Self-employment is great, sure, but am I actually self-employed?
Unfortunately, the answer for a lot of people doing contract work is – no. Truth is, there is a fine line between being an employee of a company (being classified as a W2 worker) and doing work as a contractor for a company (being classified as a 1099 worker). Sadly, employers will often take advantage of what-should-be employees by classifying them as contractors. This allows them to avoid providing these individuals with the benefits they would be entitled to as an employee while depriving them of the luxuries they could expect as a contractor (1099er).
How do I know if I’m being correctly classified?
According to the IRS, there are 3 rules to consider when trying to determine if you are an employee or a contractor. These three rules are:
Behavioral: Basically, this asks who is in control of your work. Does the company tell you what to do and when/where to do it or you do have the freedom to choose?
Financial: This rule asks who is in control of the resources that are necessary to the one doing the work. Are they providing tools or supplies that are necessary for you to get your work done? Is the employer reimbursing you on expenses that are necessary for you to complete the job (i.e. a gas expense)?
Nature of Relationship: How does your employer handle your relationship? Will the relationship between you and the employer continue after you’ve completed the agreed upon tasks? Are the tasks that you are performing key functions of the business? Lastly, is the employer providing benefits such as; a pension plan, vacation pay, or insurance, or not?
It’s important to consider these three rules when determining if you are classified correctly. If it seems as if your employer has full control over how you do your work, but isn’t providing you with the benefits of being an employee, there is a chance you are misclassified. If your employer continues to pass you projects beyond the scope of the initial work you agreed to do, again, there’s a chance that you’re misclassified.
Why does it even matter?
By being misclassified, you’re essentially being sold short to your employer’s gain. Employers deprive you from the autonomy that comes with being self-employed, while not providing the benefits that come with being an employee. It’s best to understand classification to ensure that you aren’t getting the short-end of the stick and can truly enjoy the lifestyle of being self-employed. Keep in mind though, while self-employment comes with a newfound sense of freedom, it also comes with a lot of new responsibilities.
Responsibilities..? Like what?
Well, for instance, when you are an employee you don’t have to think too much about benefits and likely take them for granted because your employer handles them on your behalf (for the most part). Benefits such as; tax withholding, healthcare, retirement, and unemployment are typically all facilitated through a benefits package from your employer. This means, when it’s time to pay taxes, your employer has already withheld tax money from your income to cover your taxes. Or when you’re feeling under the weather, you can confidently see a doctor without worrying about paying completely out-of-pocket. However, when you’re self-employed, it’s 100% your responsibility to ensure that you have these pieces covered. It’s definitely in your best interest to put the appropriate pieces in place to prepare for both the expected (taxes) and the unexpected (health crisis.)
Are there tools that can help?
Sure! There are products being created to make benefits for self-employed folks a little more manageable. Tools such as Stride Health for healthcare and Betterment for retirement planning are super helpful in making sure that you’ve got your benefits covered.
If you’re like the 70% of Americans who struggle with saving money, manually setting cash aside from each paycheck is a real pain. However, so is not having money to cover the costs of the benefits mentioned before, trust us. Painless1099 will automatically set cash aside from each paycheck, ensuring that you’re saving as you earn so that you don’t end up in a pickle.
I think I’m misclassified, what do I do?
If you’re feeling unsure about your classification, it’s always good practice to investigate and receive clarification from your employer. Do some homework, consider the situation and have a conversation with HR (if the company has a HR department) or go directly to the individual who contracted you to do the work.
Once you’re confident that you’re being correctly classified, be sure to equip yourself with proper tools, like Painless1099, to make self-employment feel like a traditional job, at least when it comes to your benefits.
There’s a laundry list of responsibility that comes with self-employment. You have to find work, manage client expectations, and then actually doing the work that you got hired to do becomes almost an afterthought. There are also a number of financial responsibilities that, because we are so used to having an employer handle for us, often times get overlooked. This includes things like finding decent healthcare insurance and setting money aside for retirement. Not to mention making sure that you have enough money set aside in an “Oh, Shit!” fund to cover any unexpected emergencies.
One of the biggest changes in your financial responsibility, is that you’re now solely in charge of keeping up with your own tax withholding and actually remitting payments to the IRS for your income taxes. This includes navigating convoluted IRS worksheets to figure out how much money you need to be saving, actively setting money aside each time you earn 1099 income, and then making sure you get payments to the IRS by their quarterly deadlines. Not only is this a nightmare to stay on top of, but also very time consuming. Some 1099 earners spend up to 35 hours preparing taxes for the year and if you make any miscalculations or happen to make a late payment, you could find yourself owing the IRS a handsome sum of cash at the end of the year.
Sound daunting? We thought so too - and we’re not alone. A recent study found that amongst certain groups of 1099 earners 43% were unaware of how much they would owe in taxes and didn’t set aside any money for taxes on that income; and approximately one-third of those workers did not know whether they were required to file quarterly estimated payments with the IRS. Couple these statistics with the fact that almost 70% of Americans don’t have enough cash to cover a $500 emergency today, it becomes easy to see why so many 1099ers find themselves in dire straits because of mishandling their tax payments.
After spending enough time stuck in this arduous process, not to mention watching a few of our good friends getting blindsided by a big tax bill from the IRS, we decided that there had to be a better way of managing your self-employment tax obligation. That’s why we built Painless1099. By automating the tax withholding process, we eliminate the need to spend hours sifting through antiquated IRS worksheets and the nightmares of getting burnt by a big tax bill. We believe that, as freelancers, our energy is best spent focusing on the things we do best, like building strong client relationships and delivering top quality work.
You shouldn’t have to work for someone else to have access to the protections and benefits necessary to have a financially stable work environment. That’s why we are committed to continue adding products and features that make it easier for you to do the work you love and create a successful career while doing it.
Being a freelancer can be one of the best careers out there. You get to do what you love and get paid while doing it. You’re constantly building, learning, and ultimately creating value for your clients. Rewarding is an understatement.
Of course, with the reward of self-employment comes responsibility. You’re 100% in charge of calculating how much of your income should be setting aside for taxes and remitting that money to the IRS, finding decent healthcare insurance, and setting up some sort of retirement plan - all things that are managed by an employer in a W2 job. And just when you feel like you’re getting the hang of it, life happens. You get blindsided by something unexpected and all you can say is, “Oh, shit!”. This can cause trouble for the even most talented or well paid of us, which is why it’s essential to always have an “Oh, shit!” fund. Of course, referring to shit throughout this entire article is likely frowned upon at best, so for the sake of reader sensibilities, we’ll refer to these savings as your rainy day fund. We all know what we’re talking about here.
You never know when there’s going to be a family emergency, an injury that keeps you from working, a dry spell of not being able to find work, having a client take forever to pay you for work, or...well, you get the picture. If you don’t have money set aside in a rainy day fund, this can really hit you where it hurts. It's important to remember that, when you're self-employed, there’s no recourse through the Department of Labor if a client doesn’t pay and there’s no such thing as drawing on unemployment if you’re suddenly out of work.
Which is why you need to save. Growing up, we used to hear that we should always have enough money in the bank to be able to pay rent for a year if things get turned sideways and you lose your income stream. While this may be a little extreme, being able to cover rent for a few months can be a lifesaver when working as a full-time freelancer. The last thing you want to do is get caught in a position where you are forced to focus more on making ends meet than you are on delivering the quality of work that your clients expect.
Here are 3 steps to creating the perfect rainy day fund..
1. Create a dedicated savings account
The best way to build a buffer of savings is to create a savings account dedicated to your rainy day fund. Even better, consider opening this account at a bank separate from your everyday bank. While it may seem inconvenient to have multiple banks, this is the best way to get your cash out of arm's reach so you won't be as tempted to spend it.
2. Save a percentage every time you get paid
The key to having a balanced financial plan is to know exactly how much to allot for specific expenses or savings. Setting aside a lump sum of cash to your rainy day fund whenever you feel like you’re a little ahead adds unnecessary ambiguity to your financial plan. Not to mention you’ll be a lot less likely to actually set enough money aside to solve a problem should one (heaven forbid) arise. The best way to ensure that you’re saving enough for your rainy day fund is to set aside a small fixed percentage of your income every time you get paid. Furthermore, knowing the exact amount that you need to set aside for your rainy day fund from each paycheck makes managing your finances as a whole a lot more palatable.
3. Automate the savings process
If manually separating money for your rainy day fund sounds a little tedious, consider automating the process. With an automated savings account, you no longer have to decide if you want to save (because, let’s be real, nobody wants to save when we can buy new things instead). The good news, new software makes it easier than ever to automatically pull out a small percentage of cash for your emergency fund every time you get income. If you’re anything like me, having this done out of sight and out of mind is the only way to make sure it’s actually going to happen. Digit is great because the app sees how much you have in your checking account and pulls a small portion out of your account for savings. Painless1099 works slightly differently in that it calculates how much you should be saving for taxes before it hits your account based on your tax status and income and then separates a percentage of your income for various savings like your rainy day fund or taxes. This means money you should be saving is separated before you have a chance to spend it, which is a great way to stay out of trouble.
Working as a freelancer is, in my opinion, one of the most gratifying ways to make a living. You get the opportunity to earn income doing exactly what you want, where you want, and how you want. With this flexibility, it’s important to remember that you’re the only person who's going to make sure that you’re staying on top of things. Treating your freelancing endeavors as an actual company is a great way to make sure things are running smoothly. If you’re financially aware and prepared, you can continue your career for years to come and have more peace of mind as you continue doing great work!
For those active in the startup community, you’re probably familiar with the Techstars accelerator – for those of you who haven’t heard of the program, it’s kind of like getting a first round draft pick into the big leagues for an early stage company. Well…not exactly, but it is one of the most prestigious startup accelerators in the world and it does a great job of helping companies prepare for serious growth. This growth, for a company with a solid product and happy users, is just what we needed to start turning Painless into a national brand (the big leagues). Now that the dust has settled and our team is back in our home office, we wanted to take a second to reflect on our experience in the 2016 Barclays Techstars NYC cohort and share a few of the pieces that made it such a killer program.
The People
Being a part of a world class accelerator means getting to work alongside some of the top talent from across the globe. Having these peers to lean on and learn with became extremely important, especially when the days started to drag on for what seemed like forever. Beyond the companies in our cohort, Techstars and Barclays both did a great job of connecting us with top tier mentors and alumni of the program who could share their own war stories and give us advice based off their personal experiences. While “mentor whiplash” (being given two completely opposite pieces of advice on the same topic by different mentors) is undoubtedly a thing and can be a bit stressful, being able to get opinions and feedback from the folks who’ve worked in some of the most successful companies in our field was beyond helpful. In talking about the long list of amazing people we met this summer, I’d be remiss if I didn’t mention the killer team of associates. From design to strategy, the associate team for our cohort plugged in with the companies to do some truly amazing work over the course of 13 weeks, and even now, post program, these are folks that we still consider part of the team.
The Community
Techstars doesn’t just stop at loading the program with talent, they really focus on making it easy to connect with everyone in the community. By holding weekly founders meetings and what they call “all hands” meetings (meetings where all the teams give a quick update on the progress they have made throughout the week) it was really easy to foster relationships with the other teams in our cohort. There were also a number of happy hours and other events (read: booze cruises) where we could hang out and connect with program alumni and partners. For the late night questions or times we need an opinion from someone who’s outside of our direct network we have Techstars Connect - a highly engaged online network where we’re able to communicate with mentors, investors, or companies in any of the Techstars programs.
The Attitude
Give first. This is more than just a motto in the Techstars community, this is what truly brings everything together. Put simply, “give first” means that as long as your peer is being sincere and realistic with what they’re asking, you help. This ensures that there will be someone there to help you whenever you need an extra hand and it definitely works. The people throughout the Techstars community have been extremely helpful and eager to help us out however they can on various occasions. Having the assurance that there is always someone there to help you when you need it makes the inevitable long nights worth it in the startup world.
As a team, we’re extremely thankful to have been given the opportunity to join the Techstars family. Moreover, we’re extremely thankful for all of the amazing relationships we’ve established with the participants of the Barclays Techstars NYC class of 2016!
Sign The Petition To Pass The Freelance Isn’t Free Act
We recently posted about the steps you can take to minimize late payments and avoid nonpayment from flakey clients. Our friends at the Freelancers Union have been thinking about the same issues and over the past year, they’ve been pushing for new legislation in New York City protecting freelancers and providing recourse if you end up in a bad client situation. The time for a vote is just around the corner and we all have a chance to do our part in making sure the Freelance Isn’t Free Act is passed! For all of our NYC freelancers, this is one of the most important steps you can take to make sure you don’t get stiffed again. Even if you’re not in NYC, this legislation is still super important as it could serve as a model for YOUR city and others across the globe.
We read through the act itself and you can do the same [here]. (It’s totally worth the read if you’re kinda nerdy and like this stuff like we do.) If you’re NOT like us, that probably good and exactly why we pulled a couple points we really dig and wanted to share.
1) Any person or company who hires a freelance working must execute a written contract detailing the scope of work being performed, payment method, and when payment is due.
2) Payment in full will be required within 30 days of the completion of the project or of the payment due date, whichever is later.
3) If there is a breach of the above terms, the bill could be enforced by the Office of Labor Standards or such entity as the mayor may designate - freelancers would no longer be left to fend for themselves!
How can you help?
-Sign this petition to show your support for the Freelance Isn’t Free Act.
-You can read more about the legislation at The New York City Council here or here on the Freelancer’s Union blog.
-Share with your friends, peers, and colleagues so this bill actually gets the support it needs to make all of our lives better.
If You’re Not Deducting These Purchases, You’re Missing Out.
When you go into business for yourself as a freelancer, there's a lot of enthusiasm and creativity involved as you build your brand, start a website, advertise through traditional and nontraditional methods, and begin doing organizational things like building your portfolio, doing customer analysis, and paying taxes.
We’re often so intent on considering such activities to be good investments in our business's future success that we overlook the fact that most purchases we make for business purposes can be written off on our federal income taxes.
This benefit is essentially the federal government showing its appreciation to business owners for contributing to the US economy. And as you've probably found out from paying income taxes on freelancer wages in the past, every penny you can reclaim as a deduction is a big deal.
Below are a few things you might pay for routinely for your business that you can deduct:
1. Vehicle expenses: Any time you go to the store to buy something business related, those miles driven are a business expense and deductible. Likewise, if you're editing a book and drive 90 miles once a week to have editorial meetings with the author, those 90 miles are deductible as well. The other option for vehicle deductions is to use the number of miles driven for business to write off a percentage of your vehicle expenses including the cost of gas and oil, repairs, new tires, parking fees and tolls, the cost of insurance, and interest on your car loan. To get a rough estimate of what you can deduct, divide the number of miles driven for business by the total number of miles driven in a calendar year. For example, if you drove 1,000 miles for business in 2015 of 8,000 miles total, your business percentage would be 12.5%. The short is you can either consider the standard per-mile deduction or you can deduct a portion of the money you spent on gas, tolls, and repairs to get the tax breaks you deserve on your car. There are also some nuances depending on if you lease or own the vehicle, (which is why we always recommend chatting with a CPA,) but those are the basics to start.
2. Health Insurance Premiums: Other than taxes, nothing hurts a freelancer's pocket more than having to pay big money every month for health insurance. Finding decent health insurance plans can be extremely expensive on the individual market. But this colossal budget-biter turns into a sweet-smelling rose come tax time because the money you spend is actually deductible. Does your spouse work in the business with you? If so, you can deduct all their premiums as well.
3. Cell phone bills: Can you hear me now? As long as you can prove that you've kept track of the minutes you spent on business calls versus everything else, you can deduct that percentage of your cell phone bills, just like you would for your vehicle expenses. For instance, if you spent 40% of your minutes on business-related calls, and your yearly cell phone bill came out to $1,800, Uncle Sam allows you to write off 40% or $720. If you're anything like us, this probably has you feeling like you need to hire an accountant to keep track of all these expenses. This would be a wise decision, or you could download the AND CO app and let your new personal assistant do all of your expense tracking for you, available for perusing or review anytime you need it.
4. Your retirement fund: Yet another downer about being a freelancer is your lack of a 401(k) or pension from an employer. Instead, you have to set aside little bits of income as you earn to build that nest egg for your golden years. Like your health insurance, however, there is a silver lining: You can deduct 100% of your contributions to your own retirement fund. As with everything, it's important to make sure you keep records for several years in case of an audit.
5. Food and Drink Expenses: Meeting a potential client at Starbucks to talk about a business arrangement? Pick up the tab - not only will you impress them with your generosity, but you'll also be able to write off 50% of that purchase when it comes time to pay your taxes. Pro tip: Make a quick note on each receipt about what the meeting was for and who it was with. This note will make your life easy as you track expenses or have to justify expenses if the IRS flags your return.
6. Books and eBooks: No, the IRS won't reimburse you for buying a first-edition Harry Potter and the Cursed Child, which by the way, is awesome; but if you're educating yourself with books pertaining to your particular industry; or you're buying books that will help you run your business better, you can write off the cost of them at year's end. This can include any eBooks or other online publications you purpose to help with things like marketing, social network advertising, branding, etc. Just make sure you keep your receipts and/or proof of purchase on file to turn over to your accountant or to have on file in case of an audit.
7. Mortgage/rent costs and utilities: Don't throw yourself a party just yet; you can only write off a percentage of your home or apartment’s biggest bills, not the whole thing. Before being a freelance and running your business from home became a common thing, the IRS's rules on qualifying part of your living space as a home office were tricky and narrow; they've since made them a good more accessible, but there are still caveats on how and when you use your home office. For starters, you can only qualify a room as a home office if you spend more than 50% of your time in that room working. Plopping down in the middle of your living room with your laptop once a month to do some design work while watching the game on Sunday doesn’t count when it comes to your deductible space. Once you've established which room truly is your home office, get out a tape measure to record the square footage of your home office. Now divide that number by the total number of square feet in your residence and the resulting percentage is how much you can deduct from your yearly mortgage payments, electricity costs, etc. For instance, our family's study is my home office and measures 12 feet by 10 feet for a total of 120 square feet. If your house is 1,500 square feet and your office were 120 square feet, you'd be able to claim 8% deductions on your household bills. If your mortgage is $1,000 a month or $12,000 a year, you can deduct $960 of that as a business expense. Not bad!
Of course, this is meant as a guide, not professional financial or tax advice. If you have any questions about your taxes or your deductions, hire an accountant or ask a tax professional.
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about AND.CO:
As a freelancer, accounting & tracking expenses is the last thing you want to do. Through a combination of smart tech and experienced experts, AND CO does the things you hate doing: invoicing, expense tracking, logging and paperwork. AND CO automates your freelance business and allows you to focus on what’s important, your projects.
Landing a new client is one of the most rewarding feelings when you’re self-employed. The only thing you want to do is get to work - after all, the sooner you finish the project, the sooner you get paid. Before you do so though, it’s important to make sure that you and your client are on the same page in terms of how and when you’ll receive payment for your work. It might not seem like a big deal, but non-payment from clients is more common than you may think.
According to a study done by the Freelancers Union, on average freelancers lost 13% of their annual income because of nonpayment from clients in 2014. As our friends at the Freelancers Union like to say: “Freelancing isn’t free.” We fully agree. If you follow the hashtag #freelancingisntfree, you can read some horror stories about people who got stiffed by their clients, which totally sucks and would be wise to avoid. We asked a few of our hardcore freelance friends about how to make sure you get paid and put together this list with their responses!
1. Do your homework. Before you make any agreements with a client, do a quick google search to see what other freelancers have to say about working with the company. If you’re working with a more established client, checking the Better Business Bureau can be a great way to make sure that they don’t have a bad track record.
2. Get some cash up front. This is actually fairly common, especially when working with a new client. Getting 25%-30% can be a great way to establish a trusting relationship, get the client to put some skin in the game (it’s harder to bail on a project if you’ve already paid something to get it done), and set the precedent that you won’t do work if you’re not getting paid.
3. Get it in writing. Having a contract that is clear and concise is crucial to making sure you and your client are on the same page. This also gives you a chance to set the expectation for payment terms and late fees if clients decide to skip a payment or draw out that final bill when the work is done. Bonsai is the perfect tool to help freelancers spin up bulletproof contracts in a matter of minutes and while having a contract doesn’t guarantee payment, clients will feel more obligated to pay when the terms are in writing.
4. Use discounting to your advantage. Incentivize your clients to pay you on a weekly basis by offering discounts. Instead of thinking about penalizing your client for late payment, consider giving them perks (10% off for instance) for paying as soon as a project is done instead of waiting a full 15 or 30 days to send your cash.
5. Set up a payment schedule. Getting paid once a week is great. Period. This gets your client invested in the project and greatly reduces the chances of not getting paid. Not to mention, you’ll find it a lot easier to do quality work when you have a steady influx of income.
6. Use invoicing tools to your advantage. Finding a good invoicing tool can be helpful in couple of ways. For one, having nice clean invoices to send to your clients helps create a sense of professionalism, which can go a long way when it comes making your clients feel good about the work and ultimately collecting payments. This is also an easy way to offer flexible payment methods to your clients. Some of these tools even help you track your hours and aggregate them on the invoice so your client knows exactly what they’re paying you for. Tools like Quickooks Invoicing and Freshbooks makes it easy to get paid via credit card, bank transfer (ACH), and peer-to-peer services like PayPal and Bitcoin through secure transactions. They also make linking your personal Stripe or PayPal account super easy, which makes accessing your money quick and painless.
Staying on top of your billables is crucial when you’re self-employed and it’s important that you have a solid foundation for how you interact with your clients when it comes to receiving payments. It can seem like a convoluted, time consuming process at first, but taking advantage of some of the tools out there can automate the entire process of creating contracts, sending invoices, and receiving payments. All in all, this gives you more time to focus on delivering top quality work that your clients are happy to pay for.
Being a freelancer is hard - plain and simple. Finding work, managing clients, hitting deadlines, finding a space, juggling life on top of everything, The only thing freelancers really want to do is make a living doing the work we love. Unfortunately there are responsibilities that come with that freedom; taxes for instance. Figuring out how much to pay in quarterlies and avoiding penalties is a full-time job to say the least. We know people hate getting blindsided by taxes - trust us, we’ve been there and done that, which is exactly why we built Painless1099. Painless1099 automates the process of planning and saving for taxes which allows our users to get back to what they know and love and worry less about what they don't.
