Don’t be desperate enough to accept anything.

You might be tempted to accept a lower rate if you’re short on work and you need money quickly. Knowing that type of situation makes you vulnerable, try to avoid reaching the point of financial desperation. Market your writing services even when you don’t need to and money set aside during your good months to fill in future income gaps. Slumps are often a good time to work on your own projects.

Don’t let clients bully you into a lower rate.

Clients may try to negotiate lower rates by quoting a price from another freelance writer. “Don’t you think $450 is a little steep? I have an offer from someone who’d accept $45 for this project.” I always find it amusing when these clients try to haggle instead of just taking the lower rate offer. There must be a reason they haven’t hired the other writer – perhaps because they realize the end-product may lack quality?

Try to work within the client’s budget.

If you’re truly interested in a project, leave room for negotiations. Clients may walk away when they receive a quote outside their budget if they don’t realize you’re willing to work with them. Let the client know that you can better accommodate their budget if you know what they’re willing to spend. For example, the client may want 20 articles but only has $500 to spend. Instead of lowering your rate, you could offer the client 10 articles for $500, for example, if your rate is $50 per article.

Make sure your rates make sense.

When your rates make sense to you, you’ll have an easier time explaining them to potential clients. Experience, education, credentials, and attention to detail are all reasons why you charge what you do. Helping your client understand this may encourage them to hire you for your rate. If clients aren’t willing to pay your rates, it’s a sign that you’ve either priced too high or targeting the wrong customers.

Know when to walk away.

Sometimes I have a hard time turning down projects; I guess it’s the Samaritan in me. But, it’s ok to turn down a project especially if it’s going to cost you, but don’t do it prematurely. Make sure you’ve taken time to understand what the client is looking for and confirmed you can’t work within their budget. It doesn’t hurt to follow up in a few weeks to be sure the client’s needs have been met. There’s a chance they went the cheaper route, were unsatisfied, and are now willing to pay your rate.

How do you handle clients who want you to change your rates?

Living Expenses/Taxes/Savings Ratio

This “live on the rest” budgeting system isn’t something I made up. I’ve read about it over and over in personal finance books, so I can’t take credit or give it to anyone else for that matter.

The gist is that you live on 70% (or some other percentage) of your income. The other 30% goes toward taxes and savings. When you get paid – or when you pay yourself – immediately set aside 20% for taxes and 10% for savings. And then, you live on the remaining 70%. If your monthly income is $4,000, you would set aside $800 for taxes, $400 for savings and you live on the remaining $2,800 left for your living expenses. It makes a big difference in how you budget, physically and mentally.

I mention the mental budget because we often make plans for our money long before we ever receive the money and even before we commit to a paper budget. If you’ve planned your spending based on one amount and what you’re actually able to spend is a much lower amount, adjusting is going to be painful. But, when you have more realistic expectations of your income, the budgeting process is much easier.

Tweak the System

For me, the system works best when I pay myself a set amount each month. That way, I can work with a lump-sum amount. But, you may have to work up to that point if you pay current month’s expenses with the current month’s income. You also budget this way on a payment-by-payment basis. Just split up your payment, 20% in an account with taxes 10% to savings and 70% in your primary checking account. If you’re faithful about splitting up your payments, you won’t have to play catch-up later on.

These numbers are generic and can certainly be adjusted, especially if you’re in a higher tax bracket. You can use an average tax rate calculator to calculate your Federal tax rate, then add 15.3% to compensate for self-employment taxes, and don’t forget to consider your state taxes. If you’re trying to pay off debt, you might use a 65/20/10/5 ratio where 5% of your income goes toward debt payments.

At first, the system may be painful. The mere thought of only getting 70% of your income is undoubtedly depressing. But, it’s pretty close to how things work when your employer deducted taxes and benefits from your pay. Believe me, you’ll be happy you did it this way. When it’s time to pay your estimated taxes, the money is already there. And though retirement may be while away, it’s a big goal to prepare for. The sooner you start and the more disciplined you with saving, the better off you’ll be when it’s quitting time.

Income & Taxes

To be a successful freelance writer, you need to make enough money to pay your taxes, save money, and cover your living expenses. You’ll pay the government sizable portion of your income – more than what you pay when you’re employed by someone else – and your after-tax income must be enough to live on or you’ll have problems.

Speaking of taxes, you’ll be responsible for paying Federal income tax, self-employment tax, and state income taxes. The clients you work for won’t withhold taxes from your pay. Instead, it’s your responsibility to send quarterly estimated taxes to the government. Then, every year, you or your accountant will prepare and file your tax return.

You’ll have to keep good records, not only so you know your income and expenses, but also so it’s easier to complete your tax return. Some clients may send you a Form 1099-C at the beginning of each year. But, if you don’t get this form, you’re still responsible for claiming the income on your taxes. On the bright side, you can also take deductions for your business expenses, e.g. child care expenses and web hosting.

Many clients, especially those who expect to pay you more than $600 in a year, will ask for a completed W-9 Form. The form basically asks for your name, address, tax ID number and signature. You can apply for an Employer Identification Number (EIN) from the IRS for this purpose. The alternative is to use your social security number.

Getting Paid

If you’ve been writing part-time, you may have already set up a rate schedule and decided on your payment methods. For brand new writers, this should be done before you start doing business. You’ll have to decide how much you’re going to charge for your writing services. You can charge per word, per hour, or per job, but make sure you’re consistent from one job to the next. Don’t arbitrarily come up with figures for a job and don’t let clients tell you what you should charge.

You also have to decide how you’re going to get paid. I like Paypal because it’s quick and easy, but there are fees and a new 1099-K Form to worry about. You can also get paid via bank transfer, check, money order, or cash.

Finally, decide when you want your clients to pay you – before, during, or after the job, or all three? Survey several writers and you’ll find that they have different timing and some may use different methods for different clients.

When you’re ready to be paid, send your clients an invoice to let them know how much to pay you and when you should be paid. Save a copy of your invoices and payment receipts for record-keeping and tax preparation.

From the beginning, develop a good system for paying yourself. I like to accumulate my freelance income in one account and pay myself a set amount each month. Keep in mind, however, that you owe taxes on everything you earn, not just the amount you allocate for monthly living expenses.

Other Considerations

The following are some expenses you’ll have to pay more attention to once you’re a full-time freelance writer: health insurance, retirement, marketing, web hosting, office equipment, in addition to your normal living expenses, e.g. rent/mortgage, utilities, child care, etc. None of these are easy tasks, but they’re all vital pieces of a long-lasting freelance writing career.

Evaluate your rates

The start of a new year is a good time to implement rate changes. Most businesses do it, especially insurance companies (bummer). And if your cost of living increases in the next year, you might have to raise your rates to sustain your life. Use a rate calculator to decide if next year’s expenses require a rate increase.

Set your income goal

Look at what you earned this year and, based on that, decide whether you want to increase your income next year. Income planning goes perfectly with rate planning since you may have to raise your rates to meet your income goal. I typically try to increase my income 5% or more each year and so far it looks like I’ve met that goal.

Target a new customer base

If you decide to raise your rates, your current customer base may not stick around to pay higher rates. You may have to target a different market, e.g. blogging for an individual vs. blogging for a big company. I’ve wanted to get into magazine writing for years, but I’ve never taken the time to make it happen. The new year is a good time to work on that goal.

Budget better

As a self-employed worker, I find it critical to plan and stick to a budget since my monthly income isn’t “guaranteed.” Plus, I write about personal finance, so it’d be hypocritical not to take my own advice. You can smooth out some of the financial bumps you experienced this year, by budgeting your income next year. Work on creating a buffer account if you don’t already have one.

Adjust your tax deductions

Earlier this year, I mentioned a downside to deducting business expenses – it lowers the income that lenders use to decide whether you can afford a loan. While you may enjoy lower taxes now, you may get turned down for a mortgage or business loan because your “on paper” income isn’t high enough. Lenders usually ask to see three years of tax returns, so think ahead.

Review your policies

While they may not be rigid or even documented, we all have policies regarding rates, pay, and work turnaround. If you haven’t established a written policy, this is a good time to do so. And, if you already have a written policy, review it to confirm that you’ll continue to operate the same way next year. Your policy may be more of a flexible guideline than a standard rule, but it’s still good to have a document you to which you can refer to answer client questions.

You can make most changes to your business any time during the year, but the end of the year is a good time to take a break and reassess. Do you changes planned for next year?

Has your monthly income been declining unexpectedly for several months?

You need to have a certain amount of money coming in each month to sustain your life. Even if you supplement your decreased earnings from a buffer account, you’ll need to replenish that account or else it will dry up. Some business models may be seasonal and you’ll recognize this after you’ve been in business for a few years. However, if your income is decreasing and seasonal changes aren’t the blame, then something else is.

Are your monthly expenses increasing while your income remains stagnant?

Every year, costs go up. The result is that it takes more money to live than it did in previous years. You may not be able to maintain your current lifestyle on the same income as last year. Evaluate your rates at least once a year, increasing as necessary. Be careful not to let your living expenses outpace your writing income.

Are you relying on just one or two clients?

Relying on a small number of clients is risky. When one of them leaves, they take a large percentage of your monthly income with them. You’ll have to hustle to make up the lost income before your finances start to feel it.

Are you past due on any debt payments?

Catching up is harder than you think. If you’re falling behind on your bills, because you’re not making enough money or because you’re not spending wisely, you’re headed for disaster. Stay ahead of your expenses, especially big payments like taxes, mortgage, and student loans. Falling behind on these can lead to big problems.

Turning the Situation Around

Once the Titanic hit the iceberg it was doomed. The same may not be true for your writing business. If it seems like things are going wrong, take action immediately. For example, you might cut back on some expenses until your cash flow picks up again. In the meantime, do some things to increase your income before it’s too late.

Business Checking Basics

Most banks have tiered business accounts and may have higher fees on the higher level accounts. Fees range from $10 to $40 depending on the type of account you open. Each tier lets you make certain number of transactions. For example, you may be able to make 150 transactions on the lower tier, including payments and deposits, each month for free (or whatever that account charges) and unlimited transactions on the higher tier. You’ll have to pay for each transaction over the allowed amount.

With many business checking accounts, you have to maintain a certain minimum balance or receive a certain dollar amount of electronic transfers to avoid paying a monthly fee on the account. (The monthly fee on a business account would be tax-deductible, but you could spend that $10-$40 a month on something else, like a book, subscription, or new domain.) Be aware that your combined business account and personal account balances are subject to the FDIC insured amount of $250,000 – that may leave some of your balances uncovered if you have more than that at the same bank.

Most business checking accounts come with a debit card, so you may not need to order business checks, which are generally more expensive than personal checks. You can always order checks through a less-expensive, but reputable third-party. Another reason you may not need business checks: with business checking accounts, direct deposit is much cheaper and sometimes free (transfers are often $25 or more with a personal checking account).

Alternative

If a business checking account sounds like more than what you need, you can always open up a second personal checking account and use it for your business only. It would accomplish the same purpose of keeping your finances separate for a lower cost and less hassle. On the other hand, a business checking account would come in handy if you ever need to establish credit for your business.

Of course, two accounts means you have two balances to track, two accounts numbers to remember, two logins to keep up with, and two debit cards to keep separate. But, such is the life of a business owner.

I use two separate personal checking accounts – one for business and one for personal. Have any of you opened a business checking account as opposed to a personal checking for your freelance writing business?

If you’ve been paying taxes on all your income all along, this new 1099-K (see the draft) will just add more paperwork. For those who’ve neglected to report certain payments, it could be mean an unexpectedly high tax bill.

To fulfill Paypal’s request, you can provide your Social Security Number or EIN. If you use an EIN, Paypal will require you to upgrade to a Business account.

Potential Confusion

This new requirement might cause some confusion. If you have clients who pay via Paypal and send Form 1099-MISC because they’ve paid you more than $600, you could end up double reporting income. Not sure how the tax forms will compensate for this, but be aware that this could be a problem. The IRS says Form 1099-K is to “improve voluntary tax compliance,” so maybe they’re just using gross receipts on the form to match what you’ve listed on your tax return.

Because Form 1099-K will report gross sales without any adjustments, you’ll have to claim deductions for returns, fees, and chargebacks elsewhere on your Schedule C.

Simplify Your Paypal Account(s)

If you have just one Paypal account that you use for both personal and business transactions, this is a great time to separate the two. Create a personal Paypal account that’s linked to your personal checking account and leave business Paypal account linked to your business checking account.

Figuring out your taxes for 2011 may be a little messy if you’ve been using just one Paypal account. You can use Paypal’s reporting feature (History > Payments > Monthly Sales Report) to print a list of transactions for each month and note which ones were personal. e.g. gifts, money transfers, and other non-business payments. These personal transactions you would leave off your tax return. Once you receive your 1099s from clients, highlight the payments that are accounted for via 1099, so you’ll know what income gap to account for on your tax return. Your invoices should help confirm this number.

Final Notes

The new Form 1099-K isn’t limited to Paypal. All third-party credit card processors will send this form. Companies that are required to file Form 1099-K with the IRS are required to also notify the taxpayer either by mail or electronically.

The new rule only asks for credit card payments, so I’m assuming that eCheck and payments from a Paypal balance won’t be included. But, to be on the safe side, I’d suggest including all taxable payments in your tax return. An audit would reveal this income one way or another.

I want to disclaim that I am not a tax professional. If you have questions about what this means for your business, be sure to talk to your accountant, tax attorney, or tax preparer.

You’re too busy to focus on bookkeeping and other financial tasks.

As your freelance business grows or your life outside of work changes, you may find that you have little time left for finances after you’ve finished client work. Once your business grows to a certain size, it’s natural to consider hiring an accountant. This may become more critical if you’ve incorporated your writing business and need to know the important details about being an employee of a company you own.

You’re not doing a good job of managing your finances.

At this point, we’re all good at the basic mathematic functions necessary to manage finances. You can easily add up the number of invoices you received this month and subtract the money you’ve spent. But, no matter how good you are at pressing + on the calculator, you still might not be good at keeping up with invoices, receipts, bank statements and other financial documents. Plus, tax are often difficult for the average taxpayer since there are so many rules and loopholes.

Is The Cost Worth It?

Accounting costs range from a few hundred to a few thousand dollars a month depending on what services you need and how often you need them. Having an accountant do your finances year round will typically be more expensive than having someone who just does your taxes.

If all you need someone to prepare your taxes, you can save money by using a tax preparer with has small business tax prep experience rather paying a Certified Public Accountant. (I envy the writers who are married to accountants and tax preparers.) The fee you pay to an accountant or tax preparer is usually a tax-deductible business expense.

Also Consider an Accountant If…

If you’re just getting started and you need to know what bookkeeping and accounting practices you need to have in place, you might pay for a consultation with an accountant. It’ll still be cheaper than having the accountant handle your finances full-time. If you have questions about a specific situation and you can’t find the answer, getting professional advice from an accountant is wise. An accountant can also give some perspective on whether you’re making the right financial decisions, e.g. putting enough money aside for retirement.

The Middle Ground Between DIY and Paying Someone

An invoicing/bookkeeping/accounting software is a compromise between totally doing it yourself and hiring an accountant. I use MacFreelance and Paypal for invoicing, file folders and Excel for organizing receipts/bookkeeping, and TurboTax to prepare and file my income taxes. Other options include Quickbooks, Freshbooks, and SimplyBill. I’ve never used any of these, so I can’t tell you anything about them. I’ve read good things about Freshbooks though.

You can always try out an accountant for a few months and go back to doing your own finances if you find that it’s not money well spent.

Have you thought about hiring an accountant? Or, if you’ve hired an accountant, when did you know it was time to make that decision?

Never get complacent with clients.

I learned this lesson very early and I’m glad I did. When I first started freelancing, I thought I could survive with two big freelance clients. Combined, the two provided enough income to pay the bills and have some leftover. After a couple of months, one of the clients left without much advance notice. I was terrified, but bounced back quickly. There were two lessons in that situation. First, never rely on just a couple of clients because if one of them leaves, your income is in shambles. Second, unless you have a contract that says otherwise, clients can leave at any time.

It feels better not to live paycheck to paycheck.

When someone else employs you, they set your pay and you pretty much have to live with it. If your pay is just enough to fit your bills, you have to work within that box. But, when you’re your own payroll department, you say how much you get paid and when. My goal is to earn at least one month in advance and it’s so much better than waiting on an invoice to be paid to get my light bill. Another perk of earning in advance is that if a client leaves, you have more time to replace them.

Taking too many tax deductions can be a bad thing.

Generally, we want to take as many tax deductions as possible to lower our taxable income. It results in a lower tax bill. However, the lower taxable income can come back to haunt you if you decide to apply for a loan. It’s hard enough to get approved for major loan like a mortgage when you don’t have W-2 income, even harder when you’ve reduced your income to avoid paying taxes. Plan major loans a few years in advance and consider taking fewer deductions in those years. (Consult a tax professional for specific tax advice.)

Clients who haggle on rates usually aren’t worth it.

In the beginning, I would lower my rates to accommodate clients, but I would end up beating myself up for doing the work at such a low price. Now, when clients try to negotiate my per article rate, I instead negotiate their expectations. I ask for their for their budget and let them know how many articles can fit within their budget. Sometimes, they agree to my rates and sometimes they walk away. Either way, I can sleep well knowing I didn’t sell myself short on a project.

What are some of the biggest freelance/writing lessons you’ve learned?

How Much Are Freelancers Paid?

We’re being paid pretty well – 45% of freelancers earn between $20 to $59 an hour, 26% earn $80 or more and 17% earn $100 or more. Most writers say they earn between $50 and $59 per hour. Note when I say freelancers that includes various types of freelancers including writers, editors, copywriters, designers, etc. In some places, I pulled out statistics specifically related to writers. More freelancers are writers – 18% – than anything else.

In general, more experienced freelancers charge more.

In the traditional working well, it’s said that men out earn women, but that’s not the case in most of the freelance world. Women charge more than men for rates less than $100 her hours. But, more men than women charge over $100 per hour. Time to increase our rates ladies?

Most freelancers charge a flat fee per product and about 1/3 bill on an hourly basis. I’ve only billed hourly for one project in my freelance career. That’s because it was too large to give a flat rate – I felt like giving a flat rate would have been cheating myself.

Freelancing is mostly recession-proof – 52% haven’t been largely affected.

How Much Do Freelancers Work? 

Sixty-six percent of freelancers do so on a full-time basis. And 52.1% are the primary income providers in their household.

Many freelancers – 39% – earn more now than they did as an employee and most work less than 40 hours per week. What I like about freelancing is that you don’t have to clock in 40 hours a week simply because that’s the standard workweek. How many full-time employees actually do 40 hours of work?

What’s Most Challenging About Freelancing?

The biggest challenge is finding new clients, but the survey shows freelancers spend less than 5 hours a month on marketing. The second biggest challenge is the feast-or-famine cycle of work. Interesting, copywriters find it harder to find new clients vs. writers. The most experienced freelancers get work through referrals and word of mouth. However, a lot of writers find clients through Craigslist, article marketing, and social media.

The Best Part of All

The majority of freelancers are at least moderately happier since they started freelancing and wouldn’t go back even if the money were better.

The survey includes answers from 1,204 freelancers in 37 professions.

What do you think? Do the survey results sound like your freelance experience?