Working on your own and for yourself can be amazing - there’s no better feeling than earning the full amount of value you bring.
But, working for yourself comes with a set of challenges as well. While you don’t have to pay any money to your employer, you also don’t have the backend set-up that an employer provides. You’re on your own, and there are a few things to consider before you sign with your first client.
1. Creating a legal entity
Before you go sign your first client, consider that you’re not employed by any company, you’re a contractor working for yourself. If things go sour for whatever reason (your client thinks you violated an NDA or stole some proprietary technology), they could come after you. For this reason, we recommend setting up an entity, likely an LLC, where you’re the 100% owner. The LLC acts as protection in case you were to get sued. This way, if set up correctly, the client would sue your LLC, not you, and thus would not come after your personal assets.
In my case, I set up an LLC, through IncFile, in the state I lived and was working (California) to protect myself. IncFile, in my experience, is incredibly simple to use, is the best bang for your buck in terms of thoroughness and cost, and doesn’t try to upsell you on every little item like LegalZoom.
Further reading: Do I need an LLC for my consulting work?
2. Separate business / personal income and expenses
When freelancing, you’re starting a business. Even if you don’t set up a separate entity, you’re now operating as a sole proprietor, and you need to keep track of business and personal line items separately. This includes income (business bank account) and expenses (business credit card). Within expenses related to your business, track which expenses are reimbursable by the client vs paid for by you - this matters for accounting purposes at the end of the year.
The good news about business expenses as a freelancer is they can help in a big way with your tax bill. To benefit from this, you need to track your expenses diligently. Things like subscriptions you have for work, miles you drove to get to a client, client dinners, internet, a home office, and business insurance can all be used to reduce your business income. The lower your business income, the smaller amount you pay taxes on and the less tax you owe. For this, you’ll want to keep careful records including receipts of your expenses. To see a full list of what you can deduct, see this page from the IRS. If you need individual help with this, contact us and we can help (trust us, this can save you thousands).
We know, everyone’s least favorite topic. Let’s simplify it. When an employee makes a salary of, let’s say, $60,000 per year, you don’t see all of that money - your company withholds taxes for you, and sends that money to the IRS on a regular basis. Without an employer doing this for you, you’ll need to do this yourself. For a freelancer, this comes in the form of estimated tax payments. These happen 4 times per year (April 15 for income before April 1, June 15 for income April 1–May 31, Sept 15 for income June 1–Aug. 31, and Jan 15 for income after Aug 31), and apply to both federal taxes and state taxes. Calculating this can be complex and you’ll likely want an accountant to help you out. We’re also happy do this for you, but the point of this article is that you know these deadlines exist, and are putting income away to pay them throughout the year.
5. Health Insurance
Likely the second least favorite topic - insurance. Not having your health insurance employee sponsored is maybe the biggest drawback of being a freelancer. The good news here is it’s really just about money. It costs you money, but you can get just as good of a plan. There are a few options for health insurance as a freelancer:
- COBRA - continuing coverage for up to 18 months from your previous employer
- Your spouse’s insurance
- Marketplace Insurance plan (varies by state)
By answering some simple questions on your state’s marketplace site, you can browse the different options for health insurance and pick the one that works best for you. When budgeting costs, expect health insurance to cost at least a few hundred dollars per month depending on your needs and your plan. As an example, my plan costs me a little over $600 per month, but there are definitely plans in the $200 - $300 range.
6. Client Proposals
Once you find a potential client (more on how to do that later) you’ll need to send them a proposal of your services. You’ll want to include a brief description of yourself that includes your background and experience, a description of the services you offer, and the amount you charge. We cover each one of these separately in a later post, but our recommendation here is to have a proposal template ready to go for when you do get an interested client.
Further reading: How a well-written proposal can win you a $20k project
7. Client Contract
No agreement is safe without a contract in place. Do yourself a favor and use a contract, no matter how friendly your client is or seems - there’s no reason not to and it can protect you in the rare case something goes wrong. We’re happy to share a contract we use with clients that has been vetted by experienced and reputable lawyers.
8. Business Insurance
If the work you’re doing is potentially risky or you’re just very risk adverse, you’ll want to look into getting insurance for your business. This is up to the individual and optional, but worth looking into if you’re worried.
9. Finding clients
Once you’re set up, it’s time to find you some clients! We’ve found clients in many different ways. The main ways we recommend are
- Leverage your network
- Reach out to people / companies
- Utilize contractor platforms
Every Mylance team member has done consulting. We're experts, and we've seen what consulting enables: more time with our families, traveling the world, more time on passion projects, or to start that business we've been dreaming about.