How to Become a Freelancer: Pros and Cons

People have been earning money freelancing for hundreds of years. During the Middle Ages, soldiers would offer their combat services and weapons — including their lances — to the highest bidder. They were free to serve whatever kingdom needed them, so each knight with a weapon was literally called a “free lance” for hire.

If you freelance, your clients may not need you to be ready for battle, but you will need to be ready to run a business.

Being a freelancer is, in fact, one of the easiest ways to start a company. If you find clients to contract with you for a skill that you offer, then you’ve basically formed a business. A survey from the nonprofit Freelancers Union found that in the United States, about 53 million people do some sort of freelancing. Less than half of them work full-time for multiple clients, but they’re all entrepreneurs in the eyes of the law.

“The term ‘freelancer’ has no legal meaning, but it is generally understood to be an individual who runs a business providing services,” says Stephen Fishman, an attorney and the author of “Working for Yourself: Law & Taxes for Independent Contractors, Freelancers and Consultants.” “It’s a pretty straightforward type of business to start,” he says.

Here’s how to tell if you’d be a good candidate.

A freelancer business might work for you if:

• You crave more freedom and flexibility than you can get working for a single company. As a freelancer, you set your own hours and can choose which assignments to accept and reject. You also decide where you’ll work and what equipment you’ll use for your jobs.

• You don’t want to rely on a boss for a raise. As a freelancer, you can choose to work more hours to get more business, or market yourself to higher-paying clients to make increased income. You may be able to make more money per hour than an employee in the same position because companies save money when they hire you: They don't have to provide any benefits, including health insurance, and you’re responsible for your own payroll taxes.

• You enjoy working with different people. Chances are you’ll be working with new clients on a regular basis. In fact, one major benefit of being a freelancer and having several clients is that even if you lose one gig, your income won’t drop to zero. A client’s layoffs or firings won’t affect you the same way they’d affect an employee.

• You like working from home. When you’re a freelancer, you choose where your office is located, and many times the cheapest and most practical place is a room in your home.

• You have home office expenses. Freelancers have more freedom than employees to deduct expenses from income, as long as those expenses are ordinary and necessary for business. Examples include cleaning costs for the home office, magazine subscriptions and the cost of creating a website. They could also include trips to restaurants and sports events with clients and potential clients.

A freelancer business might not work if:

• You require a steady paycheck from Day One. Like any business owner, as a freelancer you probably won’t have regular income when you start. You’ll do a lot of marketing, and it might take time to build up a client base. Even when you do get work, you might have to chase down payments from some clients.

• You don’t have a savings cushion or other source of income to rely on while you get your business off the ground — or when business is slow. You should probably keep your day job and save money (enough to cover expenses for a few months) before starting a company.

• You don’t want to spend money on equipment and permits. As a freelancer, you’ll need to pay for business licenses and certifications. You’ll also need to provide your own gear and buy your own insurance.

• You want to avoid self-employment tax. Freelancers who operate as sole proprietors have to pay "self-employment taxes," which are Social Security and Medicare taxes. Ordinarily, the cost of these taxes is split between employer and employee. But a sole proprietor is both the employer and the employee, so you have to pay twice as much in Social Security and Medicare taxes. Of course, as an entrepreneur, you get to decide your business structure: sole proprietorship, partnership or corporation. If you go with another structure, you might not owe as much self-employment tax, but you’d have more paperwork to manage. (And the business would still have to pay its half of the tax.)

• You prefer job security. While there’s less risk of being fired or laid off, as a freelancer your assignment may be among the first to end if a client is trying to cut costs. And as an independent contractor, you’re generally not entitled to worker’s compensation or unemployment benefits.

• You’re really an employee. Your job shouldn’t be confused with that of a company hire. A freelancer is a type of contractor. If your client is providing you with the tools to do your work, telling you when to work and controlling how you work, then you may be an employee, not a freelance contractor. The client could face stiff penalties from the IRS if it’s determined that you’ve been misclassified.

• You’re an entrepreneur, but you don’t really freelance. If you plan to sell products and keep inventory, you probably wouldn’t refer to your company as a freelance business.

How to get started

• Decide the type of business structure you want for your freelancer small business: sole proprietorship, partnership or corporation. You should also decide if you want your business to be an LLC, which could reduce your liability if your company were ever to be sued. “Most freelancers are sole proprietors because that’s the cheapest and easiest way to go,” Fishman says. But you should learn about all the business types before making a decision.

• Contact your secretary of state and city or county clerk to get necessary licenses and permits. Many cities require them, even for home-based businesses.

• Apply for a free Employer Identification Number from the IRS, so you won’t have to give out your Social Security number to the clients you invoice.

• File for a fictitious business name (also called “Doing Business As” or DBA) if you choose not to form an LLC. This can be done with your local municipality.

• Open a business checking account and consider getting a credit card for your freelance business. This will help you keep business and personal finances separate. Make sure you keep good financial records.

• Create a business plan that includes a great marketing strategy, and follow it.