Although freelancers have been around for ages — the English word originally referred to a “free lance,” or a medieval mercenary willing to fight for the highest bidder — working independently is often considered unstable. It certainly can be, but it also forces one to learn how to navigate uncertainty, recover from setbacks quickly and diversify income — all of which are useful in times of economic turmoil.
As mass layoffs start to make headlines and recession chatter grows louder, traditionally employed folks can learn a lot from freelancers to defend their finances amid anxiety about a downturn.
It is hard to know how many people are full-time freelancers, as there are different sources of data and most of what is available is from before the COVID-19 pandemic. A 2018 US Internal Revenue Service (IRS) report on sole proprietorship returns found that 27.1 million individual tax returns reported income earned from sole proprietorships. A 2019 Gallup and Intuit report estimated that there were 32 million to 44 million self-employed adults in the US.
Illustration: Constance Chou
However, people working at companies can also have second jobs that qualify as self-employment, which makes things even murkier.
What freelancers have in common, no matter the industry, is that even during boom times and tight job markets, they have to plan, budget and pivot when the unexpected arises. Projects are canceled all the time. Clients can take months to make a payment or never pay at all. Depending on the type of work, chaotic seasons could be followed by nary a potential client. Rejection is commonplace.
This kind of volatility becomes more widespread during a downturn, as companies look to reduce overhead and cut costs as much as possible. Taking a few pages from those who work independently might help alleviate some stress.
Perhaps the biggest lesson for employees is that it is good to have multiple streams of income at any given time. Most freelancers work toward managing multiple clients or students. This helps protect them when someone decides to no longer use their services.
There is also the holy grail of creating passive income streams. For instance, selling a digital download or course, or receiving royalties from a book.
If job loss is a major anxiety for you, it would not hurt to begin developing another stream of income. Reflect on your current skill sets — including beyond what is required at your day job — and consider how you could leverage those into paying gigs. Talk to freelancers you know or scroll through sites like Upwork, Fiverr or Etsy to find inspiration from ways other people are freelancing.
It is a bonus if there is minimal or no upfront cost to get started so you can test your ideas without overinvesting. Just make sure to double-check what outside work is allowed with your employer.
Another takeaway from freelancers is learning how to budget on a variable income. If you are worried about losing your job or are newly on the market, it is time to think about slashing costs, taking on gig work and managing your savings. Start with knowing how much you need to earn each month to cover your essentials, and then add in an estimate for what you would pay in taxes and that should give you a monthly minimum income goal. Use this when considering new jobs or when setting freelance rates.
The threat of lost income should encourage you to shore up cash reserves while you are still gainfully employed and minimize nonrefundable purchases (which is hard with everyone wanting to travel right now). You need to avoid or at least minimize accumulating any new debt. If you are trying to buy a home or other large asset, it is probably unwise to go to the highest end of your budget.
One big recession anxiety in the US is losing access to healthcare. Freelancers do not have the luxury of employer-subsidized health insurance, so their insurance tends to be more expensive, although it is not threatened by losing a client or gig.
Traditionally employed people who feel nervous about layoffs should start researching options for health insurance in case of job loss — including how much a new plan offered under the US Consolidated Omnibus Budget Reconciliation Act (COBRA) would cost monthly.
COBRA offers a temporary solution to extend the coverage you had with your former employer, but you would pay the entire premium, including whatever your employer subsidized.
While factors such as family size and type of plan would significantly affect costs, a Kaiser Family Foundation survey last year found that the annual premiums for employer-sponsored family health coverage reached US$22,221. Employees’ payments averaged US$5,969, but if you were suddenly on the hook for the full premium, that could soar from about US$500 a month to nearly US$2,000.
The next thing to think about is taxes. Should you pick up gig work, it is important to set aside money for what you would owe in tax — 30 percent per paycheck is a good rule of thumb, but I personally opt for 40 percent to play it safe. Freelancers have to pay self-employment tax without a company covering payroll tax, as well as make quarterly estimated payments to the IRS. It is also important to think about tax if you receive unemployment insurance payments, since those count as taxable wages and might not have tax deducted when deposited.
Recession anxiety is likely to stay for a while. Instead of panicking, channel it toward creating a secondary income stream, even if it is a modest one. More importantly, save up. A key part of running a successful freelance business is setting aside money during the boom times so you can weather the downturns. If you are able to save a bit more of your current salary each month, now would be a good time to do so.
Erin Lowry is a Bloomberg Opinion columnist covering personal finance. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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