About a decade or so ago, freelancing wasn’t considered a “real job.” At best, it was a transition phase between employment. And, at worst, it was a sign that someone was barely getting by. Now, more than 55 million Americans have taken up the freelancing lifestyle, and we are seeing a shift from the 9-5 corporate world to the gig economy. But is freelancing all it is cracked up to be? With more and more employees-turned-freelancers jumping the corporate ship and employers more willing to hire the self-employed, perhaps the freelance economy is a positive change? But is it? Read on to find out the good, bad, and ugly truths about freelancing (plus, learn why you need to conduct a California Secretary of State business search).
Freelancing has its fair share of positives; for one, freelancers tend to have more flexibility than employees. This makes it a potentially ideal job for stay-at-home parents, travelers, and anyone who can’t or does not want to commit to the standard 9-5 job.
Traveling While Freelancing
In some ways, freelancing is about creating a job that fits your lifestyle versus the other way around; take freelancing couple, Simon and Emily, who founded Greenbox Designs, a web development and graphic design company. Originally, Simon and Emily wanted jobs that would allow them to travel the world.
According to Forbes, this led them to freelancing, where Simon honed his skills as a website developer and Emily delved into graphic design. However, both realized they were most successful pairing their skillsets together, which lead to the birth of Greenbox Designs. Now, Simon and Emily have lived in over three countries getting to do what they love: travel—and making an income as they go.
The Possibility to Make More Money
Also, unless compensation pay is involved, employees normally can’t dramatically make more than their pay grade. Of course, within time they may qualify for a pay raise or a promotion. But that usually doesn’t come until years on the job.
With self-employment, freelancers don’t have a ceiling, having the potential to make as much as they want. According to TIME, freelancers in the U.S. make 17% more than the standard full-time employee—(which shatters the struggling, between-jobs stereotype). Perhaps this may be why more people are turning to the gig economy?
Companies Benefit from Hiring Freelance Talent
The largest pro for companies hiring freelancing is, unsurprisingly, money. Because freelancers are not employees, companies save hundreds to thousands in healthcare and benefits costs. Just how much?
According to CNBC, large companies shell out roughly $14,000 per year on healthcare (includes premiums and out-of-pocket costs) for each employee. Doing the math, this would mean about a whopping $70,000 on just 5 employees.
And then when you have 10, 15, or hundreds to thousands of full-time employees, we are talking figures in the hundreds of thousands—and, depending on some companies, potentially even in the millions.
The Possibility of Passive Income
Then factor in the chance for freelancers to make passive income, which, as its name suggests, is income earned without doing much work. Forbes states that either of these two components happen in order for freelancers to have passive income: one, through hard work and experience, freelancers develop skills so they can charge more, which pays for time worked and time not worked. And two, freelancers create a product and sell it via an e-commerce site; since the process is automated, freelancers can reap profit without putting in the labor.
The freelance world is not all flexibility and passive income. Because freelancers are self-employed, they carry the brunt of the work—and the stress. Although freelancers make more than the typical employee, their paychecks do not consistently come in bi-weekly or monthly, Instead, cash flow and consistent clients are problems freelancers must face—two of which are probably not even on an employee’s radar.
Securing Personal Loans and a Mortgage
And then, because of such inconsistencies, many freelancers often don’t qualify for a traditional mortgage, paying more interest for a home loan (if accepted) than those with W-2s. Freelancers may also have to shell out more for personal loans and car loans or face rejection after rejection from lenders.
Yes, this may be a result of poor financial management, but it very well could be—and in several cases is—the lender’s belief that freelancers have unstable employment. What freelancers can do, as the Chicago Tribune states, is pay attention to your write-offs. While write-offs may help with Uncle Sam, it lowers your net income, which plays into whether mortgage lenders will accept or reject your loan application.
Paying for Healthcare
Freelancers also have to pay for their own healthcare. With the average cost of a single-member healthcare plan being around $4,000 a year in 2016 (and healthcare costs on the rise), medical expenses easily start to become expensive.
Of course, a healthcare plan for someone young with no pre-existing conditions is going to be exceptionally lower than a person in their late 50s to 60s who suffers from diabetes and heart problems. However, pre-existing conditions or not, freelancers still have to fully cover the medical bills. And, what about health insurance for the entire family? Like with an individual plan, freelancers don’t have the financial backing of a company. The average family plan in 2016 was around $10,000 a year, however, trends show that this number is bound to increase.
What About Retirement?
As with healthcare, freelancers also have to stay on top of retirement planning, not having a company to match their 401(k)—or, for the lucky few, a pension. Freelancers have their share of traditional Roth IRAs, solo 401(k), SEP IRA, Simple IRA, among others. Certified accountant, Ed Slot expressed to the Wall Street Journal that a Roth IRA is a good gateway into retirement for freelancers. Roth IRAs are capped at $5,500 per year (however, those 50 and older can contribute $1,000 more). With the rate of return averaging around 6%-8%, you can get a significant amount of money back if you meet the $5,500-limit annually for 25 plus years. In fact, according to CNN Money, with a 6% annual return, Roth contributors could reach the 1 million-dollar mark in 42 years.
The freelance economy is on the up and up, with more freelancers taking the plunge. But that could also mean a surge in depression. According to Fast Company, surveys show that only 14% of the self-employed stated they were “thriving”—which is less than the unemployed (22%).
Fast Company goes on to report that a Danish study revealed one component of workaholism—not being able to separate work from your personal life—affected wellbeing; this may be a bigger problem for freelancers who work from home, having a harder time putting the phone down and shutting off the laptop.
Risk of Exploitation
While companies can save big by hiring freelancers, some companies can (and do) exploit freelance talent, paying them in exposure and experience than in hard-earned cash. While exposure is a plus, repeatedly not getting a pay check hurts freelancers’ pockets, let alone breeds resentment.
But There Is Good News
According to Forbes, as of 2016, New York City passed the Freelance Isn’t Free Act, a law that gives New York City freelancers the right to full payment within a reasonable amount of time, the right for a written contract, and protection against retaliation.
This laws helps curb exploitation and provides more regulation to the freelance industry, which still is lacking. Hopefully, because of this, other cities and states will follow suit, especially given that more people are taking the freelance path.
For some, freelancing is a blessing that outweighs its cons; in general, people who don’t like the confines of a 9-5 job and can manage multiple projects at once may excel at the freelancing life. For others, the consistent paycheck and work-life balance will pull them towards the full-time employee side. (However, part-time freelancing may be an option?)
As for the freelance economy as a whole, predictions show that it will only continue to grow, with as much as 43% of the workforce being freelancers in 2020. Still, that does not mean companies will lay off their employees and suddenly turn to freelance work. Our guess is companies will use part-time and full-time employees and also dole out some projects to freelancers.
The truth is, because of company loyalty and familiarity with the company’s mission and goals, some projects and assignments are best done in-house versus outsourced. That’s not to say there is not a place for freelancers; as the figures show, quite the opposite. What are your thoughts about the freelance economy? Are you a freelancer or full-time employee? What are the pros and cons of your job? Let us know by commenting in the comments section below.
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