Money: 1099 Freelancer vs. W2 Employee

Are you a freelance professional? A consultant? Have a side hustle in addition to your regular 9-5?

How do you manage your money as an independent worker?

Though I have always written articles on the side to supplement my income, I began to really work on my freelance career back in 2009. At the beginning, I developed relationships with a couple of publications and began to regularly contribute stories after my full-time workday.

Around October 2009, I quit my job as a technical writer for a government contractor and dove head-first into the freelance life. And let me tell you, I made a ton of mistakes and learned very quickly that there are big differences between working as a W-2 employee and a 1099 contractor when it comes to money. Today I want to talk to you about some tips I learned along the way for managing your finances if you are an independent worker.

In recent years, the number of Americans working in freelance roles has blossomed. According to Forbes, 57 million people in the U.S. work in the gig economy representing 36% of workers.

Perhaps you fall into this category. This includes people that do temporary work or have a side hustle, have multiple contracted jobs, work as a consultant, or juggle a couple of part-time gigs. Your money situation is going to look very different than a W-2 employee for a few reasons.

HOW GETTING PAID AS A FREELANCER IS DIFFERENT THAN WORKING AS AN EMPLOYEE

When you’re a W-2 employee, you are probably paid by a single company roughly the same amount of money in regular iterations. Maybe you are paid every two weeks or twice a month or once a month. Regardless, you most likely have a predictable idea of what you will receive and when.

Since most people have monthly expenses, you’re able to predict what every month is going to look like in terms of money you are guaranteed to have and what will need to be paid. In addition, if you’re a W-2 employee, your employer takes out your federal and state income taxes, Social Security, and Medicare payments automatically. Depending on where you work, your employer may offer some kind of retirement savings opportunity and possibly health insurance, so you may have those automatic deductions as well. At the end of the year, you receive your W-2 and gather a few other documents such as interest statements on student loans, mortgage interest, etc. and you are pretty much ready to file your taxes.

If you’re a freelancer, tax time can be a lot trickier. If you are like most freelance workers, you may be getting paid from a variety of sources. You may even be getting paid for a variety of different service lines. For example, if you’re a blogger, you may make money doing freelance writing for companies, publications, and websites. You may make money from selling your own online information products or even merchandise. You may get money from doing speeches, selling courses, or offering some kind of coaching program. In terms of income, you may be receiving various amounts of money, for a variety of services, from different sources at completely different times.

In addition, there may be some seasonality to your work where you have some months that are busy and you’re getting lots of money and others that are super quiet and slow. These slow months could cause a cash flow problem if you are not saving money away for them ahead of time. Actually, this is one of the biggest challenges I hear a lot about and have experienced myself. The feast or famine nature of freelancing due to irregular income can lead to serious cash flow problems when it comes to paying bills.

This is why I learned very quickly how important it is for freelance professionals to be incredibly disciplined, super organized, and plan ahead when it comes to finances. When you look at the difference between a traditional employee and an independent worker, a W-2 employee has their taxes withheld automatically. As I mentioned earlier, they may also have some kind of health insurance, 401k program, possible life and/or short term disability insurance, vacation days, sick days, personal days, etc.

Of course, the tradeoff for these cushy benefits is that you must commit to working for this single employer for a significant portion of your week –usually 5 days a week for a minimum of 8 hours a day. And there’s the perpetual risk that you could lose your job at any moment.

When it comes to this type of financial security, the independent worker receives absolutely none of this. What they do get is their freedom to work for whomever they want, in whatever ways they want, for the fee they choose to accept. And even if they lose a client, they can’t be fired in the same way that a W-2 employee can.

YOU GOTTA GET ORGANIZED

Most freelancers who I have talked with have some kind of filing system that includes some type of inbox for incoming paper receipts and invoices. In addition, they usually have some kind of computer filing system where they keep PDFs of online bank statements, credit card statements, and email receipts. Many storefronts like Staples, for example, offer the option to get your receipt printed or emailed to you. You may have things saved in different ways. The important thing is that you have some type of system.

You may already know this – there are certain business expenses that you can deduct for your taxes that are very important to keep track. I suggest checking out this IRS Tax Guide for Small Businesses for Individuals who use a Schedule C or C-EZ and also discussing with your CPA.

Generally speaking, this includes transportation expenses such mileage when you drive your car to and from client meetings. If you fly to see clients, take a taxi, Uber, shuttles, etc. you will want to keep records of those expenses. In addition, keep track of money you spend on research publications, journals, relevant subscriptions, and equipment like laptops, printers, software and postage.

Another area is your home office. This doesn’t necessarily have to be a dedicated room; it could be a corner of a room where you keep our desk and work materials. Make note of the square footage of your home and the square footage of that work area and any expenses related to it. You may be able to deduct a portion of your utilities, your Internet bill, cell phone plan, etc. Provide these numbers to your CPA. For more info on this, check out the IRS publication about the business use of your home.

Even if you decide to go completely paperless, you may still need to designate an interim place to put documents and to save things until you can scan them in. Also consider investing in a shredder so you destroy any papers with sensitive info for you or your clients. Double check with your CPA about the terms of limitations for record keeping; most of what I’ve read says to keep documents for at least seven years. However, if you didn’t file a return during a certain year or had an issue with your filing, you still want to keep those records.

With the hustle and bustle of taking care of clients and meeting deadlines, it can be difficult to make time to work on your business rather than in it. But taking even a couple of hours to dedicate a space for your files and actually organizing them a bit can do wonders for your operations and finances as a freelance professional.

How do you keep your freelance finances organized? Let me know in the comments.

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