in how to start and run a freelance business … yet
still maintain many of the benefits of employment.
In addition, today there are many staff positions
where employers have cut back on benefits, ranging
from critical needs such as medical insurance and
retirement planning to “merely” important ones
such as disability and equipment insurance.
Office supplies
I remember vividly that my first shock at the realities
of self-employment came from an unexpected source:
The office supply closet disappeared! As an employee,
when I needed anything—a pencil, staples, paper,
printer ink—I would just walk over to the supply
closet. But at the end of my first week in my homebased
office, I remember walking around the house
looking for the supplies, only to realize (to my solitary
embarrassment) there were none. What? I had to buy
my own pencils?!?
Recommendation: If you are still employed, go
out now and establish an individual charge account
at an office supply store where you can begin to
establish your business credit and get professional
supplies at a bulk price.
It’s your money
A credit union is a good place to set up financial services
for your freelance business. You don’t have to
be an employee or in some kind of trade union to
join a credit union; many are “open to the public.”
Credit unions have advantages over banks that freelancers
should consider. Members of a credit union
are the only shareholders … there are no outsiders
to take profits out of the institution. Profits are usually
distributed to credit union members via better
interest rates (e.g., on car and home loans) and lower
service fees. Shop around for a credit union for your
business and personal checking. Later on, you can
look to it for good rates on retirement plans.
The medical imperative
If you are moving to self-employment, check on
your eligibility for COBRA coverage with your
existing employer. COBRA is a federal program
that requires employers to offer exiting employees
the opportunity to continue their medical insurance
coverage when they leave. A key advantage of
COBRA extension is that, for 18 months after separation,
you can continue coverage at the employer’s
cost plus 2 percent.
One of the best arguments for signing up for
COBRA is that continuation of coverage means your
new freelance insurer can’t ask questions about existing
conditions or require you to take a physical prior
to signing you up for the new coverage. Even if you’ll
only be uninsured for a month after leaving your job,
it’s worth the money to continue coverage.
“Often, the costs and terms of COBRA coverage
are much better than if you shop for coverage
yourself—and you cannot be asked any medical questions
which might restrict coverage or make it more
expensive for you,” says John Bernat, HR practice
leader for HRadvantage in Waukegan, Ill. (See the list
of resources at the end of this article.) He advises that
once COBRA coverage is ended, you’ll have four different
options for seeking affordable medical insurance:
• Membership in a professional association may
offer a group plan or insurance policy underwritten
by a major carrier. If your business is eligible, membership
in a chamber of commerce, local or otherwise,
may offer health insurance through the United
Chambers of Commerce. Check out my good friends
at National Association for the Self-Employed.
Also look at Graphic Artists Guild, AIGA, and The
Entertainment Industry Group Insurance Trust
(TEIGIT). Caution: Medical insurance through
associations brings state-by-state legal issues, so check
that the association health provider abides by state
health insurance laws.
• Blue Cross/Blue Shield is mandated to insure
all people without regard to most of the criteria commercial
insurers normally use.
• Certain states (such as Massachusetts and
Vermont) are implementing their own “universal”
legislated health care plans. If your state is one of
them, you could have a chance at some kind of
affordable coverage.
• Ask around about commercial insurers and
HMOs. Try posing the question to your local free-
lance network. When you finally talk to an insurance
agent, look at pre-requirements, family medical
needs, treatment of existing conditions, deductibles
and co-payments, monthly premiums, handling of
medication costs, and wellness care. You can probably
afford your own wellness care, dental, and vision
care if you’re already springing for the medical.
Some considerations: “Major medical” is the
most important coverage. A simple trip to the emergency
room without insurance can result in a bill for
$2,000 to $6,000. Also, look for coverage for prescription
medications. In the U.S., at least, a brand
name drug can cost several hundred dollars vs. $25
with good insurance coverage. Finally, says Bernat,
“If you had medical coverage previously, when you
change medical insurers it’s wise to get a ‘HIPAA
Letter’ from your original insurer. This means that
preexisting medical conditions cannot be restricted or
excluded from your new private coverage.”
Covering for contingencies: Disability insurance
Your freelance income does double duty. It’s providing
for your basic necessities and serving as the
foundation of your financial future. Maybe you are
looking ahead to a nice car, a house, an occasional
vacation, retirement, and your children’s education.
As long as you have the ability to earn the income,
you’ll be able to pay your expenses and build assets.
As freelancers, we are accustomed to working “well”
… until the work is done. No sick pay, no medical
leave, and no one to call in sick to! But if (worst
case scenario) you could not work due to a debilitating
disability, your financial needs would continue.
Disability insurance may provide at least for the
essential income you’d require.
Personal liability/studio equipment insurance
The moment you start your freelance business,
whatever renter’s or homeowner’s insurance you had
on your equipment as a hobbyist is no longer applicable.
You will need a new and separate business
insurance policy for any equipment loss or damage.
This can be packaged with liability insurance
that protects your business and personal assets (if you
are a sole proprietor) against claims of bodily injury
or property damage to others arising out of injury on
your premises. You will want to include Professional
Liability, also called E&O Liability, to provide protection
for how you rendered or failed to render your
professional services. This “business owners” insurance
package can be purchased from any insurance company
or at a group discount through membership in a
professional association that offers it. For all of these
options, shopping on the web is well worthwhile.
“Savings of hundreds of dollars per year can be seen if
you shop on the internet,” Bernat says.
Setting up your own retirement plan
When you freelance, you will be paying taxes on
your income into Social Security and thus creating a
Social Security retirement benefit. It’s rare, though,
that the monthly payments from Social Security are
sufficient for a comfortable lifestyle in retirement.
There are many ways self-employed people
can prepare for retirement. The simplest is putting
money into an Individual Retirement Account, or
IRA. One specific type, the “Roth IRA,” is the choice
for many freelancers. “A Roth IRA may be better
than a conventional IRA because withdrawals from it
are forever tax-free,” Bernat says. If you are under age
50, you can contribute $4,000 each year; if you’re 50
or older, $5,000 per year. The biggest hindrance to a
Roth IRA is, believe it or not, income level. You can
contribute the full $4,000 as long as your income
falls below $95,000 if you’re single, and $150,000 if
you’re married filing a joint tax return.
The idea of saving for retirement may be the last
thing most freelancers think about, but it can really
pay off big. Look at the math: If you start at age 25
and contribute $4,000 each year to a Roth IRA until
you retire (OK, maybe just slow down) at age 65
and can get an average annual return of 8 percent
on your investment, you will have more than $1.1
million saved. Plus, the money is all yours and you
will not have to give the IRS a penny of it if you wait
until retirement age to cash out.
If you started at the same age and invested that
same $4,000 a year in a regular taxable account earning
the same 8 percent return, you would only have
about $802,000 after 40 years … with your earnings
taxed at 15 percent. That’s more than one-fourth less
money than if you had gone with the Roth IRA.
You can start anytime. Roth IRAs can be set up
by your bank or credit union and are widely available
on the web. In fact, the effort to sell these to you is
pretty widespread because fees can be charged for setting
them up. The IRS website is actually very helpful
and will not give you a “sales pitch.”
SIDEBAR
Todd Radom, of Todd
Radom Design (www.
toddradom.com), talks
about his experience
securing benefits as a
freelancer:
“I have worked by
myself and for myself
for 17 years and come
from four generations
of freelancers,
so I knew what the
lifestyle and financial
considerations were
going to be. I knew
there would be discipline
required in my
business and financial
practices that maybe
did not come naturally
… but would be necessary.
I was employed
after college and then
went into my own
business after three
years. Working for
myself and not having
the infrastructure of
the corporate environment
forced me to
look at keeping my
overhead low, getting
the best rates on
everything from office
supplies to travel, and
becoming intelligently
frugal. I knew that
whatever I saved on
expenses came back
into my pocket! The
money I bill my clients
is not my money, and
if you can make this
connection mentally
it will change your
perspective forever.
Sales minus expenses
are your net profits—and that is your
money … before taxes,
of course. My first
real wake-up call was
federal and state estimated
income taxes—
1040ES—calculated
on this net profit.
This
told me that I needed
to put aside what I
could when I could,
because a big chunk
of money coming in is
going right back out
in taxes. So my most
important recommendation
is to start
a savings plan as early
as possible—save,
save, save. Though
there are no guarantees
that come with
freelancing and no
absolute safety net,
you can still have a
savings plan. When I
started my freelance
business in my 20s,
every year I managed
to max out my contribution
to my retirement
plan, and all
these years later I can
look at that money
as my own personal
safety net.”
Recommended resources
www.officedepot.com
www.officemax.com
www.staples.com
www.cobrainsurance.com
www.teigit.com
www.nase.org
www.gag.org
www.aiga.org
www.irs.gov/faqs/faq17-3.html
