The Darkside of Self-Employment: 7 Expenses Freelancers Pay Out of Pocket

darkside of being a freelancer

September is Life Insurance Awareness month, and is educating readers on how life insurance can protect your family and your finances. This post is part of the blog tour, which helps spread awareness of the importance of providing financial security for your family. 

There are tons of misconceptions about being a freelancer: you can wake up whenever you want, never have to shower or get dressed, and can watch TV or Netflix all day.

While these things are true to some extent (you can wear yoga pants all day!), the downside to having all this freedom is that if you want to get paid, you have to do the work. The more you work, the more money you can make.

Last December, one of the freelancers that I coach, quit her job and just had her first $10,000 month in July from freelancing. Subsequently, July was also the first month that I grossed over $8,500 and I’m well on my way to hitting $10k in one month by the end of this year.

The Downside to Earning $10,000 a Month

Ten thousand dollars in one month sounds outrageously awesome! I mean, I only brought in $3,000 at my full-time accounting job, so I’m now earning more than 3 times what I used to make. Why wouldn’t you want to be a freelancer with numbers like this?

Well, for every upside there’s also a downside. You don’t get to keep all the money you earn when you’re self-employed. In fact, there are a lot more expenses you have to pay out of pocket that regular employees don’t have to think about.

1. Self-Employment Taxes

Taxes will likely be your biggest expense as you grow your freelance business. On average you’ll have to set aside between 20-30% of your income in a separate tax savings account to pay self-employment taxes each quarter.

When you’re grossing $10,000 a month you’re looking at a $2,000-3,000 tax bill each month, which means only $7,000 makes into your bank account. OUCH!

The upside to being an employee is that you don’t have to pay the full payroll tax burden on your own, as the employer pays half and you pay half. You don’t have this luxury when you’re the boss.

2. Invoicing Fees

Lots of freelance businesses are location independent — meaning you can work from anywhere as long as you have an internet connection. Whether you’re running an ecommerce shop that sells products, or selling services and working with clients virtually, a lot of transactions happen online. Which makes it nice for traveling, moving, or living across the world.

The same can be said when it comes to tracking time, billing, invoicing, and receiving payments. Getting paid online makes it easier to get paid quickly, keep clean records, and avoid checks getting lost in the mail. But this convenience comes with a price in the form of payment processing and invoicing fees.

Last year I claimed $418.44 in PayPal and credit card processing fees on my Schedule C (even with the FreshBooks PayPal invoice hack). This year, I’m looking at $667.75 and there are still several months left in 2015. I wouldn’t doubt that my year-end I’ll have paid out over $1,000 in invoicing fees — just to get paid money for work I completed.

How crazy is that?! All part of the cost of doing business, sadly. Hey! At least it’s a tax deductible expense.

3. Life Insurance

As the breadwinner for my small family, it’s important that I have all our bases covered. When I worked for my employer they paid for a small $50,000 life insurance policy as part of the employee benefits package. I didn’t have to pay anything out of pocket for the coverage.

But now that I’m responsible for putting food on the table and keeping my business going, there’s a lot more at stake if something happens to me.

If you’re not sure whether or not you need life insurance as a freelancer, just ask this question: “Will my family be taken care of financially if I pass away?”. If the answer is no and your freelance income is too valuable, you need life insurance coverage. It doesn’t have to be a lot of coverage, and there are different types you can purchase — some for only a few dollars a month.

Don’t wait until it’s too late. You don’t want your family dealing with a personal and business emergency at the same time. The best part about life insurance is that they likely won’t have to pay taxes on the benefits. So give them the peace of mind they need and make sure they’re taken care of financially.

4. Health Insurance

Health insurance is likely your second biggest monthly expense, behind self-employment taxes. With the Affordable Care Act (ACA) now firmly in place you’re forced to purchase health insurance even if you’ve never had to before.

Thankfully, there are things you can apply for to make the coverage more budget-friendly. Still, health insurance is not something you can ignore. Not only is it dangerous to go without coverage in the event you become sick and can’t work, you’ll be slapped with a pretty hefty fine on your tax return at the end of the year.

Even if you missed the enrollment deadline, there are loopholes available and affordable health insurance options when you’re self-employed.

5. Business Overhead

My entire business is on my laptop, which makes my overhead a lot cheaper than a traditional business with a storefront or office space. However, there are some unavoidable expenses that have to be paid to keep the business up-and-running.

I have to pay for a domain name and hosting service for my blog, accounting software for billing clients, business travel expenses, monthly subscriptions for newsletters, document file storage, and tons of other little things.

On top of the business expenses, I’m also responsible to pay all the household bills as well as find money to fund savings accounts for financial goals. Being the business owner means you have to pay the business and personal bills.

6. Freelance Contractors

As much as you might like to do everything yourself, it’s physically impossible. There just aren’t enough hours in the day, or endless energy, for you to be able to learn and accomplish everything you need.

When you need your website redone, you have to hire a web designer and developer who knows what they’re doing. You don’t have time to learn to design and code. If you’re ready to take your business copy to the next level, you hire an assistant editor or copywriter, who can be a second pair of eyes.

When you set out to be self-employed, I bet you wanted more time to spend with your family, or to travel. Well you can’t do that and grow a successful business by yourself. Even in emergency situations it’s important to have a backup freelancer on call who can help pick up the slack.

7. Retirement Accounts

Lastly on your expense list (but no less important) is finding the money for financial goals and saving for retirement. Much like taxes, life insurance, and health coverage, you no longer have the benefit of having an employer pay for part of your retirement contributions.

This is one area you don’t have to spend a lot of money to gain a decent benefit. Think of it as investing in yourself and your future, so any money you can save is a good thing. I started out with just $25 a month in my Roth IRA account with Betterment, and have since been able to contribute $100 a month.

Every individual, whether you’re a business owner or not, should have a Roth IRA. It’s seriously one of those “too good to be true” kind of things (I expect the government to catch on soon and terminate it). If you have an LLC or other kind of business, there are other retirement plans that will get you tax breaks, and help you build wealth for the future.

The Downside of Freelancing

Don’t let this post come off as me saying that being a freelancer is a negative thing, or that I’m not thankful that I’m on track to make $10,000 a month. Not everything about being self-employed is bad.

It’s actually very awesome! And I love the fact that I’m my own boss, but don’t be fooled or caught off guard by the darkside of being self-employed.

Know the pros-and-cons before you decide to quit your job, change careers, and go all in with your freelance business. These are just a few of the added expenses I wish I knew I’d have to pay before I started my own business.

What expenses are you paying for as a freelancer that you didn’t have to worry about as an employee? Which ones were most surprising?

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  1. Gretchen says:

    I feel your pain, girl! I don’t make nearly as much as you do, but that tax bill still hurts! Paypal fees are secondary to the tax bill, and they’re costing me a fortune!

  2. Ramona says:

    We are both working on our small home business and taxes are indeed ‘unpleasant’. But we’re still earning enough to a have nice life, spend enough time with our child and also have some plans for the future. So, being self-employed is still worth it 😉

    • Carrie says:

      Good point, Ramona! There are so many great things about being self-employed and having control over your own time is definitely one of them! I love that I can take time off during the day to go grocery shopping with my husband, or have dinner together each night. It makes any additional expense worth it (even if they’re still painful)!

  3. Gina Horkey says:

    100% agree. My gross salary (also self-employed) was around $6k. Even though I’ve hit that $10k mark, it doesn’t seem like I’m making more money…because it’s not predictable, it sometimes feels like I’m making less! At least we both have the tremendous upside of unlimited income potential though!!

  4. Alicia Rades says:

    Another great post, Carrie!

    The self-employment tax hasn’t caught up to me yet because I’m still a student and get a good deduction for it, so it tends to even out a bit. I’m also lucky enough to have a working husband and get health insurance through his employer.

    Retirement is one thing that’s been on my mind lately. Admittedly, I’m only 21 and most people my age aren’t even thinking about that, but I want to be prepared, especially because I won’t ever have a retirement account through an employer.

  5. Catt says:

    Hi Carrie,

    I was under the impression that self-employment tax was something like 15.3%, not 30%?

    Thanks for this post – I totally agree, people think it’s just dreamy when it’s like you really have to be a self-doer!


    • Carrie says:

      It always depends on your personal tax bracket (mine is 12.4%) plus one-half self-employment tax (7.7%) plus any local or state taxes (mine are 4.75%) which puts me in the 25% estimated tax range (24.85% to be exact). And it never hurts to save a bit more just in case. You don’t want to be in debt to the IRS!

      This is why I suggest that freelancers set aside at least 20% for taxes and even as much as 30% depending on their situation and where they live. Hope that helps, Catt!

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