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The finances of freelancing

Working from home has become a normal experience for many since 2020, but this has been my typical work life for more than fifteen years.

I have been working entirely from home since 2005, and have been a full-time freelancer since shortly after that. Whether you call me a freelancer, an independent contractor, or a gig-worker: I am a person who works full time, but I have no employer other than myself.

How many people in the US are freelancers? The Bureau of Labor Statistics said in May 2017 that there were 10.6 million independent contractors [BLS]. This 2021 Forbes article cites a survey that claims “20% of current employees—10 million people—are considering doing freelance work.” [More on that survey here.]

Freelancing is clearly going up.

For me, one of the main appeals of freelancing has been working remotely. I make myself available to my clients during normal working hours, but with today’s ubiquitous internet access, I can work from almost anywhere. I can duck out for a phone meeting while visiting family on the coast, keep up on emails on a camping trip, or simply arrange my normal work day any way I like.

I’ve become so accustomed to this work model that I can’t imagine working in an office again. And now that more workers are experiencing the freedom of working remotely, I’m not alone in thinking it is the best way to work. More than half of the workers who participated in a Pew survey about remote working said that “given a choice, they would want to keep working from home even after the pandemic.” [Pew] Since some employers are indicating that they will allow it, this means the flexibility of remote working is no longer mainly for freelancers.

I recently published a blog post listing some of the pros and cons of freelancing. Now, in this post, I will focus on some of those cons.


Employee benefits and freelancer’s costs

Below I’ll describe the following typical employee benefits: Social Security tax, health insurance, paid time off, and unemployment benefits. While these benefits are enjoyed by many US employees, differences in regulations across the US states mean that some employees receive these benefits at varying levels or sometimes not at all.

I will quantify these benefits as best I can using two fictitious freelancers for comparison: one earning $40K/year ($20/hour), and another earning $100K/year ($50/hour).

For all of my calculations I assume that the worker puts in about 2,000 hours per year, which works out to 8 hours per day, 5 days per week, and 50 weeks per year. According to the Clockify website, the average American worker puts in 1,757 hours per year. Some freelancers work fewer hours, and some work more. But 2000 was a nice, round number for my purpose.

There are many variables and tax consequences involved with each of these benefits that I will not get into, so the numbers presented here are merely representative. However my hope is that these best-guess numbers will be useful to demonstrate  some of the financial implications to freelancing.


Social Security tax

The first benefit that employees enjoy is the employer-paid portion of the FICA tax, or social security tax. The IRS applies this 12.4% tax to employees and gig workers alike, but 50% of the employee’s FICA tax is paid by the employer.

The freelancer commonly refers to this as self-employment tax. For our freelancer earning $40K per year, the 6.2% that isn’t covered by an employer comes to an annual total of $2,480, and for the freelancer earning $100K per year, it is $6,200.


Health insurance

One of the biggest benefits that most, but by no means all, employees enjoy is health insurance. [However, note that as the cost of healthcare in the US continues to rise, this employee benefit seems to be decreasing.] As with any employee benefit, it varies among companies and across the US.

This is a benefit in terms of both cost and quality. The employer pays a significant portion of the health insurance premium, resulting in costs to the employee that can be as low as $75-300 per month. In contrast, freelancers buying their own insurance could pay anywhere from $600 to $2,400 or more per month per person to be insured.

The wide range in what freelancers pay for health insurance points to the quality aspect of this benefit. A plan that is comparable to what employees would typically receive could cost around $1800-2,400 per month or more, depending on several factors, including where they live. Because health insurance is so expensive, many freelancers cannot afford health insurance plans of the same quality that many employees have. They very often have poorer coverage with high deductibles.

The health insurance benefit is very difficult to quantify because there are so many widely divergent variables. As of 2020, individuals earning an income over $69K/year were not eligible for subsidies from the Affordable Care Act (ACA), so our freelancer earning $100K/year will have to pay full price.

Because this benefit transcends mere finances, it is difficult to compare the dollars. As discussed in this 2016 FastCompany article, a freelancer typically must bypass insurance altogether or choose an inferior insurance policy with basic coverage and high deductibles because that is all they can afford. This puts these individuals one serious illness or accident away from bankruptcy.

For this discussion, we will assume our freelancers are insuring only themselves and not spouses or dependents. Our freelancer earning $40K per year is eligible for ACA benefits, so they could pay at least $400 per month for health insurance. Our freelancer earning $100K per year could easily pay $800 per month for a very basic plan.

Finally, note that before the ACA came into effect in 2014, many freelancers, especially those with preexisting conditions, couldn’t find a health insurance policy at any price without going to extreme measures.


Paid time off

Another benefit that employees typically enjoy is paid holidays and additional paid time off (PTO) for vacations and sick days. The number of days provided varies widely across employers and across the US states, rarely coming anywhere near approaching the time off given by European employers. Employees in the US generally receive up to 10 PTO days per year [CNBC], with the actual number of days depending on how long they’ve worked for the company, and increasing as the years go by.

Counting only those 10 days, this comes to $1,600 for our freelancer earning $40K per year, and it comes to $4,000  for our freelancer earning $100K per year.

While it is handy to put a dollar amount on this benefit for the purpose of this blog post, this is another benefit that transcends the dollars. A freelancer is paid only for the hours that they work, so when these workers do not feel well or otherwise need to take a break, even if they are very ill, they often must work anyway so they can make ends meet. Most of the freelancers I personally know feel they cannot afford to take time off to unwind. Even for the freelancer who loves their job, this is a very unhealthy situation.

Holidays aside, note that many full-time employees do not receive sick pay [Pew]. Some states and municipalities require it, but there is no federal requirement that employers offer it.


Unemployment benefits

One of the most valuable benefits an employee may enjoy is one that a freelance worker has no access to at all. US employers pay a tax for each of their employees that funds a critical benefit: unemployment payments. An employee who loses their job through no fault of their own can apply for this benefit, which will replace some of their missing income for a limited time. The amount of the benefit and the length of time it will cover differs from state to state and depends in part on the employee’s income.

Unemployment benefits could bring roughly $1-2K per month or more to a jobless employee, providing a critical buffer while they look for a new job. A freelancer who is unexpectedly dismissed by their clients has no such help: to continue receiving income they must quickly find another gig.


Other benefits

Many US employers typically offer only the basics we’ve discussed above. However, some employers offer additional benefits, such as sign-on bonuses, disability and life insurance, matching contributions to a 401k, passes for local transit systems, stock options, free coffee and snacks, and more. Sometimes much more.


Adding it up

So let’s add up the monetary value of the benefits of being an employee, or, to flip it the other way: the cost of lost benefits that a freelancer pays in exchange for having more say in the manner and place of their work.

Looking at just the Social Security tax, health insurance, and PTO benefits, the annual cost comes to 20-22% of the freelancer’s income: just over $8,800 for the freelancer earning $40K per year, and just over $19,800 for the freelancer earning $100K per year. Here are those numbers:

Freelancer earning $40K/Year Freelancer earning $100K/Year
$/Mo $/Yr $/Mo $/Yr
Tax $207 $2,480 $517 $6,200
Insurance $400 $4,800 $800 $9,600
PTO $133 $1,600 $333 $4,000
Total $740/Mo $8,880/Yr $1,650/Mo $19,800/Yr

You can rightly argue that the lack of PTO benefits cannot be counted as a cost to the gig worker. However, I include it to somewhat make up for having to exclude unemployment benefits that are difficult to quantify and the 401(k) and other benefits that are not offered by all employers. Frankly when you consider the lost value of these more premium benefits, the price of being a freelancer is actually significantly higher than is shown here.


So what does this mean?

Since the hourly rate charged by a freelancer is typically higher than what a salaried employee might be paid, some may argue that the freelancer is generally better off. But if you subtract the costs described above, the net income often works out to be more comparable. This can of course vary greatly across industries, roles, and individual freelancers.

It’s likely that many freelancers haven’t stopped to think beyond their enjoyment of their work flexibility to add up what their mode of working actually costs them. I confess that I was a freelancer for many years before it occurred to me to do so.

Some may not realize that they are earning about 21% less than they expected. Heck, if I’d done the math fifteen years ago, perhaps I would have made very different employment choices!

But “choice” is a key word in this discussion.

For some freelancers, like me, it is a choice. I love what I do and I count myself as very fortunate to be able to do it. But some freelancers  are doing this because a job as an employee is not an option. Maybe they live far away from employment opportunities. Maybe their position caring for children or other dependents makes it difficult or impossible for them to work outside of their homes. Maybe they have physical or mental differences that make it difficult or impossible for them to be an employee. Or maybe they are unable to find employment in the field for which they are trained, so they are freelancing “until a real job comes along.”

So now we are down to what made me want to write this post.

There is much debate over who should be categorized as freelancers rather than as employees, and there are many important reasons for this, well beyond the aspects I write about here. The US could reduce the impact of why this difference matters so much by taking two steps:

  1. Detach access to and the cost of health and disability insurance from one’s employment, instead offering guaranteed healthcare and disability assistance to everyone regardless of employment status.
  2. Make unemployment benefits available to all workers, whether they are an employee or a freelancer.

The percentage of freelancing US workers continues to rise, making the issues discussed in this post more prominent every year.


Feature image copyright: ssilver
Icons are from The Noun Project