The hidden costs of being a freelancer
In the Philippines alone, there are 1.5 million freelancers. In 2021, approximately a third of the global workforce—equivalent to 1.2 billion people—were employed as a freelancer.
Unlike being employed full-time, being a freelancer means you also have to take care of the business side of employment. So, before you dive in, here are some hidden costs to consider and why you need to include them in your budget.
1. Office supplies
While the kind of office supplies you need depends on your line of work, some essentials include a scanner, desktop computer, high-speed internet connection, printer, work phone, and other physical tools (e.g., paper, pens, calling cards, ink). With office supplies being an annual, regular, and typically consumable expense, they can take a significant but unnoticed part of your budget.
2. Office space
A freelancer can work from home. However, some industries that involve meeting with clients may require a commercial office space. As an independent worker, you will have to research, negotiate, and budget your office property if your business is heavy in client meetings.
You can consider sharing a private office with other freelancers, co-working spaces, or daily office rentals to save on your expenses.
3. Utility expense
A commonly overlooked cost of being a freelancer is utility expense. Along with your office space or work-from-home are higher household costs, water bills, and electricity. The more hours you spend in your office, the more likely it is for your monthly bills to increase.
4. Hardware and electronics
In line with digitization, one of the best investments you can make as a freelancer is in hardware and electronics. It helps you work more efficiently and stay connected with your customers. Fortunately, hardware and electronics can last for several years, and expenses can be deducted from tax.
5. Premium software and subscriptions
Freelancing entails a lot of side work, including accounting, bookkeeping, marketing, and communication. You may need premium software and subscriptions to help you accomplish these tasks, drastically cut administrative time, and strategize your business.
Nevertheless, explore your alternatives before committing to a subscription with a substantial fee. Nowadays, there are free communication and productivity tools available on the internet.
6. Advertising and self-promotion
Your professional website, promotions, advertising campaigns, and social media posts can boost your business. It helps you establish your brand, increase customer reach, and generate clients.
Given the hefty costs of a domain, custom-designed logo, email service providers, social media marketing, and PPC ads, it's crucial to weigh these expenses before pricing your product or service.
7. Health benefits
Unlike regular employees, freelancers have to account for medical appointments, emergencies, tests, and government-mandated benefits. Instead of expensive out-of-pocket payments, you can avail of self-employed health insurance to fund your medical costs.
A notable health insurance provider from the Philippines like BPI AIA can give you a safety net and save you from stress and unexpected bills.
8. Life insurance
As a freelancer, you have to pay for copays, deductibles, monthly coverage, and uncovered plans. For instance, you should consider availing life insurance, which is usually provided to regular employees.
Life insurance, also referred to as a death benefit, will give your family or beneficiary money after you die. It financially protects your family, replaces lost income, pays off debt, and covers funeral expenses.
9. Professional development
Investing in your professional development is crucial because it hones your skills, keeps you updated with industry trends, enables you to widen your network, and expands your services in the long term.
For this reason, large companies allocate a budget for employee training, certification, coursework, conference, or seminar. But as a freelancer, you would have to shoulder these costs.
10. Accounting and legal
Sometimes, you would need to work with intricate and detailed contracts. This brings the need for occasional legal services. Moreover, you may also need to hire a certified public accountant (CPA) to track your records, document expenses, monitor the status of payments, draft invoices, count billable hours, and prepare accounting books.
11. Self-Employment taxes
The current tax rate in the Philippines is 12% of the gross receipt. Similarly, if you are self-employed, you will have to pay up to 35% of tax, depending on your annual income.
Since taxes are not automatically listed in freelancer invoices, you have to set aside your self-employment taxes. You must also know which expenses can be considered write-offs to be included in annual tax returns.
12. Travel and commute
Given the flexible nature of freelancing, some clients would entail you to visit their homes or businesses. Thus, you will incur transportation costs such as insurance, commuting fees, parking, vehicle rentals, fuel, tolls, maintenance, and repairs.
13. Vacation and sick time
Freelancers are not paid for their time off. In contrast to employees who are given sick and vacation leaves, you have to cover and set aside an amount for days you don't or cannot work.
One tip is calculating how much you need for living expenses and using whatever extra you have for vacation pay. You can also render additional hours or save a small amount for each job you complete.
14. Retirement
A retirement plan gives you peace of mind, secures your future, and is more tax efficient. As a freelancer, you are on your own when paying for your retirement. A rule of thumb: set aside 10% of your earnings for retirement; you can either get a "locked" retirement plan or add to your savings every year to make a straight, one-time payment in the future.
8 tips for managing these hidden costs
1. Plan for ups and downs
Freelancing can sometimes be risky, with the chance of not getting jobs or clients for some time. Savings is critical in case of late client payments, no-work situations, or a surplus of accounts receivable. Allocate an amount according to your average annual revenue for slower months.
To determine how much you should save, divide your annual earnings by 12. Make sure that you only use a maximum of your average monthly income per month.
2. Track everything
Track your business and personal spending to ensure that your living expenses are within your capacity and that your business will survive in the next few months.
As a freelancer, you are your own HR, marketing, accounting, and client resource departments. It is crucial to know where every centavo goes so that you can identify hidden costs, maximize income, and minimize expenses.
Read: 5 reasons why you should track your daily expenses (and how)
3. Separate your business and personal money
By separating your personal from your business income, bookkeeping is easier. It also helps in case of a tax audit, confusion with transactions, or verification of business growth. To separate your money, you can open separate accounts for your business and personal use.
4. Make a budget based on your cash flow patterns
Develop the habit of checking your cash flow weekly. This will help you better budget your business's finances and make early adjustments. With an accurate budget, you can also evaluate which expenses you can cut off and which investments or expansions to make if you have extra income.
5. Set aside money for taxes
In identifying your taxes, you should first determine your annual income. A freelancer who earns P250,000 annually is not required to pay tax but must file an income tax return (ITR). Meanwhile, a business or a professional freelancer with an annual income of P250,000 to P3,000,000 must pay 8% of gross income.
While taxes are non-negotiable and enable your business to run legally, you can minimize them through write-offs or costs that you can deduct from your total tax payables. Knowing all possible write-offs (which may even include dinners with a client-friend) can significantly increase your annual tax returns.
6. Demand on-time payments
On-time payments are projects paid on the same month they are completed. As a freelancer, you have control over the rules of payments and can negotiate other aspects of your contracts with clients. Thus, a practical tip is timing your projects and invoices to demand on-time payments.
This entails consistent contact with your customers and adding payment terms to your contract, especially the due date and penalties for late payment. Additionally, it might be helpful to reduce the due date of your invoice from the typical 30 days to ten to 15 days.
Read: 5 reasons why you should track your daily expenses (and how)
7. Price accurately
Calculate your hourly rate accurately by using available tools online. A good computation is dividing your desired annual salary by the number of hours you work in a year. Pricing precisely yet competitively is crucial in setting up a base rate and ensuring that your earnings are enough to cover your business expenses and grow it.
8. Consult with professionals
Accounting, payment of taxes, and negotiating contracts can be overwhelming at times. To have a seamless freelance experience, consult with professionals for financial advice tailored for your specific situation.
You might have to look for CPAs or tax regulating agencies, especially with changes in the financial standing of your business or high demand for your products or services. Similarly, if a contract seems difficult and tricky, a lawyer or paralegal can help you brainstorm terms.
Be your own boss by having a plan
Freelancing indeed has many benefits. You can set your schedule, work from home, choose clients with the same advocacies as you, and be your own boss. However, it is crucial to plan for all the hidden freelancer expenses you may incur.
To ensure that these hidden costs won't eat up the earnings you get from freelancing gigs, remember accounting for both business and personal expenses, preparing for slower seasons, and budgeting are key.
Additionally, getting a safety net in case of emergencies is crucial. Be prepared for life's emergencies. Schedule a virtual appointment with a Bancassurance Sales Executive to learn how you can protect you and your family today.
