There have been freelancers throughout history — fur trappers in the 1700s, selling to whomever would buy their wares, for example — but these days, more people are working for themselves than ever. In fact, a survey last year from the Freelancers Union of more than 5,050 adults over age 18 suggests that 53 million Americans, or 34 percent of the population, make money freelancing.
That isn’t to say that 34 percent of Americans are full-time freelancers, but a lot of people are making money through a means other than a salaried job. Much of that’s due to what’s often called “the sharing economy,” in which people rent their own assets to other people, like cars and homes. Think: Uber and Airbnb, companies that allow consumers to drive their own cars to taxi people around (Uber) and allow people rent space in their own homes (Airbnb).
And while it’s great to make money through freelancing, if you don’t handle things right, you may find that earning additional income is really expensive — especially if you’re doing any of the following:
1. Not reporting your income to the IRS. It may not sound hard at first glance. You get money from freelancing, and you report it when you do your taxes, just like you do for a salaried job. But the problem, as all established freelancers know, is that you’re supposed to estimate and pay your taxes on a quarterly basis (that is, on or by April 15, June 15, September 15 and January 15).
Since most freelancers aren’t paid on a consistent basis, you may feel that paying your electric bill is a higher priority than making your quarterly tax payment when checks finally do roll in. That may be true at the time, but it’s also a good way to fall behind with the IRS.
Making late payments, or not making them at all, is a common problem among full-time freelance workers, says Ryan Saltz, a licensed tax professional at Tax Defense Network, a Jacksonville, Florida-based business that specializes in helping individuals and businesses resolve unpaid tax debts.
“If you’re not careful, reporting errors can lead to prolonged problems with the IRS,” Saltz says.
What sort of problems? Mostly owing back taxes and receiving penalties for not paying taxes on time. If you’re not careful, “ultimately, Uncle Sam can decide to perform an audit,” Saltz says, adding that you should also be wary of any potential employer suggesting you work “under the table, or in a capacity that precludes you or them from reporting and paying taxes. This can create serious, even criminal, problems for you down the road.”
Part-time freelancers often run into trouble too, according to Ted Devine, CEO of Insureon, a small business insurance company headquartered in Chicago.
“The largest money mistake that freelancers make is treating their freelance income the same as income from a W-2 job, which many of them also have,” he says. “In reality, the IRS considers freelancers to be small businesses, which means they need to track income, pay taxes and manage risks like any other business.”
2. Not buying health insurance. If you’re freelancing full time, but the money isn’t rolling in, you may start looking for ways to reduce your monthly budget. And if you’re young and healthy, you may well decide not to renew or get health insurance.
But that’s a huge financial risk you’re taking if something does happen, such as getting into a car wreck or coming down with an illness. Besides, it’ll probably hurt your wallet in the long run, says Noah Lang, the San Francisco-based co-founder and CEO of Stride Health, a health insurance recommendation engine.
“Not only will the government fine you at least $695 or 2.5 percent of your income, whichever is higher, for going uninsured, [but] not buying coverage also puts you at risk of hefty medical costs,” Lang says. “Medical bills are the No. 1 one cause of bankruptcy in the United States.”
And if you’re scratching your head, thinking that $695 or 2.5 percent is a higher fine than you recall, that’s because Lang is referring to a penalty that will kick in next year.
3. Not putting money away for retirement. Many people are guilty of this. In fact, last March, the National Institute on Retirement Security released a study revealing that nearly 40 million working-age households have no retirement savings at all.
But it can be even more difficult for freelancers to save for their golden years when hampered by health insurance premiums and an often-sporadic cash flow.
But it’s so important for freelancers to do, says Coleen Pantalone, professor of finance at Northeastern University in Boston. “Set up retirement accounts and contribute regularly. You may not want to be working when you are 80,” she says.
4. Not having enough insurance, or the right kind. That’s right — you get to tally up more money you should be spending but probably aren’t.
Grant Moore, a Rockford, Illinois-based financial advisor with Savant Capital Management, says many freelancers should consider getting an umbrella insurance policy to protect against personal liability.
Even if you think you’re protected through your home and car insurance, Moore says that might not be the case.
Devine agrees, noting that your car insurance may not cover an accident if your insurer learns you were en route to a customer’s house, or, say, on an assignment for an online food-delivery business.
“It’s critical to know where you are covered and where you are not,” he says.
5. Not preparing for an emergency. True, salaried people also need to have an emergency fund, and often they don’t, but at least if you’re working for a company, and you’re laid off, you probably have a severance package, even if it’s only the standard two weeks’ worth of pay. If you’re a full-time freelancer and have a lot of clients, you can’t really be laid off, so that’s a major point in your favor. But you could lose your biggest client and see your income plunge — or be swamped with work but utterly broke while waiting for invoices to be paid.
Aside from putting money in the bank for a rainy day, there’s another way freelancers should protect themselves but often don’t, Pantalone says.
“To protect their income and lifestyle, it’s important to have short- and long-term disability insurance,” she says. “Bad things can happen even when you are young and you don’t want to be in the poor house because you can’t work for some period of time.”
In case you haven’t noticed, after the taxes, most of the financial mistakes freelancers make have to do with replacing the perks they would be getting at a conventional job, such as protecting themselves with disability insurance (your version of workers’ comp) and putting money away for retirement.
In other words, if you want to be successful, there’s really only one thing you can do, Pantalone says: “Freelancers have to create their own benefits package.”
More from U.S. News
50 Ways to Improve Your Finances in 2016
9 Money Faux Pas to Avoid at Holiday Gatherings
5 Big Money Mistakes Freelancers Make originally appeared on usnews.com
