Risk Management for the Self-Employed [Risk Management]

When Michelle Goodman began as a freelance writer, she wasn't savvy to che ways contracts could ave her from client-induced stress. "I did some hand' shake deals that cost me so much rime and money," said Goodman, who now helps self-employed professionals avoid similar mishap: wich her hook My So-Called Fretiaaa Up. In one fruscrating example, Goodman said she neglected to outline in a contract how long the project would last or ask foi any upfront payment. Then she slogged along, hoping her client's demands woutd eventually stop and she would be paid. "Thai just reduced my income tremendously," Goodman laid.

About 15 million Americans - one in nine U.S. workers - arc selfemployed, according to the Bureau of Labor Statistics. "This is a segment that, as fat as we can tell, is the most important part of the economy from the gross perspective," said "led Devine, CEO of Insuieon, an online insurance broker specialiúng in coverage for small businesses. From financial issues like quarterly tax payments to legal concerns like liability insurance, life as a self-employed professional comes with its own set of perils. But freelancers can rake steps to protect themselves from che Inherent risks of self-employment.

The preparation for (hopefully) risk-free self-employment often begins before a worker jumps from a fulltime job to the freelance life. Instead til star! inj; a business with zcio clients on day one, Goodman said, an aspiring self-employed professional should freelance on die side to establish a dient base before taking the plunge. It is also smart to compose a standard contract to use with diento. The legal website Nolo, com offers templates, but it u a good idea to ask a lawyer to help you hash it out. Because drumming up clients and drawing up a contract are basically unpaid work for freelancers, Goodman said, try to set up your self-employed shop before leaving a job, "It can take awhile to build up to where you want to be," she said.

Freelancers might need a license to start their new ventures tegally, said Stephen Fiihman, a legal writer who authoied the book WerJeingfir Yountlf. If you are planning to see clients in your home, he added, you will need a business license. And it is also worth checking local zoning rules to make sure youx community allows its residents to work from home,

A major roadblock for the selfemployed - and one that keeps many people from entering the freelance workforce- is health insurance. If coverage Lindel a family plan is not an option, the self-employed are responsible for buying theit own insurance, which often proves costly. Some freelancers take the risk and skip health insurance altogether, but for many, like Goodman, that is not an option, "If you don't have some minimum catastrophic care, say you broke your teg or need an appendectomy, I'm in the camp of 'it's better to have some insurance," she said.

Fortunately, there are ways to reduce the health care burden. The Affordable Care Act and the advent of health insurance exchanges should make purchasing an individual plan easier, especially fot people with pre-existing conditions. In addition, some selfemployed workers can deduct the cost of insurance from their taxes.

Another policy for the tctf-cmploycd to consider, especially if professionals in their Geld are vulnerable to negligence Lawsuits, is liability insurance. From giving a client bad advice to creating a sub-pal produce to damaging property, imagining the worst-case scenario can help freelancers protect against it, aid Devine whose self-employed clients include web designer*, lawyers and com wtiorv An insurance specialist can discuss risk management concerns and help the self-employed make the right insurance choice.

But for many freelancers, one of the biggest everyday risks is even more bask than establishing a retirement plan 01 examining insurance policies - its getting sdfTcd. ?a protect against shady clients and scams, Goodman encourages conducting investigative work, such as Googling a client and scanning freelance message boards, before signing a freelance contract. " It's really importanr to find out who you're getting into bed with," she said. For lengthy projects, Goodman suggests asking for partial payment up front. And make sure ro get die contact information of at least two people at the company just in case someone is on leave when it is tune to cut the check.

Once a self-employed worker is paid, it is cime to give Uncle Sam his due. Samuels' firm recommends freelancers maintain a separate bank account for money specifically set aside fot taxes. "Generally somewhere between 20% to 40% of whatever money you bring in the door as income as a freelance person is going to wind up going to tax," he said. While workers are legally obligated to pay tax on income as they earn it, the government created a system of quaiterly taxes for the selfemployed to avoid receiving tiny payments on every freelance check. But calculating that figure requires running a mini-tax return. "That's not a simple calculation, " he said.

Tax deductions for the self-employed can take the sting oui of a hefty tax bite. Generally, any expense incurred that is related ro a freelance business - from internet and a cell phone to professional dues and subscriptions - is at least partially deductible, he said. Even big-ticket hems, like a new laptop, can generally haw their full cost deducted In the year of purchase. Potentially the largest deduction for freelancers is a home office, but it must be legitimate. "You've got to bave a real home office," said Samuels, "It needs to be yogi primary place of business," When daiming the home office deduccion, he said, freelancers should cake a photograph of the office space as evidence in die event of an audit,

It might be tempting for freelancers to cut cost corners, for example, bue Samuels recommends finding a cai professional specializing in die sclf-tmploycd. An accountant could highlight numbers on a freelance tax return that could trigger in audit and even help the sclftrnpfoycd save money as their business grows. "Once [our freelance clients] are quire profitable," Samuels said, "maybe theres an opportunity to save a good amount of tax dollars by incorporating themselves."

From financial issues like quarterly tax payments lo legal concerns like liability insurance, lifp as a sstf-empfoyed professional comes with its own se of perils

For many freelancers, one of the biggest everyday risks is even more basic than establishing a retirement plan or examining insurance policies- it's getting stiffed.

Christina Hernandez Sherwood is a freelance writer based in Philadelphia.