Whether you’ve just been laid off or have finally decided to follow your bliss, there’s no question that you need to start thinking differently about your finances. When you had a job, your checks were deposited automatically in your bank account, your taxes were taken out each pay period, your health insurance was paid for, and your employer matched your automatic contributions to your 401k. In part one we took a look at the most important and potentially confusing change, your change in tax status. But freelancers also need to handle the cost of their healthcare, plan a bit more carefully for retirement, and may even need to be concerned about whether they will be paid for their services at all.
This is perhaps the scariest part of deciding to go freelance. Health care is expensive and individuals looking for health insurance don’t get the same kind of group rates that employers can offer. Many freelancers, especially when starting out, forgo health insurance entirely because of the cost. But don’t make this mistake. One motorcycle accident that puts you in the hospital could be the end of your brilliant career. And there are alternatives that can save you money on this most essential of expenses.
Full-time freelancers paying out-of-pocket for health insurance can deduct the premiums on the first page of Form 1040, says Mark Luscombe JD, CPA Principal Tax Analyst for CCH. He goes on to say that, “If the health insurance is provided through an employer, any portion of the expense that the employee is required to pay can only be deducted as a medical expense on Schedule A of Form 1040, and then only if the taxpayer itemizes deductions and the total medical expenses of the employee, including health insurance premiums paid, exceed 7.5 percent of adjusted gross income.”
Finding appropriate medical coverage might not be easy, but by researching your options thoroughly, you might be able to find good coverage with lower rates. Look into large professional organizations, more often than not, if the organization is large, it will more likely offer lower rates. Check out the Freelancers Union and see what kind of coverage they provide and if it is adequate for you. You can also call insurance companies directly, thus avoiding the middleman such as membership organizations. This can help decrease your costs. Ask your doctor for information. Since they deal with insurance everyday, they might be able to give you advice or at least lead you to the right direction. Some big wholesale stores like Costco also provide insurance at a discount as well as big name department stores. The NASE, National Association for the Self-Employed also has information on insurance. Try contacting your state insurance department; you can obtain a list of insurance companies registered in your state through them.
The type of retirement plan freelancers choose depend on how much the freelancer can afford to put aside for retirement and how much expense they want to incur to administer the plan, according to Luscombe. He goes on to say, “The plans range from SEP IRAs and SIMPLE IRA or 401(k) plans to Keogh plans, with the contribution limits going up and the administration expense going up with each type of plan. They would be available to both full-timers and part-timers.”
Just dealing with the sporadic nature of freelance work can be an adjustment for someone accustomed to receiving a regular paycheck. You’ll want to be sure to maintain a regular savings account and it is a good idea to have a larger savings stockpiled for those times when the work dries up. But there’s a darker side to getting paid that, sadly, afflicts many freelancers. In all too many cases, you may not get paid at all.
According to Barbara Mende, Grievance and Contract Division Coordinator for the National Writers Union, The Grievance and Contract Division (GCD) gets several emails each month asking for legal help in getting publishers and clients to pay up. As she puts it, “We always say no. We’re not lawyers. We don’t even play them on TV. But most members don’t need a lawyer. They need an advocate. Our grievance officers are thoroughly trained in helping writers deal with deadbeats. And our track record is excellent. We’ve won nearly $1.5 million for members since we started keeping records.” She goes on to say; “The GO helps the member craft a demand letter, threatening to file a grievance with the NWU if the publisher doesn’t do X by Y date. The demand letter works surprisingly often. If it doesn’t, the GO will follow up with an NWU demand letter, noting the clout that comes from being part of an organization affiliated with the labor movement, and threaten such non-legal actions as publicity. That works extremely often.” She says most often, you just need to keep persisting until you get paid.
No matter what type of freelancing you specialize in, to protect yourself before initiating a project, create a contract that is detailed and dated and that the client is required to sign before work is started. The contract should list the fee the client agrees to pay for your work, the job description and any other terms agreed upon between you and the client. One other way to increase your chances of getting paid is to have your clients pay in installments. After each phase of work, have your client pay for it before proceeding to the next phase. With certain kinds of consultancies, a “retainer” fee can allow you to receive a partial payment upfront, before you’ve even begun the work. It’s fair and expected since you will be committing time to that client during which you can’t accept other work.
If you’ve got the temperament to deal with the peaks and valleys of freelancing, it can be a wonderful way to make a living. Take care of these basic financial needs and there’s no reason you can’t be successful