What every freelancer should know

Tired of getting gouged on your taxes? Sensing an impending mental breakdown? Here are tips for the self-employed, from someone who feels your pain.

Published April 15, 2008 11:08AM (EDT)

I could never be happy in a traditional job. I hate fluorescent lights. I detest working in groups. While I can get interested in just about anything, nothing interests me enough for it to be a full-time career. Also -- and, to me, this is no small thing -- the smell of office carpet makes me existentially depressed.

So I became a freelancer -- thus joining the growing armada of the self-employed who sit at the same cafe table every day and thrust their business cards in your face during casual conversation. For the most part, it is a satisfying existence, a life of freedom and flexibility and almost no personal connection to "The Office." Then there are days when the clock slips past noon, but I haven't been outside, I haven't spoken to another human being, and I start to wonder if I'm going to wake up one morning when I'm 70 and regret never having owned a pantsuit.

That was the sort of mood I was in on April 14 of last year, when I took out the tax forms I'd picked up at the library and started trying to wade through my finances. I was still wearing the clothes I'd fallen asleep in the night before and now was facing a floor covered with 1099s, a few W-2s, and those pesky "estimated tax payment" envelopes that I never remembered to send in.

About eight hours later, I was still sitting in my room and the sun was going down. I had reached my yearly tax breaking point, the moment each April when I realize that, while they are technically written in English, I have no idea what any of the documents I am reading actually mean. I had, however, discovered for the umpteenth time that not sending in quarterly tax payments meant I owed the government interest, that I had to pay an additional 15 percent in self-employment tax (the way the government collects Social Security and Medicare/Medicaid payments from the self-employed), and that I hadn't kept good enough track of my receipts. Taxes are hard for everyone -- but for the freelancer, they're a special kind of hell, one where the devil sips martinis as you weep in the corner, struggling through your Schedule C.

That's why I decided to get a handle on the noncreative side of my life -- not just my taxes, but on all the mounting challenges of being my own boss. What was the smartest way to plan for retirement? What were the best resources for health insurance? How could I, starved for human contact, avoid leaping on my fiancé like a puppy every time he walked in the door? I wanted to better manage both my finances and emotions -- and reach a stage where bouts of depression and frustration came less frequently than my paychecks.

In the past year, I've managed to turn around my situation. And so, on this tax day -- which is a New Year's of sorts (though with fewer party hats and much more paperwork) -- I offer you a list of tips to make the practical, financial and emotional sides of freelancing more manageable. Some of it may seem obvious. Some of it may seem too wonky and technical. But if one poor freelancer opens an IRA as the result of this story, then I'll have done my job.

1. Get a tax advisor. These lovely people have chosen to read IRS documents as a full-time career -- take advantage of this bizarre miscalculation. Not only can they save you more money in taxes than they charge in fees, but hiring one means you will never, ever have to figure out the part of the 4562 Depreciation and Amortization form that asks you to calculate your special allowance for qualified Gulf Opportunity Zone property placed in service during the tax year and used more than 50 percent in a qualified business use.

Even if you feel the need to do your own taxes (do you also like walking across hot coals and curling up on a bed of stinging nettles?) you can still benefit from a one-time consultation. Pick an advisor who works with other people in your field and set up an appointment soon -- like, this April.

2. Set up a different bank account for your business earnings. And use a separate credit card -- which you pay for with your business account -- for business and healthcare expenses. This makes it much easier to keep track of your cash flow. I did this by opening a linked account with my normal bank account and then signing up for a JetBlue credit card -- which makes me feel like every time I'm buying staples (deductible!), I'm getting one step closer to a vacation. Or, at the very least, five free hours of DirecTV.

3. Pay your taxes quarterly. The bastards charge interest.

4. Set aside a regular percentage of your income -- enough for state and federal -- into a tax fund that you do not touch. Then tack on an extra 15 percent for the self-employment tax. Then have a friend slap you in the face, just in case you are not already hurting enough.

5. Do not wear your pajamas after noon. If regular workers can brave 9 a.m. traffic, then you can change your underwear by lunchtime.

6. Build in rewards. To quote a friend: "Do not get into the habit of drinking beer with lunch. At the same time, you should sometimes drink beer with lunch, because that is one of the reasons you are self-employed in the first place." His advice isn't just about alcohol -- though I did have a ginger-tini with lunch the other day that made me feel everything was right with the world. The point is that you need to build in rewards for yourself -- rewards that take advantage of being your own boss. Go for a walk in the middle of the day. Watch "Oprah." Take an afternoon off and see a movie. At the same time, though, make sure to set limits, so you don't cross the line from self-employed to unemployed. Some activities might be such time sucks that you need to outlaw them completely. "My downfall was television," one former freelancer told me. "How much television could I watch in the afternoon? Eventually, the answer to this question was 'none.'"

7. Exercise. This helps your brain and your body, but more important, it gets you out of the house. I realize that it sounds a little sad to say that you have "spent time with people" when in fact you have attended an aerobics class with strangers, but trust me. Friday morning cardio hip-hop has changed my life.

8. Take a shower. At least every other day.

9. Get health insurance. I know it's a nightmare. I am a Type 1 diabetic, and trying to find health insurance reduced me to tears. ("So are you trying to tell me that even if I were willing to give you a million dollars a month, you would still not let me join your health plan?" I asked one representative. She said yes and hung up.) But if nothing else, you must sign up for catastrophic coverage. Please. This may sound frivolous -- You've never been sick! You'd rather save money for your one vacation a year! -- but it's not. Sara Horowitz, founder of the New York-based Freelancers Union says this is a crucial investment that way too many freelancers don't make. And it's not just about the risk of going bankrupt over a broken leg: When the time comes (or your budget allows) for you to buy into a better plan, you'll need to provide proof of previous coverage (that is, "creditable coverage") to avoid exclusion periods for preexisting conditions. Those exclusion periods can be as long as a year (or in some cases 18 months), which means if you don't have any sort of previous coverage, you could end up screwed.

Granted, none of this is easy. Horowitz says healthcare options for self-employed workers these days are the worst she's ever seen, mostly because there are very few group plans -- that is, ones that can't grill you about your medical history -- for freelancers. Instead, the majority of options available are individual health insurance policies, which are usually much more expensive than group plans, if they agree to cover you at all.

Still, there are resources out there: Freelancers in New York can buy into the Freelancers Union's group plan (they also have partnered with Golden Rule to offer individual plans in 30 other states -- and have options for dental, life and disability insurance as well). If you're in entertainment or an arts-related field, there's the Actors Fund of America -- you might be eligible for its one-on-one health insurance counseling, or its health insurance workshops (in New York and Los Angeles). If you're not in entertainment, try Access to Health Insurance/Resources for Care or Health Insurance Info, both of which list health insurance information and resources for every state.

And if the process of finding health insurance makes you want to bang your head on the floor, please don't. At least not until you find a plan that covers skull injuries.

10. Open an Individual Retirement Account, better known as an IRA. I know that when you're struggling each month to pay your rent, saving for your retirement isn't a top priority. But listen to this: By starting a SEP IRA, I not only put aside money for retirement but also saved $2,000 on this year's taxes.

There are a bunch of different kinds -- which you can read all about next time you need an excuse to procrastinate -- but the important thing to remember is that, while the government normally gets first dibs on your money (taking bites for federal and state taxes, social security, Medicare and Medicaid), most IRAs let you take a first shot at your cash. You don't have to pay any tax on the money you put in these accounts until you take it out. (The exception is the Roth IRA -- you put in post-tax money but then don't have to pay taxes on the account ever again, no matter how much it earns.)

The catch is that you usually can't take out money from your IRA until you're 59 1/2 (there are other restrictions, too, so do your research). But think of it this way: Would you rather have untouchable money that's still yours and that might have earned something by the time you get it back? Or would you rather write a check directly to the IRS?

11. Do not own a coffeemaker. I know this goes against the wisdom of those budgeting articles (the money you save on lattes could pay for your child's college education!). But it's critical for your mental health to leave the house at least once a day and interact with real, live humans -- even if you are only talking about Starbucks. So here's a compromise: Identify the cheapest drink that you enjoy. Then calculate how much it costs -- in my case, $1.50 for iced tea -- compared to a $100 therapy session in which you talk about how lonely and depressed you are. My guess? That iced tea is a bargain.

12. Consider sharing office space with other self-employed people. This is a good option if you don't want to -- or can't -- work from home. Check out the Coworking Wiki, which offers a directory of co-working organizations around the world. Also, if you've managed to find a cafe with the magic combination of good coffee, convenient outlet placement, acceptable music, wireless Internet and a bathroom that is not totally disgusting, do not, under any circumstances, date the barista.

13. Socialize with other people in your field. This will both help you network and keep you sane. Check out the freelancers' Meetup page, or research local professional organizations (writers can turn to MediaBistro.) Leave your apartment. Get dinner. Wear real pants. Enjoy having people around to complain to -- or even better, celebrate with. And in your deepest, darkest moments, remind yourself of what made you want to be self-employed in the first place.

I realize that might be hard to remember right now, given that it's tax day. If so, forget the philosophical contemplation. Grab a friend and get a drink.

By Catherine Price

Catherine Price is an award-winning journalist and author of Vitamania: How Vitamins Revolutionized the Way We Think About Food. Her written and multimedia work has appeared in publications including The Best American Science Writing, The New York Times, Popular Science, O: The Oprah Magazine, the Los Angeles Times, The San Francisco Chronicle, The Washington Post Magazine, Salon, Slate, Men’s Journal, Mother Jones, PARADE, Health Magazine, and Outside. Price lives in Philadelphia.

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