The U.S. labor force is undergoing a sea change, with people increasingly opting to be their own boss. According to a recent Freelancing in America study, the number of freelancers swelled to 53.7 million people in 2015. That’s nearly 34 percent of the country’s entire workforce.
Experts expect that number to continue to grow, especially when it comes to independent contractors who derive work from online platforms. In a recent op-ed in Inc. Magazine, Xero president Russ Fujioka predicts that by 2020, the online portion of independent contractor jobs will grow to 50 percent of all freelance work, and that freelance work overall will experience 15–20 percent growth. And according to a survey by the company, more than half of the on-demand workers polled consider their job a career, not just a way of earning additional income.
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Setting your own hours and schedule is indeed attractive, but going the freelance route isn’t as easy as quitting your job and letting the contracting work flow in. Here are four things to make sure you have buttoned up before you start freelancing:
1. Learn basic accounting skills.
Without an accounting or HR department, it falls on you to take care of your accounting as a freelancer. But unfortunately, many freelancers don’t have a handle on basic accounting skills. One-fourth of on-demand workers polled in Xero’s survey reported having difficulty keeping track of expenses, and a whopping 73 percent don’t deduct any expenses at all. To avoid long- and short-term headaches, make sure to learn simple accounting practices before you go out on your own.
2. Know the freelancing tax rules.
For freelancers, taxes get a little more complicated. The regulations are different than they are for salaried employees, including self-employment taxes and quarterly estimated taxes. Troublingly, more than a third of those polled in Xero’s survey reported trouble understanding or paying their taxes.
As a freelancer, it’s crucial to have a solid understanding of your tax obligations, most importantly how much you need to set aside and your quarterly tax payment schedule. Do as much research as you can, and pour over the IRS Self-Employed Individuals Tax Center. The last thing you want is to be hit with a tax audit.
3. Consult with a professional.
Only 20 percent of freelancers polled in Xero’s survey said they’ve consulted with a professional for tax and bookkeeping advice. For those who can afford it, advice from tax and bookkeeping experts is a worthy investment — especially when freelancing is a new career path. They can help you navigate the financial waters of working for yourself, and set up budgets to help keep you on track. Read tips for how to find the right accountant for your business.
Luckily, there are a number of affordable tools that can help freelancers manage their business, from simple bookkeeping technology that can help you avoid audits to invoicing software to help you streamline your billing process. Before you take the plunge into freelancing, get some of these tools in your arsenal. They’ll make managing things leagues easier.