If you’re making your living as a full-time freelancer, chances are you’ve felt that pang of panic set in as your nine-to-fiver friend casually carries on about their retirement plan and benefits package. Sure, as a solo-preneur you can throw a couple of drinks on the business card, take vacations when you want, and be your own boss, but when it comes to a long-term financial game plan, the whole entrepreneurial venture can feel like it lacks an exit strategy.
Although we can’t give you individualized financial advice, we can provide some helpful tips for applying for a mortgage, starting a retirement plan, and finding health benefits as a freelancer. With some prior planning, your golden years can be just as bountiful as the ones enjoyed by those who spend their lives punching the time-clock.
How to Buy a Home as a Freelancer
When you’re self-employed, the murky waters of the mortgage process can seem impossible to navigate. It helps to remember that you’re not alone in this journey. In a study commissioned by the Freelancers Union & Elance-oDesk, researchers found that a whopping 34% of the U.S. workforce is freelancing. So, for all you 1099ers out there, let us provide a beacon of light to help you land safely on the shores of a new home.
Tip One: Be meticulous with your bookkeeping. Banks and lender like at least two years of tax returns.
Freelancers make an average salary of $60,000 a year in the U.S. (about $4,000 above the national average salary). Not bad, right? But, from the bank’s perspective, this income is unstable, which makes getting approved for a mortgage far more challenging for 1099ers than it is for traditionally employed individuals. To ensure your income is consistent, debt is low, and business is growing, banks and lenders want to see at least two years’ worth of tax returns.
Tip Two: Report your finances accurately to boost your chances of approval.
More often than not, freelancers file a “Schedule C” at tax time—this form is where you claim business expenses. We know it’s tempting to obscure as much dough from Uncle Sam as mathematically possible; the problem is that mortgage underwriters want to see net income, not gross. Remember, the more expenses you have, the lower your income looks.
If a lender sees massive tax write-offs and a small take-home, you’re going to be seen as a risky borrower.
In some cases, lenders allow you to add certain deductions back to your income, such as depreciation on business equipment and hardware, car payments, and large one-time expenses. To position yourself for a higher probability of approval, be sure to:
Claim all of your income
Clean up your credit score
Record regular/return clients
Separate personal finances from the business
Show proof of funds for down payment
Write off fewer expenses
Tip Three: Always show year-over-year growth.
Lenders want to see that your freelance venture is a viable option for the future. To further increase your chances of approval, be sure to show year-over-year financial growth. Depending on your lender, the mortgage officer may conduct a 1084 Cash Flow Analysis. As Fannie Mae puts it, “The purpose of this analysis is to determine the amount of stable and continuous income that will be available to the borrower for loan qualifying purposes.”
Basically, everyone wants to know, if you have money today, what are the odds you’ll have it tomorrow? With all that being said, be sure to hire an accountant if numbers aren’t your thing.
How to Start A Retirement Fund As A Freelancer
You may not have a portion of your biweekly paycheck going straight into a 401(k), but that doesn’t mean you can’t set up a retirement plan.
Tip One: Consider an individual retirement account (IRA).
There are two general types of IRAs: traditional IRAs or Roth IRAs. A traditional IRA is essentially a savings account that you can’t touch (or at least shouldn’t touch) until you’re 59 and a half. An IRA has a relatively low contribution rate, but what it lacks in return, it makes up for in stability and tax benefits.
With a traditional IRA, you can contribute up to $5,500 a year (2018 contribution). These contributions are typically tax-free or tax-deferred (it should be noted that if a retirement plan from an employer covers you or your spouse, your contribution may not be deductible). With a Roth IRA, you’ll make contributions based on your net income. Because you’re making a contribution with taxed income, you can typically withdraw your money after 59 and with no taxes due, unlike a traditional IRA.
Tip Two: If you’re just kicking off your business, wait until you’ve done your taxes to determine the amount of your contribution.
If you’re interested in contributing to an IRA of any kind, every tax year you’ll have a few months of wiggle room to make your contributions. For instance, you’d have until April 15, 2019, to contribute for 2018.
If you’re procrastinating on your retirement because you don’t want to deal with paperwork, know that an IRA is simple to set up. Choose your bank and your initial IRA plan, make a contribution, and you’re good to go.
Tip Three: Separate yourself from the business.
If you’re feeling ambitious, freelancers also have the opportunity to contribute to a 401(k), specifically a solo (one-participant) 401(k). If business is booming and you’re looking for a higher contribution limit, this may be the best option, as you can contribute up to $18,500 (as of 2018) per year.
In the case of a solo 401(k), it’s helpful to think of yourself as two entities: employer and employee. This is because as the business, the IRS allows you can make an additional contribution of up to 25% of compensation. However, should you end up hiring other employees, a solo 401(k) is no longer an option. If you’re growing, you should consider a simplified employee pension (SEP) IRA.
By filling out an Individual Retirement Accounts Contribution Agreement form and specifying eligible employees, you’ll be ready to make flexible annual contributions. The flexibility of this plan is great for businesses with cash flow fluctuations, especially ones with significant seasonal swings. This is to say, during good times, employers can make more substantial contributions and during downtimes, make smaller contributions.
Look, cash on hand is excellent. But, consider this: researchers from The National Institute On Retirement Security (NIRS) found that “even after counting households’ entire net worth—a generous measure of retirement savings—two thirds (66 percent) of working families fall short of conservative retirement savings targets for their age and income based on working until age 67.” For these families, their annual income is far below what they will need to maintain their standard of living in retirement.
Health Insurance for the Self-Employed
Arguably, one of the most devastating times of the year for freelancers is tax time. However, should you need to take a trip to the emergency room, that day might take the cake instead.
Tip One: Get health insurance to avoid a fine at tax time and/or massive medical bills.
To alleviate some of the pain, buy yourself some health benefits to avoid a $695 fine. If you have a family without benefits, this fee can be as high as $2,085. Furthermore, between 2012 and 2016, the price of an outpatient ER visit increased by 31% to $1,917, according to the Health Cost Institute.
If you’re self-employed, you can access the Health Insurance Marketplace to enroll in a plan. Depending on your income and household size, you may qualify for tax credits and other savings. The plans are broken down into four main categories:
Tip Two: Seriously consider your health.
If you know you get sick often, buy yourself a plan that gives you ample coverage. For instance, the bronze plan may have a dirt-cheap monthly premium, but you’re going to cough up a copay for nearly every doctor’s visit. A gold plan, on the other hand, has a higher monthly premium, but you’re almost entirely covered when you need care.
Remember that premiums are based on your income. This means the same plan is going to fluctuate in price from freelancer to freelancer. You can get a “quick check” estimate on Healthcare.gov.
Learn From Peers and Pros
Feeling a little lost? Find some freelance peers that’ll point you in the right direction. Not only do coworking spaces have a bunch of 1099ers who broke the nine-to-five grind but they also have extended networks of attorneys and accountants who traipse in from time to time. Connect with those people, share your wisdom and value with them, and get a little guidance yourself.