Many people dream of quitting their full-time job to become their own boss.
Whether it’s freelancing or some form of consulting, lots of cubicle dwellers have thought about how their life would look different if they could make freelancing work.
There are certainly a lot of benefits to freelancing such as having no boss, working for yourself, having a flexible schedule, choosing which clients you want to work with (and not work with), and more.
It’s important to give these daydreams a dose of reality, though. The fact is there are many drawbacks when it comes to freelancing and being self-employed.
1) Inconsistent & Unpredictable Work
One drawback of freelancing and consulting is the inconsistent and unpredictable work load. This will vary depending on what type of work you do and the time constraints that come with it. If you can schedule months out in advance there may be an opportunity to mitigate the unpredictability of freelance work. Other times, though, you need to work when clients need you. This could cause an 80 hour work week one week and a 5 hour work week the next week.
Conversely, one of the benefits of a 9-5 job is that you are virtually guaranteed forty hours of work a week and the pay is consistent. Having predictable work allows you to sleep a little easier at night because you don’t have to worry about where your work will come from – and what you will do if no work comes your way.
2) Taxes are a Pain
As someone who has reported self-employment or freelance income on their tax return, I know first-hand how taxes can be much more painful for a freelancer or consultant.
The issue lies in the fact that as a freelancer you do not have money coming out of your paycheck regularly. The only way to save yourself some pain at tax time is through proactively paying quarterly estimated taxes. I explain how to calculate and pay quarterly estimated taxes in this post. You may be surprised just how much you need to set aside for taxes if you are a freelancer, especially once you factor in that you are paying a higher rate than an employee because your employer is not paying half of your social security income tax.
You might also want to check out my post 4 Ways to be Better Prepared for Taxes Next Year which provides some good tips for preparing for taxes, especially if you have self-employment or freelance income.
3) Benefits aren’t included
If you work for yourself you don’t get the same benefits that a full-time employee receives. There are many benefits to being a full-time employee that some freelancers don’t think about until they’ve already quit their job. These include:
- 401k Match
- Health Insurance
- Dental and Vision Insurance
- Employee Stock Purchase Plans
- Training and Development
This isn’t a comprehensive list by any means, but the point is that when you freelance or consult you are foregoing these benefits. While you may have the freedom to work on your own terms and be your own boss, you have to factor in everything you are giving up before you decide it’s worth the sacrifice to go solo.
4) The Necessity of Charging a High Dollar Amount for your Services
Now that we’ve talked about some of the things that freelancers and consultants sacrifice in order to be their own boss, it’s a little easier to understand the drawback of needing to charge a lot of money for your services.
Not every hour you spend working as a freelancer is for billable hours. From contract negotiations to administrative work, there’s a lot of time that is spent on hours that aren’t directly generating income. There are also expenses that need to be factored into your work: computers, transportation, office supplies, etc. These need to be covered by billable hours.
Two more things that have to be factored into your billable hour pricing: taxes and retirement savings. As I illustrated in my quarterly estimated tax post my freelance rate is essentially 47.35%. Additionally you will want money automatically going into your retirement account each month, especially since you don’t have an employer matching your contributions.
Once you’re aware of all the costs that need to be factored into a billable hour, you’ll want to think long and hard on whether your rate is competitive. This will largely depend on what work you are doing and how much competition there is for said work.
In case it helps, I was once told by a friend who owns a consulting business that it’s hard to run a profitable service business if you’re not charging at least $100/hour.
5) Same Issue as being Employed: Trading Time for Money
Another drawback of freelancing or consulting is the fact that you likely will still be trading your time for money. Most freelancers and consultants perform a service for a set amount per hour. This isn’t really much different than being an employee, which isn’t a bad thing but is an important thing to realize from the get-go.
While being self-employed is similar to owning a small business in some ways, it’s important to distinguish between the two. In a small business the owner is actively trying to leverage the time and resources of others. In freelancing it’s typically a one-person shop that is completing work for businesses and individuals for a set rate.
Freelancing isn’t a bad place to start if your goal is a small business because freelancing has potential to give you a more flexible schedule to work on a side business in addition to your freelance work. Ultimately I think every small business owner should have a goal of creating a system that allows them to completely remove themselves from the day-to-day operations while extracting passive income.
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If I haven’t deterred you yet from pursuing the freelance life yet, you might be the right person for it. It’s important to not sugarcoat freelancing and consulting – there are drawbacks. If you are aware of them and have a plan in place to address them you are a step ahead of most people who are considering taking the plunge.
What are your thoughts on freelancing/consulting versus being a full-time employee? Is there one you prefer over the other?
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David
Most employees don’t realize how much benefits cost that’s a part of their compensation. Mine is an additional 40 percent due to my car and profit sharing. I prefer to be an employee as I would be too scared to go on my own
I honestly do not dream of being my own boss. I like having a secure primary career, and then supplementing that with freelancing – that gives me a solid foundation that I can (more or less) depend upon, and something additional that allows me to earn variable extra income depending upon how much time and effort I want to put into it – and that can vary from month to month. For me, anyway, that’s a perfect combination!
Working as a freelancer is not easy, it’s not a stable job, you might wake up one morning and you’ll get a message from your client that he/she doesn’t want your service anymore. It happened to me earlier this year, luckily I have another client who helped me to cope up with this problem.
The lack of benefits and inconsistency is definitely a huge drawback. I’m just getting into freelancing and the other thing that really strikes me is how long it sometimes takes to get paid. I have earnings from early April that still haven’t been deposited in my account yet.
Those are all disadvantages of being in business for yourself, that’s why many people just stick to the safe route. Swapping dollars for hours at an employer.
But, no one even got rich working as a W2 employee. Taking risks, will equate to future rewards.
Great post DC! I think that people definitely do not put enough emphasis on the value of the benefits you get with your current employer. When I started my own company, I knew I could move onto my hubby’s benefits and that was a huge plus for my decision making. If we had to provide our own benefits, I may have delayed the move longer.
You make some great points here DC. As someone who is full-time employed I have to be honest and admit that sometimes I take some of the perks for granted such as the subsidized health insurance, employer match, etc.
I’m not really a freelancer but do have to deal with self employment income. You certainly have to plan more. When you get a paycheck where everything is all deducted and allocated, you kind of know what you have to spend. With freelancing, as you know, what you see in the bank isn’t really yours yet. That can be a good thing because it kind of kills the desire to impulse spend and really makes me want to put as much as possible in tax deferred accounts to avoid giving it to Uncle Sam!
You’re 100 percent right with all of your points. I hate that I am still trading time for money but my plan is to freelance to pay the bills and then build up other income streams on the side. I’ve been working pretty hard on this over the past month and I’m seeing results already.
The other thing that kind of sucks is the work comes in spurts. For example, Monday through Wednesday I am slammed with writing assignments then Thursday and Friday there’s not much going on. But that can be a good thing too, I guess. It gives me time to work on other things.
Well, I won’t be freelancing right away but the biggest decisions we have to consider in me being a stay at home dad surround benefits. Sometime in the next year we will be switching health insurance as I’ll no longer have that at an employer. We will either stay with our HSA or go on my wife’s plan at her work.
Interesting post! Sometimes I idealize life as a freelancer thinking that there will be more flexibility and free time, but ultimately you’re still trading time for money. For me, I have these golden handcuffs from my employer…great benefits and pension and stable job.
Great post! Even with all of this, I am still glad I made the switch to freelancing. Taxes are definitely a HUGE pain though…
#5 is a great point. As someone who is striving for Financial Independence, I don’t see freelancing as a destination. It is a different path to financial independence, but it is still part of the journey.
That said, if freelancing instead of my day job or in addition to my day job supercharged my earnings for a few years, it could be a MUCH faster path to FI!
I really like the point about trading time for money. You’re either someone else’s employee (in a normal job) or you’re your own employee (in a consulting position). Ideally, you have neither of these and you’re the boss of your company, which does not require your presence. This is the ultimate passive income goal!
I think #1 and #3 would drive me crazy. I can’t stand inconsistency. When I check my Google Adsense account and only see $1, I tend to freak out!
All excellent points, DC. I often see people look at self-employment with rose-tinted glasses. There are great benefits to self-employment and I am glad I took the leap but there are pros and cons to self-employment too. I’m glad you brought up #5 because that’s the one that people sometimes miss. I definitely enjoy more flexibility in my schedule but I definitely work as many hours, if not more, than I did when I was an employee.
Taxes really are a big deterrent. I am lucky that I’m still on my parents medical plan, and I never had a 401k at any of the jobs I’ve worked, so I’m not missing too much right now. That said, the instability is a bit scary and it would be nice to have a source of stable income. I think the flexibility is what draws me to it, and if I could find a job that would let me work from home that would be great.
I love freelancing. Yes, I’m trading time for money, but overall, I’m happier doing it. Taxes are a pain…but I’ve got an accountant to help with that. Overall, I’m pretty happy with my decision to be a freelancer. Also, I’ve started providing small discounts for clients that send me work on a consistent weekly basis. They have to send the work for a month before they get this discount. Now, I’ve got several of these clients which has made freelance income more consistent than it’s ever been!
Charles@gettingarichlife It’s amazing how easy it is to not factor in the extra benefits into your overall take-home pay. I know my benefits are a huge incentive to not leave my employer and definitely makes it hard to ever see myself making enough working for myself to overcome the hurdles of being self-employed.
Clarisse @ Make Money Your Way I’m glad you have another client to help you get through! It’s definitely tough not knowing when your client’s financial situation will change. I only have one client that I freelance for and, while it seems like they should be a solid client long-term, things can change quickly.
brokeandbeau I know some companies actively try to pay clients later and later. It’s hard to imagine it having an impact on a small scale, but if you think about companies that have billions in revenue and expenses you can see how the longer you can delay payment the more flexibility they have in financing. It really is amazing, though, that some don’t pay for 30+ days.
No Nonsense Landlord I don’t agree that no one got rich working as a W2 employee, mainly because I have many in my business who would be considered “rich” by others. With that being said, many self-employed individuals are simply trading their time for money as well. It’s when you build a business that allows you to remove yourself as an owner that you can start building passive income.
BudgetforMore I think until you are either working for yourself or are seriously considering taking the plunge do you think about all the advantages you have as an employee. Granted some employees do not have all the same benefits, but you can reasonably assume that if you continue the employee path that you will have access to a lot of benefits that you otherwise wouldn’t have.
Eyesonthedollar It’s almost comical how small my paycheck is at work relative to my pay. I have money going out for all sorts of things, from 401(k) to HSA, to taxes, to employee stock purchase program. But I really like having my full-time income that way because it’s forcing me to set aside money for retirement, health expenses, and other things.
SingleMomIncome I really dislike the pace of my advertising work with my blog. It has come in spurts, as you described, and it sometimes has been a drastic difference week-to-week.
I will admit that if you are a freelancer you have potential to free up time or manage your schedule in a way that makes it easier to start a scalable small business or to work on creating passive income.
Brian @ Luke1428 There definitely will be a few changes for you and your family. I would be interested in reading some blog posts about how you deal with various changes, such as the health insurance question.
SenseofCents It certainly seems like a good fit for where you are/were at. Once you have your side income (consistently) surpass your full-time income, have your student loans paid off, etc. I think it’s a serious thing to consider.
The New York Budget I would have a lot of trouble ever considering leaving my job for something that has no ability to become a small business that I can build up versus just another job that I am trading hour for hour.
I agree with your second point, which is exactly why I don’t mind hour-for-hour freelancing as side income. Just would be careful about making the switch to having that be my full-time income.
theFinancegirl Absolutely! That’s my goal and that’s the sort of work I would like to pursue. At the same time, if I can be a consultant for $100/hour or more and get consistently 20-40 hours a week, I’d consider going that route simply because it offers me more time/flexibility to pursue a small biz idea that would allow me to remove myself from it eventually.
MyMoneyDesign Haha same here.
ShannonRyan I definitely have fallen into the group that looks at self-employment through rose-tinted glasses, and now that I have a decent full-time job with benefits it has changed my perspective.
JourneytoSaving Flexibility is a big draw for some, and I think eventually it will be for me as well. At this time, though, it would take something pretty big to make me leave my job for self-employment. Nothing I’ve looked at has come close to fitting the criteria.
All great points! It would be hard to go from having all of those employer-sponsored benefits to having none. We still hope to make the leap some day, but we are realizing that it’s going to take a LOT longer than we’d thought because of all of these considerations.
colormefrugal Same here, Dee. I would like to make the move eventually but I don’t really feel like it’s going to be anytime in the foreseeable future. And that’s okay with me.
I’m slowly learning the pain of the taxes. I’ve been putting away 20% of all of my jobs so far, but now I am realizing I should up it to 30%. So hard to see all of that money go!
The biggest issue I see is paying the taxes because you essentially have to pay double cover you’re half and the employer’s half. I think if you can get a consulting position through an agency then maybe that would be a better situation because then the agency would take care of paying all the taxes and your paycheck is yours.
fitisthenewpoor I definitely would say save 30%. After paying in a ton last year I can’t imagine what a full-time freelancer/consultant would owe.
Raquel@Practical Cents Hmmm good idea with the agency. I think I personally would prefer to get 100% of the instead of just taking a paycheck, though. Otherwise I’m more than happy being an employee.
Freelancing is tough! I think so many see it as an easy road to take, and it’s not. You get to be your own boss, but then everything falls on your shoulders- taxes, benefits, finding clients, getting paid, etc. I love to write, so I think I’ll always do some freelancing, but I look forward to finding steady employment again in the near future.
Freelancing is hard but I think it can be really rewarding too. When I was doing a lot of copywriting, I was being paid $30 per hour but found out the company was charging me out at $197 per hour. Ouch.
I think people have an idea that being self employed is ultra-glamorous, when in reality it’s not. I wouldn’t trade it for anything, though.
WealthWayOnline Holy cow, $167 difference between what you were getting paid and what the company was being paid, that’s crazy.
I like how you have a balanced approach to it. It’s clearly not as glamorous as some make it out to be, but it can definitely work if you want it bad enough.
TheWriteBudget I’m happy to do my little freelance stuff on the side, but I don’t foresee becoming self-employed anytime soon. I’d much rather have a consistent full-time job and keep my side stuff my side stuff.
I would say the biggest thing that draws me away from this type of thing would be inconstancy. It can definitely pay off, but for me it’s just to unpredictable to put all my eggs into the freelancing basket. One day I may feel differently though.
PrairieEcoThrifter I agree that one day I may think differently about this, but if that day were to come it would be because I have a business that I would eventually be able to remove myself from. Until that day comes I have much better pay prospects by sticking to my career in finance.
You really have to want to put in the hard yards to set this up I’d say.. Re-heard a quote today that I’ve heard on a few occasions. “I hated every minute of training but I said don’t quit, suffer now and live the rest of your life as a champion”.. This is what being a freelancer and consultant and a lot of things in life is all about :)
Great and very thoughtful post though DC, loving it man
DC I have’t had a complete day off in forever!!! Like Shannon said in the comments, people see freelancing through rose tinted glasses. It’s tough. I’m noticing that the people who like freelancing the most, are the ones married or are seriously involved with someone who has a steady paycheck. I’d breathe a lot easier if that were the case too. When it’s just you and you have to take care of yourself, it’s scary sometimes. I’m making decent money so far this year, but the tradeoff is I get seriously overworked and burned out.
mycareercrusade Thanks for the kind words! While I think being a freelancer or consultant is definitely hard work and may not be fun at time, I think it’s important to really stack up a paid job versus going out on your own. I think in many cases becoming employed is a better option until your freelance/consulting income far outweighs your job’s salary and benefits.
Beachbudget That’s a really good point, and the fact is that even though I’m married my wife is still working on her masters and I have student loans so the uncertainty of freelancing – even if it made the same as being an employee – really isn’t that attractive right now. I definitely think if I had my student loans paid off and my wife was done with her masters I would have a more favorable view of freelancing.
Great points here, DC. The inconsistent pay is the one that bothers me the most, but I’ll take it so I can work around homeschooling and being with the kids.
Laurie TheFrugalFarmer Thanks Laurie. Everyone’s situation is different. As you may know, children and homeschooling have zero impact on my decision-making process when it comes to freelancing versus being an employee. I can definitely see how someone in your situation would find great benefit in being able to home school and be with your kids.
Beachbudget I actually asked about couples and freelancing in a freelancers FB group recently. I was curious b/c my bf is currently “freelance”, but unfortunately grossly underemployed. I am the breadwinner. I am getting the taste of freelance life, but I don’t know what it would be like for us to both be freelance. He benefits off my health insurance and my steady paycheck. I only got a few responses, but most people said that they are with people that are also freelance and that it’s good for the relationship, but can be tough financially. However, most of the people I’ve heard from do have someone supporting the idea, emotionally or financially, of their freelance life.
deardebt Beachbudget I know a couple who both freelance, but I’m pretty sure they have no student loans left and no consumer debt. The husband is very well-established in his freelance projects and has very consistent work (video and video editing work). He also works part-time as a musician at a church which is surprisingly stable work.
My thought is this: It’s very hard to have both spouses freelance. It’s far easier to have one with a stable job. I can’t imagine the stress of having two people freelancing, especially if they are in the same field and the work comes and goes at the same time for both of them.
DC @ Young Adult Money deardebt Beachbudget I freelance and my partner freelances.. it works great. We get a lot of extra time together. I have been freelancing for about 14 months and he’s been doing it for about 5 as he quickly realised for him a “traditional” job wasn’t going to work.
It depends on how in demand your services are, really.
DC @ Young Adult Money mycareercrusade Exactly yes, for me once I start developing a repeatable model, I’d be more than happy to cut back on my working days or work in a part-time basis to focus on the business..
Watch this space :)