Disadvantages of Self-Employment

Overcoming the biggest drawbacks of freelancing

A person works on their computer.
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Tired of working long hours to grow someone else’s bottom line? As a freelancer, you can venture out and build your own. No more clocking in and out or relying on someone else for a regular paycheck. However, there are some major differences between employment and self-employment—and they aren’t all good. Here’s a look at the main disadvantages of self-employment and how you can overcome them.

Key Takeaways

  • Freelancers don’t get employee benefits such as health insurance, paid time off, or a 401(k) account.
  • Self-employment income can be inconsistent and unpredictable.
  • Getting clients as a new freelancer can be difficult.
  • Freelancers are responsible for their business expenses out of pocket.
  • Freelancing means running a business alone, without much socializing.

Freelancers Don’t Get Employee Benefits

Freelancing comes with many advantages, such as planning your own schedule, working for yourself, and choosing your clients. However, it lacks the common benefits that employees receive, such as paid time off, insurance coverage, and a 401(k) account. If you want any of those perks, you’ll have to provide them yourself.

You can set up a one-participant 401(k) account as a self-employed individual and make contributions (up to the annual limits) as the employer and employee. Further, you may be able to qualify for health care coverage through the Health Insurance Marketplace.

Self-Employment Income Can Be Inconsistent

Commonly known as the “feast or famine” effect, self-employment income often ebbs and flows. One month you could be drowning in work and the next, you’re wondering where all your clients went. Unlike the consistent paycheck you get every two weeks as an employee, your income can dip below what you need to cover your expenses. This can be difficult, especially if you don’t have much of a financial cushion.

If you can, build an emergency business fund as soon as possible so you aren’t suffering financially due to slow spells, a client paying late, or clients not paying at all. Also consider payment structures that prevent financial shortfalls, such as 50/50 payment splits (50% upfront, 50% paid when the work is complete) or asking for full payment before you do the work.

You Have To Build Name Recognition and Experience

Freelancing can feel like an uphill battle when you first start. Nobody knows who you are, what you do, or if they can trust you. To break through, you’ll need to dust off your sales and marketing skills and search for someone to give you a chance. It could be a friend, a family member, or an open-minded business owner you offer a good deal. You may even want to offer work for free for your first client just to get some experience under your belt.

Creating your professional brand can help you raise awareness, build trust, and gain more work.

You Pay for Equipment and Repairs

When you’re self-employed, you’re responsible for all of your business expenses. There’s no employer to help cover the costs. If you need equipment, software, tools, repairs, certifications, or anything else, you pay for it.

If you spill coffee on your keyboard and fry your computer, you have to pay for a new one. As a freelancer, this means a large unexpected expense.

If you’re not able to cover these costs when they come up, it could cause your business to suffer or fail. You can prepare with an emergency fund and by factoring these costs into your overall pricing. While it can be hard to estimate in the first year, you’ll have a better idea in the years following.

Don’t forget to document your expenses as you go so you can deduct them on your taxes.

Freelancing Takes Up Living Space

In many cases, being self-employed requires you to create your own workspace. That can mean designating part of your home as your office or finding a workspace outside of your home. Both can come with costs such as rent, furnishings, supplies, and internet service. Fortunately, you can deduct many office expenses on your taxes (even for a home office as long as it’s used exclusively for business).

You Lose the Social Aspect of Work

While the idea of working without office politics or a required dress code can sound appealing, in time, you may miss some aspects of having coworkers. When you become self-employed, it’s just you. Your successes and failures are yours to experience alone, and you have to keep yourself motivated and productive. While this can work well for some, those who thrive in a social environment may struggle.

However, with a bit of effort, you can build social ties as a freelancer. There are many online groups on LinkedIn and Facebook, and Slack, where you can network with other freelancers to find a sense of community. You can also reach out to other business owners in your community to build relationships offline through local events, chamber of commerce meetings, and professional organizations related to your field.

Frequently Asked Questions (FAQs)

How can I start freelancing?

You can start freelancing by identifying the services you want to provide and the clientele you want to serve. From there, decide how you want to structure your business. Many freelancers start out as sole proprietors. However, you can legally separate the business from yourself with an LLC or S corp.

How do I find work as a freelancer?

An easy way to get your feet wet is through freelancing sites such as Upwork or Fiverr. These platforms feature clients who are ready to hire contractors, and Upwork provides added security through escrowed payments for many contracts. On the down side, it can be hard to win jobs amid the competition, and the platforms take a cut of your earnings. Alternatively, you can go out on your own but will need to set up a marketing plan, project contracts, and a payment structure and system.

What skills are required to be a successful freelancer?

The skills required to be a successful freelancer will vary depending on the type of business you plan to open. However, all freelancers should have knowledge of sales, marketing, time management, customer service, accounting, legal matters, networking, and interpersonal communication.

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