The Finances of Freelancing

I quit my job recently to become a freelance web developer after picking up my very first contract.

I did what most people do and gave them a low rate because I just wanted a contract.  It was fine for awhile.  I got up and went to bed whenever I pleased.  I went to the gym or walked the dog in the middle of the day.  I had so much free time.  Then, I started to realize that the paychecks weren’t as good.  I was no longer contributing to my 401k or investments for fear of not having enough money.  Choosing such a low rate was my serious downfall and I had to get out of it.

Today, I’m happy to report that I have gotten out of it!  I accepted a contract at a new company for 150% of my low-balled rate and it feels good.  In fact, I had to get rid of two other contracts so that I can devote as much time as possible to the new company and rate.

Working remotely is definitely a new experience for me.  There’s a lot of work that goes into marketing yourself and seemingly always being on the lookout for new opportunities.  More work than I would have assumed.  But, I don’t think I’d do it any other way.  Since I can take a break from all that (until taxes are due!), I can take a step back and reflect on what this new type of work means for my retirement and how I’m going to proceed with saving money.

I want to hire a CPA

With so much going on and things getting more and more complicated, I think I might want to head over to my local CPA and see what he has to say about my situation.  There’s the rental house, the individual 401k, quarterly taxes, year-end taxes and all of the deductions that are on the table.  I could probably TurboTax my way out of it, but I think having a CPA (whose fees are tax deductible!) might save me more money in the long-run.  It would also give me somebody to talk to, that knows my situation, if I ever had a really hard question that Google couldn’t answer.

I need to setup an individual 401k

I chose this over a SEP IRA, since I figured since I’ll be making over 6 figures and saving very aggressively, I’ll want to take advantage of the higher annual contribution limit.  There’s a bit more paperwork involved, but that’s ok.  I chose Vanguard (obviously) to manage my account and, for now, put everything into VTSAX.

I need dental insurance

Or, do I?  From what I’ve seen, the dental plans are kind of a rip-off.  I only get a cleaning every 6 months and I can do very good preventative maintenance myself.  Also, I found a nice place that will give 20% off to veterans and a flat $50 exam + cleaning.

With the money saved from not paying insurance, I’ll probably come out ahead.  For instance, if I need two exams and a cleanings every year, that’s $100/yr.  Premiums for the cheapest insurance would be about $15/mo, or $180/yr.  Saving $80/year.

I suppose I would “make my money back” if I had a lot of dental work and had insurance, but, the plans only seem to cover up to $1000/year anyway.  Also, the cheapest option would only cover half of the cost, when I had to pay out of pocket.

I think I’d rather just use the 20% veteran’s discount at that point, that has no limit.

To “Sole Proprietor” or LLC?

It seems that they are pretty much the same I’m leaning towards ‘sole proprietor’ simply because I don’t foresee very many lawsuits in my line of work.  It just seems easier and simpler to go this route and if I can avoid any kind of headache, I would like to.  I couldn’t see any scenario where my client would sue me, rather than just terminate my contract…but, then again, do we ever see lawsuits coming?

For now, I think I’m safe enough to stay as a sole proprietor.

I have to keep track of all of my expenses and time

I decided to use Freshbooks for this, since it’s very easy to use and it’s currently free for me (under 3 active clients).  If I had to pay a monthly fee, I’d probably just use Pancake which has a one-time cost.

Whoa, I should churn a few business credit cards

I started out with the Chase Ink Cash card, which will give me $300 if I spent $3000 in the first 3 months.  I’ll likely keep this card since it has no annual fee.

Also, I can link this card to Freshbooks and automatically import purchases made for the business (likely none, but just in case I need some cables or new mouse batteries or something).  Then, when it comes time for taxes, all of my purchases and income are listed right in the cloud.

Anything else, I’ll learn along the way

Like most things, I’m sure with the rest, you just have to learn by doing and seeing what works out best for your specific situation.  By no means should you take this as “advice,” just mere financial voyeurism!

Thoughts on how I can make this a more seamless transition?

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