Recent studies project that by 2027, freelancers will represent 50.9% of the US workforce.
That is more than half of the workforce choosing to leap into freelancing.
The Catch: However, while attracting many to this freedom and flexibility in freelancing, a business setup without the appropriate legal and financial groundwork is like constructing a roller coaster without checks on the buckles-wildly thrilling to begin with but risky in the long run.
In this article, we go beyond finding clients and creating invoices. We will dive into setting up your freelance business the right way-from getting licenses to managing taxes-so you can ride this freelancing wave confidently.
Buckle up, because it’s time to get your “License to Bill”!
Do freelancers need a business license?
The answer is a little complicated but in a nutshell, Most probably.
Whether you freelance full-time or part-time, several local governments require you to get a business license to operate. People often believe freelancing falls under the radar, and it doesn’t.
Why a license? It lets your local government consider you as a business entity. They can tax you correctly, and it also keeps you within the realm of legality. Depending on where you reside in the country, you may need a basic business license or one specific to your business. For example, freelancing designers or consultants would require different permits than someone offering photography services.
Pro Tip: Check your city or county’s website for what is required to obtain a business license as the rules vary widely.
California and New York, for example, require very particular licensing so be sure to do your homework ahead of time.
Freelance Business Structure: LLC, Sole Proprietorship, or Something Else?
Your business structure choice is more like the right choice of the blueprint to build your roller coaster- it defines how to construct your business and how it will work.
Mostly, freelancers either work as a sole proprietorship or a Limited Liability Company (LLC).
Sole Proprietorship: This is the most obvious type. You and your business are considered the same; it is relatively simple to set up, and your tax filing will be straightforward. However, in case debts or legal issues arrive on your doorstep, then you are liable personally.
LLC: You’ll form a limited liability company, which gives you the added benefit of keeping your personal properties separate from your business. In other words, if someone wants to sue your business, they cannot take over your savings or property.
It requires a little bit more paperwork and costs more to form, but for most entrepreneurs, the protection from lawsuits becomes more than worth it as your freelance business grows.
What fits your needs best? If you are relatively new to your business and want to keep things easy, maybe a sole proprietorship works. If you do have ambitions to grow your business or have an asset you do not wish to lose if something goes wrong, then it is easier to feel safe with an LLC.
Taxes: The Freelancer’s Necessary Evil
Alright. Let’s speak of the most thrilling subject known to men: Taxes!!
Okay, it might not be thrilling, but it is surely important if you want to get through a financial black hole with the least effort.
As a freelancer, you are your boss, great; but it also means you have to manage your taxes. No more pesky deductions from your paycheck. It’s like a scavenger hunt, searching for taxes instead of gold.
The Self-Employment Tax: This is the IRS telling you, “Hey, because you are your boss, we are going to pretend you have two jobs.” Therefore, you are going to pay Social Security and Medicare taxes; that’s like giving the IRS a double dip.
Quarterly Estimated Taxes: This is often considered as a “just in case” kind of tax payment. Like setting aside some money each quarter, just in case the IRS comes knocking.
Deductions- The Tax Treasure Hunt: Sometimes, it is the silver lining in tax deductions that gives relief. The freelancer can take off just about everything that comes into play as a freelancer- from office supplies to software subscriptions of your very own home office, really, just think of it as your very own treasure chest in the comfort of your own home.
Pro Tip: Engaging the services of an accountant or perhaps some great accounting software can make the whole process less painful. You need a personal tax detective.
Business Insurance: Yes, You Probably Need It
Ah, insurance is only for big business, right? Think again! Freelancers can face hidden risks as well, not just limited to lawsuits by clients but also damage to equipment. That is where you realize the importance of freelance business insurance.
Here are the types of insurance you might need:
General Liability Insurance: This provides you a cover in case someone gets hurt, or your property is damaged due to your business. Picture tripping on a cable in your home office and hurting a client. Ouch! General liability insurance can help pay for those costs.
Professional Liability Insurance (E&O): Basically, a safety net if your reputation is dragged down the drain. If you are sued for malpractice in the services offered by a client, E&O can act as an attorney or even pay for the damages awarded.
Business Property Insurance: Need to buy some costly equipment? This insurance insures all equipment, etc. against theft, damage, and other accidents.
Pro Tip: Don’t be a risk-taker. Insurance can be your cover against unexpected thunderstorms in your freelance business. It might feel like an extra expense but will truly save you if something goes haywire.
It is never too late to get a proper insurance cover. And when you do, you can enjoy yourself without the worries.
Set Up a Business Bank Account
One of the smartest things you can do as a freelancer is keeping your personal and business finances separate. This means all your income, business expenses, taxes, and more are handled in a dedicated business bank account.
Why separate accounts?
Track Your Finances: When all your income and expenses are in one place, tracking them becomes easier. This provides a simpler way to prepare for tax season and helps you make financially smart decisions.
LLC Requirement: In most states, having an LLC requires a separate business bank account.
Ease in Tax Filing: If the business has separate finances, you will be able to better manage your taxes while filing them.
Avoid Temptation: You will avoid being tempted to spend the business money on personal goods if your money is kept separate from personal funds.
Pro Tip: Be sure to name and label all transactions so that you can easily sort them out later.
Cash Flow Management: Don’t Wait Till You Are All Out of Dough
Freelancing means that your income is entirely unpredictable. There are months when you feel like you have struck gold, and then again, there are not-so-good months. Whatever the case may be, managing cash flows keeps you intact during the bad times.
This is how to stay on top of it:
Allocate a monthly saving: Deduce the sum you would spend towards your personal and business expenses and save some towards future requirements.
Establish a safety fund: A freelancer typically requires having about 3-6 months’ worth of spending saved for, in case times when work dries a bit, there are no stress or financial pressures.
Automate Invoicing and Follow-Ups: Late payments are one of the major headaches for many freelancers. With Billbooks invoicing software, you can send invoices in no time, set up payment reminders, and know which clients have paid.
Invoicing and Getting Paid: Make it Easy for Clients
Getting paid is essentially the whole point of freelancing. But without a structured invoicing system, you’re bound to experience delays or worse-not get paid at all.
Streamline the payment process by using the following:
Use Invoice Tools: Create and send professional invoices with Billbooks in minutes, track payments made, and even send automatic reminders to clients.
Providing Alternative Payment Methods: Make it as easy as possible for customers to send money your way. Let them have choices such as payment through credit card, PayPal, or even a bank transfer.
Late Fees Clause: Including a clause on your contract that explains what happens when invoices are delayed is not unusual. This will encourage customers to be on time.
Wrapping Up
Starting a freelance business doesn’t have to resemble walking through a legal and financial minefield. With the right licenses, a solid tax plan, business insurance, and smart cash flow management, you can head out to play in the freedom of freelancing without worries about things going wrong.
It’s not exactly fun stuff, but it is anything but something you can afford to skip over to get started.
Need invoicing that works as fast as you do? Billbooks is here to help, and guess what? You can try it free without reaching for your wallet.
Sign up now, and thank us later!
