How to Work for Yourself: The Financial Advice You Need to Get Started
A quick-start guide to setting up your finances for self-employment and learning how to work for yourself
Source: Karolina Grabowska
If you’re toying with the question of how to work for yourself, you’re likely feeling a mix of excitement, empowerment, and overwhelm. You get to be your own boss and the master of your own destiny! But also you have to be your own boss, which means answering a lot of hard questions—like calculating your rates, finding clients, and setting your own schedule.
You might also find yourself googling a lot. (LLC vs. S Corp. Hourly rate vs. retainer.) And in the process, you’ll no doubt come across a lot of people who promise they can help you find your passion and create a six-figure business, all for the low, low cost of $399 for a two-hour course. Sure, some argue that you have to spend money to make money, but the truth is, it’s pretty easy to set yourself up on the path to entrepreneurship without spending a whole lot. You do need patience and determination, but you’re a mom, so we already know you have those qualities.
So, how do you begin working for yourself? Start with your finances. Here’s your step-by-step guide to setting up your finances and managing your money when you’re ready to be your own boss.
Meet the Expert:
Lindsey Stanberry: Founder of The Purse, a site dedicated to women and personal finance. Formerly the founding editor of Refinery29’s Money Diaries.
Step 1: Get Your Finances Organized for Self Employment
It might seem odd to open a small business credit card and checking account when you don’t feel like an entrepreneur, but organizing your finances is a critical first step in embarking on your new self-employed work journey.
As a freelancer or consultant, your self-employment taxes are going to be very different than they were when you were a full-time employee and the taxes were automatically deducted from your paycheck. Now you’ll need to pay income tax and a self-employment tax, which is a Social Security and Medicare tax for self-employed individuals. You’ll also need to pay estimated taxes quarterly (on April 15, June 15, September 15, and January 15 of the next year).
If all of this sounds a little confusing, try not to stress. While you’re getting your finances organized, you should also spend some time finding a good accountant. (And maybe you already have one, but give them a call and let them know about your new plans.) A good accountant will help you better understand the tax implications of freelancing and what expenses can be written off.
As a freelancer/consultant, you’ll also have more opportunities to write off different expenses when it comes time to pay taxes, which can sometimes reduce your bill. Buying a new laptop, picking up the tab for a networking lunch, attending a conference for continuing education purposes, or setting up an office in the spare room of your home—these may all count as expenses your accountant will write-off come tax time, which can help you save money.
It might seem odd to open a small business credit card and checking account when you don’t feel like an entrepreneur, but organizing your finances is a critical first step…
If you don’t have a good accountant, start asking your friends for recommendations and take the time to interview them before you hire them. If they speak to you with a lot of jargon or they only want to talk to your husband, keep looking! Don’t be afraid to ask questions and push them to explain everything they’re doing in clear terms you understand.
Tracking your earnings and expenses is much easier when you keep them separate from your household finances, hence the reason why you want to have a separate credit card and checking account. You’ll also want to spend some time setting up a document to formally track your income and expenses. You can use something as simple as an Excel spreadsheet or Google sheets, or invest in a product like QuickBooks. It really doesn’t need to be fancy—you just need a system that you find easy to maintain.
CNBC Select (where I was a founding editor) does rigorous research to determine the best small business checking and savings accounts, along with the best small business credit cards. When choosing financial products, you want to make sure to look carefully at the fees, interest rates, and rewards attached. If you’re just starting out, it probably doesn’t make sense to be paying a big annual fee for a flashy small business credit card. But if you do need to buy a new laptop, it might be smart to get a card that offers 0% APR for several months so you have time to pay it off. Similarly, some business banking accounts require you to have a certain amount of money or they charge you a monthly fee. At The Purse, we always recommend you find a free checking account!
Access the full, 9-Step Guide to Working for Yourself, from Mother Untitled x The Purse
Step 2: Determine Your Rate as a Freelancer or Consultant
One of the most difficult things about freelancing/consulting is determining your rate. It can be hard to know how much to charge for your services, and it’s not unusual to feel like you’re undervaluing your work while also worrying a potential client might say no if you present a high retainer fee or hourly rate.
It can be so tempting in the beginning to take on projects for free (or at a discount rate) to build your portfolio or forge connections. There are a few reasons this isn’t always a great idea. One, it can build resentment on your end, when you start working on the project and feel like your client isn’t valuing your work. Two, it sets a bad precedent. And three, no one really appreciates free things—by offering your services for free, or at a big discount, you undervalue your work and even if it’s the best thing you’ve ever created, it doesn’t have the same value as if you were charging for it.
The most important step in determining your rate: Do your research. This is so important! Thankfully, there are a lot of good resources out there, including on The Upside, a community platform for consultants, and Freelancing Female’s Freelance Rate Database. Don’t be afraid to ask other people what they charge—both men and women. This is good data to have, but it’s also OK if you learn their rates and decide it doesn’t quite apply to the work you do.
What Is a Good Hourly Rate When You’re Self Employed?
There are some basic formulas you can use to figure out your hourly rate:
Take your ideal salary (say $150,000) and then divide that by 2,000.
150,000 / 2,000 = $75 per hour
You’ll want to increase that some to take into account that as a freelancer, you’re not getting any benefits (health insurance, retirement plan, vacation or sick days), and you’ll need to pay that pesky self-employment tax. According to the U.S. Department of Labor, benefits can account for another 30% of a person’s overall compensation package. Remember: Companies get a good deal paying you an hourly rate because they don’t have to cover the cost of benefits that would be included in your package if you worked for them full-time.
At The Upside, they recommend increasing your hourly rate by 1.5 to 2x. If that feels like too much, you should at least aim to increase it by 30%. Going back to our earlier equation, you can do one of the following:
75 x 2 = $150 an hour
75 x 1.5 = $112.50 an hour
(75 x 30%) + 75 = $97.50 an hour
How to Charge Clients When You’re Self Employed
Once you determine your rate, you need to decide if you want to offer your services based on an hourly rate, retainer fee, or per-project basis. You will also need to be clear on when and how you’re going to be paid. Do you need to submit an invoice each month? How quickly will the client pay you? Many companies work on a 30-day payment schedule, but you can negotiate 15. It’s crucial not to drop the ball on filing invoices and to stay on top of payment. In some cases, with project-based work, you can ask for payments in installments, with a certain percentage of the payment up front. Here’s a look at the pros and cons of each fee type:
Choosing an Hourly Rate When You’re Self Employed
How it work: Just like it sounds, you charge the client for every hour you work. This shouldn’t just include the actual labor, but any meetings you attend as well.
Pros: When you charge an hourly rate as a freelancer or consultant, you have the flexibility to work as many hours as you like. This allows you to potentially charge more if the scope of the project expands. This may be a good option if you’re working for a client whose needs change seasonally.
Cons: It can be tricky to keep track of your working hours, and there’s always a risk your client will think you’re always available. Choosing an hourly rate also potentially undervalues your expertise if you’re able to complete the project quickly.
Choosing to Work on Retainer
How it works: A retainer fee is a predetermined monthly rate, usually based on a set number of hours you and your client agree upon.
Pros: This option relieves you from the tedious task of tracking every hour of work. It always gives you a better sense of where you stand financially, because you know how much you’ll be paid each month.
Cons: However, the downside of choosing to work on retainer is that if the specs of the project are not clearly defined, you risk scope-creep. This may mean you end up taking on more work than you planned to.
Choosing to Work on a Per-Project Basis
How it works: Choosing a project based fee structure means charging clients for each project you complete. This is a predetermined rate based specifically on a project, and not the number of hours needed to complete the work. However, you can use your hourly rate to calculate your project rate.
Pros: If you’re an efficient worker, a project-based fee can be ideal. Choosing this option for your freelance or consulting work also means you won’t have to worry about tracking each hour you spend on each client.
Cons: If you opt to charge clients by the project, you may risk undervaluing your services. If the project takes longer than anticipated, you may end up losing money.
Step 3: Remember, Your Time Is Valuable
It can be so easy to fall into a people-pleasing trap of wanting to over deliver for new clients to prove your value, or to agree to a project at a lower rate than you think you’re worth. Or even worse, to find yourself answering emails and Slack messages at all hours, allowing the client to take advantage of your perceived flexibility.
Erin Halper, founder of The Upside, recommends you have a short contract and a long scope-of-work document. Make sure you and your client understand the deliverables, the hours when you’re available to answer questions or take calls, and any additional specs that are relevant to the project. Erin also adds that it’s important to agree on what success looks like, so you can ensure everyone is on the same page and will be happy with the outcome.
Don’t be afraid to speak up for yourself if you think the work is expanding beyond the agreed upon terms. And if you’re working on a retainer or with a project-based fee, include what Erin calls an “overflow rate,” in case the project takes longer because of client changes or if you work additional hours beyond the agreed upon amount. She recommends charging 25 percent for this extra time.
Working for yourself comes with a host of benefits, including setting your own hours, choosing clients, and working from anywhere you please. But for anyone figuring out self-employment for the first time, there’s often a steep learning curve. That’s why we partnered with The Purse–a site dedicated to women and personal finance–to create a complete, 9-step guide to working for yourself. This guide is available for free and includes detailed advice on determining your business structure, creating a project scope list, additional resources we rely on, and more.
