They have no employer, they have no employees. They are a business solely onto themselves that works for other businesses. (Sometimes a freelancer works for a consumer audience, like a fine arts painter that sells their art direct to customers. But, for the most part, the freelancers we are writing about do work for other businesses.) As a freelancer, this person is running a business. Sometimes the business component is more important than the creative component in deciding whether the freelancer will be successful or not.

The world of freelancing and business is not something that can be covered in an article. What we are going to cover here is just scratching the surface of what is involved, but hopefully it will steer individuals in the right direction looking for more answers. Or maybe it will steer those same individuals away from freelancing entirely. It is not something that everyone can do. This article is not a “how to”, but more so, it is a list of items to be aware of and a primer to point the way to learning more. As such, anyone reading this article should be aware that legal, financial, and tax decisions should be made with the advice of trusted counsel. Do not use this article to substitute for professional advice that is needed for your individual circumstances. 

The three types of freelancers

The interim freelancer
This is the person that is in-between jobs. They really aren’t looking to have a freelance business, but are using their talents to do some projects in the interim. These projects are done to (a) create income, (b) add samples to the portfolio, or (c) showcase the talent to potential employers. Many employers will hire creative personnel that they have first used as freelancers. It gives the employer the opportunity to test out the potential employee in a real life situation, but without any of the obligations that come from hiring the person.

The true freelancer 
This is the person that wants to freelance as their job. They like the independence of being their own boss and are enthralled with the gig economy. Freelancing has a lot of advantages over a regular job working for someone else. The freelancer gets to pick the hours they work, the types of jobs they want to work on, and often the location where they want to work. In today’s connected society, you don’t have to live in the same city (or country for that matter) with the person that you are doing the work for. There is a lot of freedom in freelancing. A good freelancer can earn a significant income as well. 

The entrepreneur
This is the person that actually wants to build a bigger business with employees. The first step in getting that type of business may simply be bootstrapping the business with themselves as the first employee. Until they hire that next employee, they are for all practical purposes a freelancer. Yet, the attitude of an entrepreneur is different than that of a freelancer. They look at things on what is best for the business, not necessarily what is best for themselves as an employee. 

There are businesses that came out of freelancing without the intent of that happening. Michael E. Gerber’s breakthrough book The E-Myth discusses this accidental entrepreneur who originally just started as a freelancer but the business grew regardless.

The type of person that is successful at freelancing
Freelancers need three skills to be successful. The first skill is the ability to do the work. So if this is someone that is hired to design brand identities, they better be good at designing brand identities. You might get a trial on a job one time, but if you don’t deliver, in the business world you won’t get a second chance from the same place. 

The second skill is the business skill set. A good business person will run their business like a business. That means showing up on time for meetings, have clear communications about project details, hitting deadlines, and taking care of the money aspects (estimates, invoicing, etc.) Those are the “up front” parts of the business, the interaction with the clients. There are also items “behind the door” that are important: business structure, insurance, etc. (More on that later.) 

We can say these business skills are more than just skills, they are responsibilities. A person can find themselves in legal jeopardy if they don’t follow local, state and federal business laws, as well as the tax obligations that goes with running a business. All individuals need to realize that they become a business when they accept their first check for work that they’ve done for another business (that is not their employer.)

Third, a successful freelancer needs to be able to market and sell themselves. This can mean building a Rolodex of contacts by interacting with industry groups. It could mean creating marketing materials and websites and thought leadership programs to get their name out. It can mean picking up the phone and calling someone they don’t know. If a freelancer isn’t willing or able to do the things to get the jobs, it doesn’t matter how talented they are in doing the work. A business without sales is a former business. (In some cases this can be outsourced to someone else, but it is difficult to find the right person to do that.)

The business entity
In the United States, businesses are typically sole proprietorships, corporations, LLCs, and partnerships. Most freelancers will start out as a sole proprietorship and will use their social security number to fill out appropriate business identification and tax components, later updating to a Federal tax ID number. (Also referred to as a FEIN: Federal Employer Identification Number, given from the IRS.) If someone falls in the interim freelancer category, they may never go beyond this designation of a sole proprietorship. 

If someone is looking at a more permanent business structure, they probably want to look at becoming an LLC or similar legal entity. The idea of having the freelance business under a legal framework like an LLC is to separate the personal property from the business property. So in a legal action against you, it is possible for the business to lose business assets, but your personal property is still protected. (So you might lose business assets, but you personally are not responsible and won’t lose personal property, like your home or your personal savings.)

Taxes
There are two types of taxes that a freelancer needs to be well-versed in (or hire someone to take care of these issues for them), collecting taxes from your clients and paying personal/business income tax.

Collecting sales tax
Many states require businesses to collect sales taxes on the work they do or the products that they sell. They then are obligated to send the state the moneys they collected. Different states have different rules and tax rates. Even different counties within a state can have their own tax rates. Some businesses reside in special tax districts. As an example, some larger metropolitan areas have a stadium tax to pay for their professional sports team’s stadium. If you are in that zone, or do work for someone within that zone, you may have to collect that tax.

You might be collecting different taxes based based on the type of work that you’ve done. You might be collecting different taxes based on whether the work was delivered online or a physical items was delivered. Along with this is different organizations might have exemptions based on who they are or how they are using what you are selling them. Some businesses are exempt, at least some of the time. These are just items that the freelancer will need to investigate and learn. 

Confused? You are not alone. It can be extremely confusing and tax laws change often and different laws can seemingly contradict each other. You either need to learn all of this or hire someone to take care of it for you.

Paying income tax
As a freelancer, no one is withholding taxes out of the checks they are sending you to pay the government. It is your responsibility to do that. You need to figure out how much income you are generating and pay both your federal taxes and your state taxes. And as the business owner, you also need to pay things like FICA taxes that you wouldn’t be paying if you were employed by another company. (They would pay it for you.) And there will be a point where you have to pay this quarterly, not just at the end of the year. 

Write-offs
The good news is that as a business owner you do get a lot of tax advantages in that you can write-off a lot of expenses. New camera? Is it used for business? Write it off. Do you work from home and your internet service is primarily for business? Write it off. Going on a business trip that just happens to be in a warm weather state in the middle of winter? Write it off.  There are some perks to being a business owner. But to sound like a broken record, you need to learn what you can (and can’t do) or hire someone that knows it. Don’t guess at it. Learn it before you get too far into your business.

Insurance
It is always advisable to have business insurance when running a business. Often larger companies will require that a freelancer have insurance simply in order to pick up jobs on location. There are different types of insurance. Liability insurance protects the business from accidents (someone slipping on ice on the sidewalk.) Errors and omissions insurance protects the business from making mistakes in the business dealings. (Listing a wrong price on an ad that costs the client money, for example.) As an independent business, it is also advised that freelancers get appropriate health insurance. And what happens if you get sick and can’t work? Disability insurance can help cover lost wages during downtown and for medical bills not covered by health insurance. 

Bookkeeping
Every freelancer needs to learn basic bookkeeping. This is how the freelancer gets paid. They need to know what to charge and how to bill their clients. What to charge is typically figured out by project or by number of hours spent on a project. The freelancer also needs to include outside costs that are associated with each job, if those are billed to the client. (Photography, printing, etc., that the freelancer hires or buys from an outside service or vendor—and of course the freelancer needs to pay these people when invoiced!) 

It is the freelancer’s responsibility to negotiate the rate with the client in advance of accepting the job and then to bill the client according to terms. It is also the freelancer’s responsibility to charge appropriate taxes and pay those taxes to the state or other municipality. 

Bookkeeping also includes the process of keeping records of all expenses. Every business needs these records for tax purposes. (See taxes, mentioned previously.)

Now it is possible for the freelancer to hire someone else to do this bookkeeping for them. However, this does not abdicate their responsibility to learn the fundamentals of bookkeeping. Every business owner should have a basic knowledge of the billing process.

Sales and Promotion
No business survives without sales. If no one hires the freelancer, that freelancer is going to be out of business in a hurry. Getting work is as important as doing the work. Often times the best way to get work is to inquire directly. Send an email and follow up with a phone call. Sending an email by itself isn’t going to be an effective strategy for getting business. Remember that the person that hires freelancers have a lot of other job responsibilities. Most probably get over a thousand emails in a week’s time. 

So emails get looked through at jet speeds, if they are seen at all. Junk filtering software may mean that your email never get to its intended recipient. Never rely on an email to get through. Always have a follow-up method for reaching the person. That typically is the phone. 

Having a portfolio and website are essential components for most freelancers. If someone is looking for you, you have to be able to be found.

Marketing and advertising are things serious freelancers engage. Once again, this is a business. Having a marketing campaign for a business can separate the success stories from the failures. Often it helps to get an outside opinion on creating that marketing program. Often creative people don’t see their own value in the same way that their potential clients might. Bringing in outside help, especially someone from the client side or who works with those clients, can be invaluable. 

Specialization
Uniqueness in product and service offerings can make a freelancer stand out. Often people shy away from the specialization approach because they are afraid that limiting their offerings will limit the amount of jobs they receive. However, in a competitive environment, specializing in one area probably will increase recognition and opportunities. Having a specialization implies a level of expertise. (And, if you don’t have that expertise yet, if you continue to work within a special genre you probably will gain that expertise within a reasonable amount of time.)

Conclusion
Once again, to be clear, this is the tip of the iceberg. Freelancing means running a business. Each of these quick subjects above could probably be written up in their own books. Also please note that none of this should be construed as legal or tax advise, everyone’s situation is going to be unique and it is essential to seek out the professional advisors that are best qualified for the individuals’ circumstances. Most creatives will find themselves at one point or another in the freelancer’s shoes. It can be a very rewarding occupation, or an opportunity that leads to bigger and better opportunities. 

Also look for an article (coming soon) about the “Freelance Project”. This discussion will be about an actual project, how to write up a basic contract, who owns the copyright, what is “work for hire”, and more.

About the author…

Randy Gunter is a thirty year advertising agency veteran and agency owner. The Gunter Agency has worked on national and international projects for companies that include Charter Business, Firestone, Fiskars, John Deere, Kimberly-Clark, Oscar Mayer, OshKosh B’Gosh, Rayovac, and others. Randy and his agency have received Adweek’s Media Plan of the Year award, NAMA Best of PR award, and hundreds of creative awards and recognitions.

Randy still consults with companies on marketing, but today his main concentration is CEO of Sugar River Trading Company. Sugar River is best known as the manufacturer and distributor of McNess home products.

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