Don’t Write Alone | Shop Talk

Financial Advice for the Freelancer

For our Money Week series, Nicole Dieker answers commonly-asked questions from freelance writers

I’ve been a full-time freelancer for nearly a decade and am currently in my third year of six-figure freelancing. In the past ten years, I’ve gone from earning three cents a word writing recipes to earning fifty cents a word (or more) writing about everything from personal finance to pop culture.

I regularly teach classes on how to earn money as a freelancer and how to turn freelance writing into a career, and I am in the process of developing a new class on personal finance for the freelance writer. Here are some of the most common questions that come up during my courses—along with many of the lessons I learned as I built my own freelance career.

When do I need to start paying taxes?

You need to report every dollar you earn as a freelance writer—even if you only publish a few pieces per year.

If you consider your freelance career more of a hobby than a business, you can report your freelance income annually. Include your freelance income on Form 1040, Schedule 1, under the line labeled “Other income.”

If you consider your freelance career a business, you’ll need to itemize your income and expenses on Form 1040, Schedule C—and you’ll probably want to ask a CPA for help. Your CPA can also tell you how much you need to set aside for quarterly estimated taxes. (Employees have taxes withheld from every paycheck; freelancers need to withhold their own tax and submit it every quarter.)

In addition to paying federal and state tax, you may also need to pay state business tax—or even city business tax—on your freelance income. Do your research, talk to a CPA to learn what you might owe, and set a little money aside for taxes every time you get a freelance paycheck.

How do I know whether my freelance career is a hobby or a business?

The IRS has a nine-step guide to help you determine whether your freelance career is a hobby or a business. In general, if your freelance career brings in a significant part of your income and earns a profit (i.e. your freelance earnings exceed your freelance expenses), it probably qualifies as a business.

When do I need a business license?

Many states require freelance writers to apply for a business license—especially if freelancing is your primary career and not something you do to earn hobby income. You can search your state name plus the words “business license” to learn more about which activities require a license, but a good CPA will not only have that information ready for you but also help you fill out all of the necessary forms.

When do I need a permit to work from home?

Believe it or not, some cities require freelancers to obtain a permit before they can work from home. In most cases, you won’t have to worry about getting a permit to operate a freelance business out of your house or apartment—but when I lived in Cedar Rapids, Iowa, I had to pay $25 to obtain a permit that allowed me to freelance from a residence. Since I was renting at the time, I also needed to send the city an approval letter from my landlord, giving me permission to write articles in the unit I was currently occupying.

When do I need a CPA?

I would recommend getting a CPA as soon as you decide that you’re going to make freelancing your career. Yes, CPAs cost money—but it also cost money to pay the back taxes I didn’t know I owed the City of Los Angeles, and it cost money to pay the penalties I owed the IRS when I didn’t set aside enough money for estimated taxes, and I could have saved at least some of that money if I had started working with a CPA as soon as began freelancing full-time.

Look for a CPA who understands what freelance writers do. If you have a career that includes both freelance paychecks and royalties (if you’re a freelance writer who is also an author, for example), make sure your CPA is familiar with all the nuances of your profession. Having a CPA who knows that PayPal takes a percentage of every freelance payment, for example, makes a huge difference. So does having a CPA who understands how Amazon pays self-published authors.

When you find a CPA you like, do your best to make their job as easy as possible. Keep accurate records of both your income and your expenses, and make sure those records are easy for your CPA to understand. Some CPAs will suggest that you use a specific software program, such as FreshBooks, for your record keeping; in those cases, all you’ll have to do is keep your records up-to-date and send a profit-and-loss report to your CPA every quarter, which will make the entire process very, very easy.

When do I need to set up an LLC?

Some people believe they need to become an LLC or a S-Corp to reduce their tax burden and/or protect themselves from certain types of liability. In some cases, that’s true; in other cases, you won’t save anything on your taxes and your incorporation structure won’t actually separate your business and your personal assets.

If you’re thinking about incorporating, talk to a CPA first—don’t just hop onto one of those online incorporation websites and hope for the best. Changing the legal definition of your business literally changes the way you do business, so make sure you understand what you’re getting into.

For what it’s worth, I have been freelancing for nearly a decade and I’m still a sole proprietor. I haven’t felt the need to incorporate my own freelance business, and my CPA hasn’t felt that I need to either.

How much can I expect to earn as a freelancer?

When I teach intro-to-freelancing classes, I tell my students that they can expect to earn between $50 and $150 per piece as an entry-level freelancer; between $150 and $350 per piece as a midlevel freelancer; and between $350 and $800 per piece as they continue to build their reputation and their client base.

If you want to know how much you can expect to earn at any stage in your freelance career, multiply the per-piece rate by the number of pieces you can realistically expect to pitch and complete in a month. Right now, for example, I generally complete fifteen articles each month. Each article is roughly 1,200 to 1,800 words, and my pay rate averages at around fifty cents a word. This means that I can expect to earn $750 per piece on average and around $11,000 per month (pretax).

How can I maximize my freelance earnings?

When I began freelancing full-time, I gave myself two metrics by which to measure my progress:

• Are my total earnings going up?

• Are my total work hours going down?

If my earnings and work hours were both going up, then I wasn’t necessarily maximizing my freelancing earnings—I was simply earning more cash by doing more work. As a freelancer, you have the ability to increase your pay rate without simultaneously increasing your workload, whether you renegotiate your rates, build relationships with better-paying clients, or streamline your writing process so it takes less time to complete a 1,200-word article.

Take advantage of the freelancer’s ability to increase your income while reducing your work hours, because you won’t be able to maximize this particular equation in other types of careers.

When should I renegotiate my rates?

Renegotiate your rates annually. Email your editor, thank them for the opportunities you’ve had to work together, and let them know that you are currently having freelance-rate conversations with all of your clients. Ask them whether the current year’s budget will be able to accommodate a rate increase, and go ahead and offer a reasonable number, if you want to. If you’re earning $100 per piece, for example, ask for $125 and give them the opportunity to counter with $110 or $115.

You can also negotiate a rate increase any time you’re offered a new assignment—especially if you’re working with a new client or a long-term client who is requesting a more substantive piece than usual. When Catapult offered me this article, for example, I successfully negotiated a higher rate before we signed our contract.

If you want more money for your writing, all you have to do is ask—although it helps if you have a history of high-quality, on-time work to back up the request. When I emailed Catapult requesting a higher rate for this piece, I had already built my reputation with Catapult as a freelancer who could provide high-level work that met the terms and deadlines required. That made it a lot easier for my editor to agree to a rate increase for this assignment.

When should I drop a freelance client?

If a client is unwilling to negotiate rates, it’s time to start looking for a client who might have a little more room in their budget. Likewise, any client that is running up unpaid work hours (with nitpicky edit requests, for example) might be worth replacing.

In some cases, you’ll want to give notice before dropping a client, especially if you’ve been completing assignments for that client on a regular basis. This is not an industry in which you want to burn bridges; instead, do your best to make the transition as easy as possible. If you know another freelancer who might be interested in taking on your former workload, for example, make sure the client knows how to get in touch with them.

It’s always a good idea to land a better client before dropping a current one, especially if you need to hit a certain income level every month. That said, sometimes dropping a less-than-optimal client without having a replacement lined up gives you both the time and mental energy to seek out the kind of freelance opportunity that can transform your career.

Do the math, and then do what’s best for you.

When should I quit my day job and freelance full-time?

When I began freelance writing, I was technically unemployed, which meant that I was able to devote nearly all of my workday hours (and several of my evening hours) toward completing assignments and building my client base.

If you are currently working another job, you probably won’t have that privilege. Instead, you’ll have to do the cost-benefit analysis and decide whether freelancing is likely to give you the kind of long-term, full-time career you’re hoping for. From there, it’s a matter of building up your client base until you are bringing in enough freelancing income to quit your job.

This doesn’t necessarily mean that you need to freelance until your earnings exceed your current salary or wages, but it does mean that you need to see a track record of month-over-month freelancing growth with the potential to match or exceed your current income. It helps if you can set aside enough savings to cover the gap as you continue to build your writing career.

Make sure that your current employer doesn’t have any restrictions around moonlighting or intellectual property, especially if you plan to do any part of your freelance work in your employer’s workplace (this includes answering freelance emails during your lunch break).

You’ll probably know within a year whether you’re suited for full-time freelancing and whether your writing interests are likely to provide you with full-time freelance work. In my case, it only took a few months to understand that I could make it as a full-time freelancer—and I’ve been pitching, writing, and collecting paychecks ever since.