Thinking About Starting a Freelance Business? Read This First

Freelancer working from home and playing with his dog
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You’ll find a lot of ways to make money on The Penny Hoarder, but one of the best ways to make extra money is to jump in with both feet and start a freelance business.

Whether you want to become a full-time solopreneur or you simply want to use your mad skills to earn some extra cash, here’s what you need to know about starting a freelance business.

Choose Your Business Carefully

You’re going to be spending a lot of time with your freelance business, so choose it carefully. A popular Venn diagram suggests your ideal business should be a combination of:

Image of a freelance Business Venn DiagramIf you aim for that intersection, you’ll be positioning yourself towards success.

However, keep in mind that some of the best businesses come out of left field, so if you feel like your gut is propelling you in a certain direction, you can always choose to follow it and see what happens.

With the Internet, Setup is Easy

How do you set up a freelance business? Often, it’s as simple as creating a website.

Whether you want to be a freelance writer, a photographer, a clothing designer, or a life coach, all you really have to do is grab a domain name and hang out your online shingle.

Program and platforms like WordPress can help you create a professional website quickly, and when you work with PayPal, taking payments from customers becomes a matter of a few clicks.

Building Your Customer Base is Half the Battle

It’s one of the dirty little secrets of running a freelance business: You can make the best hand-knit baby blankets in the world, but nobody will ever know unless you take the time to build your customer base.

The internet is full of freelancers, many of them doing the exact same thing you want to do. Just because you put out your online shingle doesn’t mean the customers will start clicking at your door.

You have to slowly build up your fan base, one satisfied customer at a time.

How do you build a customer base? Plenty of online resources discuss the finer details of mailing lists, promotions, Facebook business pages and Google Ad campaigns.

But the real way to build a customer base is to make good products (or offer good services), get satisfied customers, and use a combination of advertising and word of mouth to slowly bring more and more people to your business.

The emphasis, of course, is on slowly. There are very few overnight successes, so be prepared to have a lot of lean months until you start turning a serious profit.

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Everything You Need to Know About Profit

Here’s what you need to know about profit: Be sure you’re making one.

One of the biggest mistakes freelance business owners make is trying to undersell the competition, or assuming they can only charge low prices because they are new and/or inexperienced.

You need to make a profit on every single product or service you sell. You also need to make sure you’re including both the costs of your materials and overhead as well as the cost of your time.

For example: let’s say you make fun, funky belts out of old pulp fiction book covers. And let’s say that it costs you $20 in materials and takes two hours to make each belt.

How much should you charge for a belt? $25? That’s putting your time at $2.50 an hour, and it’s a good way to run your business into the ground.

Instead, try selling your belts at $45. That’s $25 in profit for each belt, which now means your time is worth $12.50 an hour.

(Think $12.50 an hour is not enough to live on? You’re probably right — if you want to run a serious freelance business, you’ll need to charge even more, or figure out ways to reduce your overhead costs so more of that $45 becomes profit.)

This is a really simplistic explanation of how to price your products and services and make a profit.

Use it as a guideline, but keep in mind that you’ll probably have additional business costs — think domain names, business cards, coworking spaces — to deduct out of your gross profit, so you’ll want to factor all of those costs together before you decide how to price your products and services.

Don’t forget that you’ll also have to set aside a certain percentage of your profit for taxes!

Taxes, Licenses and Permits

Once you start earning money through a freelance business — even a part-time one — you need to be prepared to pay federal, state and sometimes even city taxes.

With federal tax, you need to be prepared to pay quarterly estimated taxes throughout the year. Since freelance payments don’t have taxes taken out of them, you need to take out the tax yourself and make an estimated tax payment every three months.

Every state has its own individual rules about taxation, so do some research into your state’s small business regulations to learn more about how freelance businesses are taxed. In addition to the state income tax, for example, you may have to pay an additional business tax.

Likewise, many U.S. cities require freelance business owners to pay city taxes, so make sure you’ve confirmed whether or not you’ll be responsible for those additional taxes.

And don’t forget about sales tax — if you’re selling items to other people, you need to learn how different types of sales taxes apply to you.

Many types of businesses also require licenses or permits. Always check to see if you need a business license or permit before getting started, even if you want to start a “small” business like a part-time freelance writing business!

How do you learn about which licenses and permits you need, as well as which types of tax you are responsible for paying? Research, research and more research.

Start with the U.S. Small Business Administration’s resources for self-employed and independent contractors, and then look for similar resources in both your state and your city.

Note: Neither the author nor The Penny Hoarder are tax professionals. To learn more about paying taxes on your earnings and licenses required, consult a professional advisor.

Nicole Dieker is a senior editor at The Billfold, and her work has also appeared in The Toast, The Write Life, Boing Boing and Popular Science.