What do I need to know about transitioning to contract work?

February 23, 2016 10:59 AM

I've been working a union job for the last decade. Now I'm thinking about taking the plunge into full-time graphic design contract work, at least for the next six months. Besides figuring out healthcare and tax stuff, what else should I be aware of?

For instance, it just occurred to me that there won't be any such thing as "earned leave". Either I'm earning money, or I'm not.

Also, I know the rule of thumb for freelance is to charge twice as much as you'd ask for a desk job, but is there a similar rubric for contract work? I'll be working from home, if it makes a difference.

I'm informally meeting with somebody tonight to chat about this over drinks; any other specific questions I should ask?

posted by redsparkler to Work & Money (11 answers total)

is there a similar rubric for contract work?

The rule of thumb I use is to presume that 25% of whatever you earn will go straight to taxes. This is an oversimplification of the fact that (in the US) you pay your own social security if you are a contract worker including the amount your employer would have been contributing.

Other important stuff is paying close attention to business expenses because if, for example you made $2000 but it cost $500 to do that, you pay taxes on $1500 (oversimplifying again). See if where you work from home can qualify as a home office. Get ready to charge people for phone calls and emails or figure in all those phone calls and emails into whatever your cost of doing business is.

In short, read a nice book about how taxes work as a freelancer. It's not actually that hard but there are a lot of fiddly complications.
posted by jessamyn at 11:09 AM on February 23, 2016 [1 favorite]

Check your state laws, but, in general you will not have workers comp or unemployment insurance coverage unless you specifically pay into those systems. You'll want to set aside funds to cover these risks.

Unless you are being brought on as an employee, there is no difference between freelance and contract - you are self employed and selling your services to another business. Depending on the terms of the contract, you may need to purchase liability or omissions/errors insurance. You may need to register as a business with your local or state authorities. You may need to register for sales tax purposes, if the jurisdiction you operate in or sell into imposes a sales tax on the goods or services you provide. If you are in one state and your clients are in another, that adds another layer of complexity for tax purposes. You'll need to keep all of your receipts and document any expenses - if you use your car for business you may need to keep a mileage log. If you outsource any work or contract with freelancers yourself, you may need to issue 1099s.
posted by melissasaurus at 11:21 AM on February 23, 2016 [1 favorite]

I suppose it applies to graphic design as well, there is ALWAYS project creep. You'll do more things and spend more time on a project than you estimate in the beginning. This is why I only charge by the hour. It's best for the client and for me.
posted by humboldt32 at 11:45 AM on February 23, 2016

Response by poster: Unless you are being brought on as an employee, there is no difference between freelance and contract-

Oh, goodness. Perhaps there's even more I need to know. Does anyone have a good link to some information about the different types of contract work out there?
posted by redsparkler at 1:29 PM on February 23, 2016

Best answer: What it boils down to is if you're getting a 1099 or a W-2 at the end of the year. Contractors and freelancers typically get 1099s, employees get a W-2. The difference between contract and freelance is that contractors typically work for one company at a time, while freelancers take on multiple clients at once. Obviously there's lot of grey area.

If you've never done self-employed taxes before, I strongly encourage you to use a CPA at least for the first couple years until you get the hang of it. You do have to pay estimated tax quarterly, not just at the end of the year, because your employer is no longer withholding taxes from your paychecks, and the IRS would like to see your tax money sooner rather than later :) Your CPA can help you figure out your estimated tax and give you little slips to mail in along with your check each quarter. Then at the end of the year you go back and adjust your income and expenses, and either owe or get money back depending on how your year went vs your estimates.

I highly recommend ClientsFromHell's Freelancer Series. They have a lot of great resources on their website. Here's a video they made on how to get started as a freelancer. Good luck!!
posted by ananci at 2:16 PM on February 23, 2016 [3 favorites]

Unless you are so good and well known that clients seek you out, you will have to spend time chasing them down and courting them. You may spend a lot of time hand holding clients that don't know what they're doing only to have them go with someone that massively undercuts you. You may have to take work from people you dislike because the alternative is no income. The constant chase for work is something that I do not miss at all from my contracting days.

Also, some places will take forever to get you paid, and even if your contact specifies n days, you'll possibly end up sucking it up when clients that give you a lot of work do it.
posted by Candleman at 3:28 PM on February 23, 2016

Response by poster: I should have mentioned that I've been actively approached by a friend who already works for the company I'd be working with, so my concerns are less about theoretical clients and more about contract work specifics. As such, only the very last part of the Clients from Hell webinar was useful. But it was useful!
posted by redsparkler at 3:43 PM on February 23, 2016

In that case let me also mention that you might want to schedule a quick meeting with that CPA as soon as you get started, or just before, to get guidelines about what you should be keeping track of as far as deductions/business expenses go. There are certain things that do and do not qualify as expenses, and it's helpful to know about them going in. These things include part of your rent or mortgage if you have a home office, how to track your travel, some or all of your phone bill, supplies, meals, etc etc. Each state has slightly different ways they do this, which your CPA should be able to explain to you in detail.
posted by ananci at 4:17 PM on February 23, 2016

In my state, (CT) and my line of work (computer programming), I had to collect sales tax. It wasn't hard, but it was annoying filing monthly reports.

I was never able to treat idle time as vacation. It was always "being unemployed." The psychology is a big factor.

I had projects where I did almost as much job pitching the job, providing proof of feasibility, examples, as the the job eventually required. Some employers are good about that, some will let you spend a lot of effort and say no thanks, perhaps even using the work product theve gotten for free.
posted by SemiSalt at 4:48 PM on February 23, 2016

A few more things to think about: How this might affect your retirement planning. Banking and bookkeeping for your business. Payment options for your clients.

You might find this Nolo DIY book helpful: Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants [Amazon link].

It's been recommended here on AskMe a few times before and covers a decent range of topics. I suggest considering it as an intro reference, and as a springboard for coming up with other questions to ask a local accountant, small business attorney, etc, and of course your clients or potential clients. For example: while the book contains a section on contracts (as well as sample contracts), a good business lawyer with experience in reviewing contracts for your line of work will be able to give you much more personalized advice relevant for your state/locale/situation.
posted by rangefinder 1.4 at 12:47 AM on February 24, 2016

Best answer: Will your contract allow you to take on other work as well? IMO one of the best things about being a freelancer is the opportunity to diversify clients.

As Semisalt says, you'll need to schedule in the time for AQUIRING work, not just working on work.

"For instance, it just occurred to me that there won't be any such thing as "earned leave". Either I'm earning money, or I'm not."

You don't have to look at it this way. You can actually plan for time off by working smarter, not harder. I highly recommend setting up a business plan (don't worry, it's not as in-depth as it sounds). I really like this series of articles from Virgina Smith on writing a personalized business plan.
posted by Brittanie at 2:37 AM on February 24, 2016