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Correct your misconceptions about the ⅓ of the US population who engage in freelance work. Even six-figure earners find they sometimes can make more freelancing, and enjoy themselves more while doing it. Here’s what they say on the issue, and how it might one day benefit you.
In 2016, the number of folks in the US economy who freelanced exceeded 55 million.
That is an astounding number. I’m embarrassed to admit that my suppositions about the scope and experience of the freelancing economy are incredibly outdated. I paid little attention to its opportunities for years; after all, I was some hoity-toity six figure-earning worker bee. Would a side gig work ever be worth my while financially? Were those people excited about their choice or forced into it? The answers to those questions and more are below. If you’re like me, you’ll find the following information – and the opportunities it represent for you – illuminating.
Independent firm Edelman Intelligence surveyed 6,002 adults in August 2016. Of these, 2,043 were freelancers and 3,953 were defined as non-freelancers. Freelancers were defined as “individuals who have engaged in supplemental, temporary, project- or contract-based work within the past 12 months.” Note that that includes folks who are doing part-time or moonlighting work in additional to a primary job. Forbes also interviewed the CEO of Upwork – one of the largest freelancing networks online – for more information. Here are some of the major takeaways:
54% of freelancers who left a full-time job reported that they made more within a year compared to their past full-time job. That’s surprising. Building one’s own book of business is supposed to be incredibly difficult. Sure you get to reap the rewards of flexibility, autonomy, etc., but I had always been told the initial start-up is incredibly difficult. While they say nothing of what went into that first year of building the business, the length of time to exceed their past income – 12 months – is very encouraging.
79% of freelancers said freelancing was better than a full time job. They feel more empowered, respected, and motivated to get to work. I don’t know about you, but as I think about the cube farm of a typical job, I’d be hard-pressed to conclude that 79% of folks were feeling empowered, respected, and motivated to get to work. Maybe 30%. On a Friday? 20%.
63% of freelancers said they were freelancing voluntarily, up from 53% in 2014. I’m embarrassed to admit I had previously believe freelancers were often folks who wanted a full-time gig but couldn’t get it. That’s clearly not the case. What’s more, a 10 point jump in two years is huge. The dynamic is shifting, with freelancers in the driver’s seat rather than victims of “the economy” or circumstance.
The average freelancer works 36 hours a week and feels that is the right amount of work for them, meaning they have no desire to add to their workload. That’s four hours less than the standard 40-hour workweek, but you also subtract out the average commute. At 30 minutes each way, that’s an additional 5 hours a week for a total of a 9 hour shorter workweek than their full-time peers. That’s a whole working day’s worth a week of freedom. And 54% of them are making more than their full time counterparts!
That doesn’t even touch the flexibility you get in choosing your hours. You can stack your work into a four day work week and enjoy three day weekends every week. You can organize your work around volunteering at your child’s school or to take advantage of running your errands during off peak hours just like a retired person.
I do wish there more detail on the freelancing experience by years of experience and by profession. I suspect strategy consultants have a different experience than graphic designers or website developers. But it’s fascinating data nonetheless.
Financial Benefits And Drawbacks
While I don’t freelance for clients (though I did briefly write some freelance articles earlier this year), dealing with the blog’s income has highlighted some interest financial features of a freelancing/self-employed career.
Tax-Advantaged Options: SEP IRAs, Solo-401ks
Depending on the way you set up your business for tax purposes, you can take advantage of different retirement plans. One option is the SEP IRA, which allows you to put up to 25% of your income in a tax-advantaged account. If you’re making $100k, you can put up to $25k in a SEP IRA. That’s almost $10k more than a full-time employee can put in their 401k. It is technically the lesser of 25% of your income or $54k, so if your freelance business is booming and you make over $216k a year, you will probably max out at $54k a year…which is more than 3 times what a full-time employee is allowed to put into their equivalent 401k.
Another even more intriguing option to consider the solo-401k. With a solo-401k, you get to contribute to the account under two different hats. You can contribute the maximum $18,000 a year from your salary as an employee, and you can contribute up to 25% of that employee’s income as the employer, up to a maximum total contribution from both sides of $54,000. For example, if you made $100k as a contractor, you could contribute $18,000 as the employee, and $25,000 as the employer/owner of the business, totaling to $43,000 in tax-deductible retirement contributions for the year.
As you are running your own business, you doubtless have numerous business expenses you must take care of, and most of those can be deducted. You have a home office? Deduction. Internet required to run your business? Deduction. Need a laptop to do your work? Deduct, deduct, deduct. That means the total taxable income you show at the end of year can be significantly lower. You will need to do all of this strictly by the book, but it is one of the most-cited benefits of being in business for yourself.
Note that there are two major drawbacks of freelancing.
The first is that you have to pay self-employment tax on your income. This is composed of roughly a 12.4% social security tax and a 2.9% Medicare tax. As someone’s full-time employee, you typically pay half of this cost, with your employer paying the other half. That means when freelancing that you have to pay an additional 7.25% on your taxable income. There are, however, so many deductions (some mentioned above) that the net taxable income on which you apply this extra tax may be much lower than you think.
The second issue is that if you are pursuing freelancing as a full-time substitute, you are responsible for paying for your own health insurance. Many employers provide this benefit to full-time employees. It’s unclear how much this works out to in dollars and cents. I have a white collar worker friend who is offered a high-deductible health insurance plan through his employer, but the employer offers no subsidy on the premium. The net difference to what he’d be able to obtain on the marketplace is perhaps $100-$150 a month total for his family? For those who qualify for subsidies, perhaps finding something on the federal marketplace and taking advantage of those subsidies would in fact be more financially beneficial than going through their employer’s plan, rendering the potential drawback to being a freelancer moot. In addition, self-employed folks can deduct their health insurance premiums. And that’s in addition to being able to stash money away in a tax-deductible HSA if you have a high-deductible plan.
Considering Freelancing/Side Hustles – Even For High Earners
With all the technology enable freelancing – remote work solutions, marketplaces like Upwork/Uber/Etsy, etc. – it’s a pretty interesting time to consider this option, and this applies to folks all along the earning spectrum. I know a consultant who went freelance as a healthcare expert. His old clients followed him when he left, but all of a sudden he got the whole amount of the check rather than his employer. He’s been a contractor now for over five years. He makes 1.25x more (about $300k a year) as a contractor… and he works about half the number of hours.
$300k to work part-time??
This gentleman uses the extra time to run his own start-up (which also generates six figures) and travel around the world with his fiancee. He loves to stay busy.
Several of my programmer friends have discussed the possibility of freelancing part-time once they want to pull back on their working lives. Software developers are in particular demand, and they can often earn six figure salaries for freelance work while moving to a lower cost of living area and enjoying the arbitrage.
Of course, you don’t have to be making six figures already to step into a six-figure contractor role. Here are three folks from different walks of life who make six-figures a year on Fiverr.
The Golden Start: Part-Time
While I think the idea of switching to full-time freelancing may be a frightening prospect to most folks, I am a huge proponent of considering at least part-time freelancing or some kind of side hustle.
With a part-time side hustle, you are able to put one more frying pan in the fire. Not only will it earn you some extra money to snowball your wealth through compound interest, but it can be a fun change of pace and also potentially organically grow into something that ends up being better than your full-time work. Will everyone achieve the success of the folks I talked about above? Of course not. But it was embarrassing to me that I hadn’t even considered it a possibility. I didn’t have more than one bet on the table at any given time while I was working.
Since I started blogging, I’ve been inundated by object lessons of success.The blogging world is full of folks who started from humble financial beginnings. Melyssa Griffin was teaching English in Japan when she started a site to help her earn some freelancing graphic design work. That small side gig has turned into a behemoth of a blog that now generates millions of dollars each year. Holly and Greg Johnson were in the funeral business when they started a blog to help them earn side income – now she earns more than $200k a year just from freelance writing alone, not counting the blog’s income. Jim Wang was a highly paid consultant at Booz Allen Hamilton when he started his blog, and his side gig quietly earned him 10 years’ of annual expenses before he eventually quit to work on it full-time.
The unifying theme? They all started part-time. They were able to test the waters out, proceed at their own pace, and eventually build incredibly valuable assets that throw off incomes that would make most people blush.
If you have jiu-jitsued your spending into disciplined order and are looking for more ways to get ahead financially, you might give freelancing and the broader side hustle economy a second look. It’s changed a lot in the last ten years, and there are thousands of people out there quietly making a mint on their own schedule, setting their own hours, and choosing their own clients. Practice your full-time trade on your off hours as a contractor, start a blog, or try a new role out like dog sitting for Rover (paid to play with dogs!) or selling your photos on Shutterstock. Not only will it broaden your horizons, but it will put more money in your pocket.
Do you currently freelance? Are you thinking of starting some sort of side gig? Curious how you’re looking at these income-generating opportunities.