3 Downsides of Being a Freelancer -- and How to Cope With Them

Freelancing has become hot. Work platform Upwork found that last year, freelancers made up 38% of the U.S. workforce -- 64 million of us did freelance work in 2023 (up 4 percentage points from 2022, to boot). We must be onto something -- and indeed, freelancing comes with great perks. Unfortunately, it also comes with drawbacks. Here are three you should know about, as well as how to manage them.

1. No paid time off

Admittedly, I wasn't always privy to loads of vacation time in my non-freelance jobs -- tiny nonprofit museums aren't exactly known for their employee benefits. But even getting a week or two of paid vacation time a year made it a lot easier to get away from work occasionally. Freelancers don't get any paid time off -- when we're not working, we're not earning.

If you, like me, tend toward being a wee bit of a workaholic, becoming a freelancer might result in a situation where you end up burned out because you never take time off. I have gotten better at this, but it took a lot of soul searching and also making a special move during the last few months of 2023. My favorite feature of my high-yield savings account is the ability to create sub-accounts for different purposes. I made a new one for paid time off, and started chucking money into it (after taking taxes out, of course -- more on freelance taxes below).

I haven't dipped into this DIY PTO yet, but I have an overseas trip coming up next month and will likely use some of it then. Regardless, I intend to keep adding to it -- $100, $250, or more here and there will grow it over time.

2. Higher health insurance costs

Employers that offer health insurance benefits also cover some of the cost. I've talked to several people who used to freelance, and health insurance cost was the most common reason given for going back to work as an employee. This isn't surprising -- last year, I paid $500 a month for health insurance, and by upgrading my plan for 2024, I took on a monthly cost of over $700 (and dental insurance is extra). And that's for a plan that covers just me. I shudder to think what my costs might be if I was also paying to insure a spouse, children, or both.

Admittedly, I did decide to splurge during Open Enrollment for 2024, after many years of sub-standard (yet still expensive) health insurance. I don't qualify for any government assistance with my insurance costs, but depending on your income and family situation, you might. So explore your options for health insurance on HealthCare.gov.

One of the best ways to save on health insurance coverage if you're turning to the marketplace is to opt for a high-deductible plan that allows you to open a health savings account (HSA). These have great tax benefits, both now and for your future.

But not all insurance plans qualify for one -- if you're buying coverage for only you, your deductible must be at least $1,600, but your out-of-pocket-maximum cost must be below $8,050. The limits are higher if you're covering a family. A high-deductible plan might not be a good idea if you're actively managing a health condition -- but if you're generally pretty healthy, consider it.

3. More complicated taxes

Finally, another major bummer about going freelance is taking on a more complicated and likely more stressful tax situation. As a freelancer, your income doesn't come to you less taxes, like it would if you were a traditional employee. Instead, you receive 1099 forms at the beginning of the year, showing all you were paid by a given client over the previous year.

Your tax obligations are also ongoing -- you have to pay estimated taxes four times a year, in January, April, June, and September. This means planning ahead -- personally, I take a percentage of every dollar I make and leave it in yet another sub-account of my savings. When taxes are due, it's not hard to pay what I owe and I'm not left scrambling.

I have never enjoyed messing with taxes, and while using self-employed tax software would likely be cheaper, I hired an accountant instead. Paying extra for more peace of mind is worth it for me (plus, as a small business expense, it's tax deductible). It might be worth it for you, too. Investigate your options here.

After all this gloom and doom about freelancing, I have to note that going freelance has easily been one of the better financial decisions I've made. I love being a writer and editor, and getting to do the job without the obligations (read: endless meetings) that come with traditional employment has made it that much better.

Plus, I have the kind of freedom and flexibility with my work that I've never had before, period. Despite the downsides, I'm a happy freelancer. If none of the above sounds like a deal breaker to you, you might enjoy it too.