The 9-to-5 workweek is a staple in American culture, but times are changing. More than 53 million people currently work as freelancers, and an estimated 50% of the U.S. workforce will follow suit by 2020. If you're ready to jump in, take these steps as you move forward. Succeeding in the gig economy means establishing new income while managing expenses and planning for the future. (Easy, right?)
1. Build a safety net
If you're leaving your job in favor of a better lifestyle, creating a financial plan should be priority No. 1. If you haven't already, begin stashing money in an emergency fund until you have enough to cover at least six months of living expenses. While you may not need to use it, the freelancing is unpredictable, and it's important to establish a safety net along the way. It's also a good idea to learn whether you qualify for federal unemployment benefits under the Self-Employment Assistance Program, which provides financial support to solo entrepreneurs as they launch their businesses. Contact your state's Department of Labor to find out if you're covered.
2. Find legitimate clients
Online scams are common these days, and it's important to locate high-paying and reputable clients. Begin by using these sources:
- LinkedIn: Hone in on direct job listings by using Microsoft's LinkedIn's search options. If you're a technical writer, for instance, enter "looking for technical writer" in the search box and limit your results to "posts." From there, you'll see the latest jobs posted by LinkedIn members, which will allow you to contact them directly.
- FlexJobs.com: This site boasts a huge list of contract and telecommuting jobs, many of which come from well-known brands and companies. Although it's a paid membership, the jobs tab allows you to view the type of postings on their site before you decide to join.
- HireMyMom.com: No, you don't need to be a mom (or dad) to join this service, and you'll pay $10 a month for access to heavily vetted job listings.
- Group boards: The freelance community has been warm in my experience, and connecting with like-minded people is a great way to network and secure employment. Make connections by joining Facebook group boards. You're likely to learn from others' experiences and find new leads.
3. Research profitable niches
The pressure to succeed in a non-traditional work environment is tough, but there are several market trends working in your favor. The freelance economy is full of profitable niches according to the latest data from the Bureau of Labor Statistics (BLS), which include:
- Curriculum writer: Freelance writers earn an average of $42,000 a year, but developing a specialty focus can help you make much more. Online learning is a vital tool for internal business education and even grade-level students. Freelance curriculum writers earn an average of $61,500 a year, and a search on FlexJobs found nearly 400 active listings.
- Business consultant: Whether you're a public relations pro, a project manager, or an IT expert, companies need your services, and you'll earn an average of close to $70,000 to share your professional expertise.
- Software developer: You'll rake in about $78,000 a year developing software programs for freelance clients, and you might consider floating the idea of a retainer agreement that provides them with ongoing tech support (while providing you with a steady income).
- Graphic Designers/Web Developers: Your design talents could yield nearly $56,000 a year in the freelance world. The internet is a necessity in today's marketplace, and businesses depend on their online presence to retain customers and drive sales. Use your aesthetic and user-based vision to help them succeed.
These are just a few of the avenues your career could take. Catalog your professional skills and do your homework to find (or create) a profitable niche.
4. Get serious about your taxes
Uncle Sam isn't going to give you a break just because you're a solopreneur. In fact, the majority of freelancers are classified as 1099 employees, which means that you're responsible for paying your own income and self-employment taxes (Social Security and Medicare). That said, certain tax breaks exist depending on how you structure your business. For example, I started my career as a sole-proprietor before registering as a limited liability company (LLC). Once I began earning a steady income, I was able to establish myself as an S Corporation (S Corp), a move that significantly reduced my tax burden. Consider the scope of your freelance career and talk to your accountant about they best way to approach your taxes.
5. Plan for retirement
If you hated working in an office, escaping to the world of freelancing can feel like a vacation. Even so, you'll still want to retire someday. One of the toughest things about working for yourself is the lack of employer benefits, and retirement is no exception. The good news is that the IRS makes it easy for freelancers to save for the future with these options:
- Solo 401(k): If you're a sole-proprietor or owner-only LLC or corporation, then you can save for retirement with a Solo 401(k). Like an employer-sponsored plan, you'll put money away using salary deferrals, and you can also use funds from profit-sharing plans provided by your clients. Annual contribution limits are also the same at $18,000, or $24,000 if you're over 50, with one caveat: non-elective contributions.
For example, Tara is a 35-year-old consultant who will earn $85,000 in 2017 under her S Corp. As an "employee," she contributes the maximum of $18,000 to her 401(k), and her business structure allows her to save even more. As the head of her S Corp, Tara is considered an "employer," and may contribute up to 25% of her business earnings, or $21,250, in addition to her employee contributions, for a total of $41,250. The annual cap for 2017 is $54,000 or $60,000 if you're over 50. The rules of Solo 401(k)s depend on your earnings and business structure, and it's a good idea to ask your financial planner about the most cost-effective way to use your earnings.
- Simplified Employee Pension Plan (SEP): Solo workers have the benefit of opening a SEP: another type of IRA that allows you to save for retirement. Your contributions and earnings are after-tax, and contribution limits are higher than those of a traditional or Roth IRA. In 2017, for example, you can contribute the lesser of 25% of your compensation, or up to $54,000.
Succeeding in the gig economy is no picnic -- it takes hard work and relentless motivation. But the trade-offs, like work-life balance, are well worth it. Take the bold step with preparation in your arsenal.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Sarah Szczypinski owns shares of Microsoft. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.