Happy Holidays!

Here's hoping that you and your families have a safe and happy holiday!

The Freelancers Best Friend

I talked a lot about a SEPP or SEP-IRA in my first post. I also posted a poll and asked how many folks took advantage of a SEP-IRA, and even if they knew what one was. To date, 2 people said that they didn't know what a SEP was, 2 people said that the didn't contribute to a SEP, 1 person said they contributed a little and 1 person contributed the maximum amount allowed. Since the one person who contributed the maximum amount was me, that means that the majority of everyone else who responded are unaware of the benefits of a SEP-IRA.

OK. So what is a SEP? Without exaggerating brothers and sisters, it's your best friend. Well, only if you like keeping the money you earn that is.

"An S or C corporation, an incorporated partnership or a LLC electing to be taxed as a corporation (i.e. the agencies we work for) pays the business owner (that's you Sparky!) a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner's W-2 salary up to the SEP IRA contribution limit. SEP IRA contributions are generally 100% tax deductible as a business expense."

At the end of the year AFTER your accountant (please tell me you have an accountant!) calculates your business deductions, and how much you have paid into your quarterly taxes, you are left with your net profit (pre-tax earnings). You now have to pay Federal and State income tax on this amount. Or do you? Not if you contribute to an IRA.

If you have a regular IRA you are limited to a maximum contribution of $5,000 (for 2008 - the same amount as a Roth IRA). With a SEP you can contribute up to 25% of your pre-tax earnings.

Kind of a no-brainer here kids. Obviously being able to contribute up to 25% of your pre-tax earnings is far more advantageous than being limited to $5,000. Bottom line: a SEP-IRA can save you hundreds, if not thousands of dollars in annual taxes as well as providing you with substantial retirement nest egg. And with the uncertainty of the future of Social Security, your retirement should be a very real concern.

As stated previously, SEP-IRA contributions are based on income earned via W-2s, not 1099s. With income earned from 1099s you are limited to Roth and regular IRA contributions.

You can find more info on SEP-IRAs here:
wikipedia SEP-IRA
SEPIRA.com
wikipedia ROTH 401K

The Real Freelancer vs. The Fake Freelancer

Over the years I noticed that there are two kinds of freelancers. What I like to call "fake freelancers" and "real freelancers". Fake freelancers are people who leave or lose their staff position, and only freelance temporarily until they can find another staff position. A real freelancer won't take a staff position even when it's offered to them on a silver platter.

I started out as a fake freelancer until I came to the realization that I was never suited to working on staff. Some people love working freelance and others can't stand it. Freelance is certainly not for everybody, and it does take a bit of getting used to.

Right now our market is flooded with fake freelancers who have recently lost their staff positions. Many of the big agencies have conducted layoffs, and it looks like this trend will continue into next year. This is bad news for the majority of real freelancers who are having a hard time finding work as it is.

I know more than a few real freelancers that are actively looking for a staff position, and who would have never considered doing so before. Meanwhile, the fake freelancers who can't find work anywhere may be resigning themselves to the fact that becoming a full-time freelancer is their only option. When the economy rebounds it's going to be very interesting to see where both the real and fake freelancers end up.

Of course, as soon as the economy rebounds I'll hopefully be back to work and won't have to fill my time with this dumb blog anymore!

The Worst Things About Being A Freelancer

So what are the worst things about being a freelancer? I think we all know the number one answer to this one...

Not being paid in a timely fashion. This is, in fact, the bane of our existence, and every freelancer knows just how bad it can get. Your bills are piling up, your mortgage is due and you're dipping into your 401K savings to make ends meet. Week after week you check your mailbox only to find more junk mail. Maybe your invoice has been forgotten on someone's desk, caught in an endless loop of red tape, or was just "lost". Of course, none of this matters to the creditors who come banging on your door.

April 15th. The worst day of the year, and the second worst thing about freelancing. The days leading up to April 15th aren't easy either. Digging out old receipts, organizing bank statements, calculating mileage and trying to do all the bookkeeping is always a nightmare. The only thing worse is sitting in your accountant's office, listening to his fingers total up the damage. When he looks up and reads off how much you owe, be sure to have a brown paper bag ready to keep yourself from hyperventilating.

Working at "freelance stations." You've just been given a work order to crank out 8 high-res mechs in less than 3 hours. Unfortunately, the Mac Mini you're working on is 3 years old, has the minimum amount of RAM possible, and outdated software that is incompatible with the rest of the creative department's newer software. The numerous crashes, freezes and font conflicts make meeting any deadline impossible, which in turn makes you look like a slow poke. Did I mention that your computer is hooked up to the only scanner in the building? "Hey, I need you to scan in these 57 sketches for me asap. And how are those mechs coming along?"

Being devalued. You have years of experience, great ideas and a broad creative skill set. Oh, by the way, no one cares. You don't need any of those things to shift a ® one mouse click to the left. Unfortunately, the bulk of freelance work does not require a lot of creativity. On those rare days when you get to actually design a logo or a layout... Well brothers and sisters, those are the good days.

Did I miss anything? Maybe. Now that I think about it, if I could get paid in a timely fashion, that would offset all of the other cons listed above. Ahhhhh, I can dream, can't I?

The Best Things About Being A Freelancer

You know, I never wanted to be a freelancer. When I left my last staff position, I was certain that I could easily find another job. I figured that if I couldn't find a staff position, then I could always freelance - as a last resort. After all, who would voluntarily forfeit "job stability", health benefits, paid time off and a fancy cubical. I never found that staff position. And now, over 7 years later, my views about freelance have changed dramatically.

So what are the best things about being a freelancer? While it's not all a bed of roses, there are a number of reasons why some folks prefer freelancing over a staff position.

In no particular order...

The freedom to work with different agencies. The variety of working with different creative teams and on different brands really help to keep the creative juices flowing. The constant challenges of jumping from one agency to another reinforce the fact that I'm running my own business.

No more performance reviews. One of the most awkward, humiliating and wholly unnecessary aspects of being on staff... the performance review. Even after busting your ass all year long, your boss will inevitable find that there is "plenty of room for improvement" on your end. So why didn't your boss bother to mention all of these shortcomings 6 months ago? Having to endure this formulaic slap in the face just to receive well-deserved raise? No thanks.

Being your own boss. Nuff said.

Leaving work at work. When I was on staff I used to leave work at 9 or 10 o'clock at night. I'd go home and lay awake in bed while gritting my teeth as I obsessed over whatever project I was working on. My dentist and I are both glad those days are long gone.

Working from home. FTP transfers, video conferencing, iChats, and emails all while festooned in your pajama bottoms.

What are your favorite things about being a freelancer?

Ahhhhh, Freelancer Surprise!

Your working away and look up at the clock. It's lunch time! But you didn't bring any lunch (again), and you don't have a lot of time to run out and get any. Unnnghhh! Soooooo hungry.

Now, any freelancer worth his or her salt knows that a FREE lunch may only be a few steps away. Yes brothers and sisters, I said free. Of course I'm talking about the cold left-overs from meetings which eventually make their way to the kitchen to be picked over by anyone with an appetite. It doesn't happen every day, but when these left-overs show up , it can really save a famished freelancer. All you need to do is make it to the kitchen before the rest of the agency does. If you do, then you'll be able to treat yourself to the "Freelancer Surprise".

I call these left-overs the "Freelancer Surprise" because it's always a surprise what will be left in the kitchen for you to scavenge. Actually, "surprise" might be a bit of an overstatement. 90% of the time these left-overs come in the form of pizza, and not very good pizza either. For whatever reason it seems that agencies have an unfathomable penchant for ordering the shittiest pizza around even when good pizza is readily available. While free, these odious old slices will inevitably leave you with severe acid reflux and a spastic colon.

Sometimes you'll get lucky and find sandwiches. Not the good sandwiches though. Those were eaten over 2 hours ago. The only sandwiches left now are egg salad and prune on rye, or tofu and Tabasco on pumpernickel. Just don't think about how many fingers have poked and prodded at them and you'll be fine. Then there is the salad. Someone always orders it, but no one ever eats it. There always seems to be plenty of salad. And every once in a while... cookies (gasp!). Jackpot my friends!

Who says there is no such thing as a free lunch?

When The Phone Doesn't Ring

In my first post I had originally crammed several topics into one long-winded diatribe. While the topics are all related, it will be a lot easier to read and discuss them if they are given their own space.

Obviously, the past year has been a tough one for many creative and production freelancers in the Promotional Marketing industry. With my recent down time I've been giving a lot of thought to our situation. I think that many of us consider the economic nose dive that this country has been in to be our biggest concern. It seems that quite a few of us are even considering drastic measures that we wouldn't normally consider. One of which is lowering our rates.

Brothers and sisters, I don't believe that lowering your rates should even be an option. The problem isn't our rates, it's the fact that entire freelancer budgets are being liquidated and/or shifted to other areas within an agency. We could drop our rate to $10 an hour and our phones still wouldn't ring.

Let's say we do drop our rates and an agency does hires us at that discounted rate. What happens when the economy swings back (which it always does)? And how will we know exactly when to boost our rate back up? After the economy has picked up for 3 months? 6 months? A year? You know as well as I do that as soon as we hit the agencies with a rate increase, they'll try to hold us to the established lower rate. I don't know about you, but I HATE price negotiations. Actually, I'd rather give my grandfather a Brazilian bikini wax than have to haggle over my rate with a client.

Listen, once we start dropping our rates it could take years for the precedent to be broken. And that, my friends, will be a very bad thing.

"Allright Grampa, just lie still. This will only take a minute!"

The Death Of Freelance As We Know It

(Edited for the sake of brevity on 11/22/08 - Thank you Bill!)

Fellow freelancers, I'd like to share with you a concern that has already impacted the freelance community and how we do business. I'm referring to the current trend by large agencies and the IRS to reclassify all freelancers (independent contractors) as "temp" or statutory employees.

The trend to reclassify freelancers as temp employees began several years ago presumably to meet certain IRS guidelines. To date almost all of the large promotional marketing agencies in the area have adopted this policy, and now issue W-2s instead of 1099s. A few agencies side step this by requiring freelancers to work through a placement agency who also hire you as a temp employee and issue W-2s.

Smaller agencies have not adopted this policy yet, and still issue 1099s.

However, now that the large agencies are classifying freelancers as temp employees I have to wonder how long it will take for all of the smaller agencies to follow suit. Since the big agencies are protecting themselves from the IRS, I can't imagine that it will take long before smaller agencies start taking the same precautions.

As an employer, hiring a temp employee is a pretty sweet deal. Temp employees are paid a fixed hourly rate and their hours are limited. Other than paying half of Social Security (a mere pittance comparatively speaking) employers don't have to pay any benefits, or contribute anything towards a temp's retirement plan. Employers also don't have to worry about paying for any sick days, vacation days, personal days or holidays. Other little things like not having to provide adequate work space, a phone line, business cards or up-to-date computers provide even more savings for the employer.

For individuals classified as a temp employee the deal isn't so sweet. If an agency issues you a W-2 then you can not write off mileage while working at that agency. If you only work for agencies who issue W-2(s) then technically you can not write off ANY deductions for that year because by IRS definition you are an employee, not an independent contractor. You also can't contribute any income earned via a W-2 into a SEPP IRA. When you receive a W-2, you are taxed on 100% of your income. When you receive a 1099 you are only taxed on the remainder of income that hasn't been contributed into a SEPP IRA (tax shelter), and deducted as a business expense.

The difference between a 1099 and W-2 could represent well over $20,000 in taxable income annually! And this, in turn, could represent thousands of dollars in lost revenue. While it is true that companies who issue W-2s pay for half of your Social Security, that "benefit" doesn't even come close to offsetting the loss you take when you can't contribute to a SEPP IRA, or take advantage of business expenses. Don't forget that your health benefits are 100% tax deductible too.

Obviously, the temp employee status is a lose-lose scenario for each and every one of us. And I think it's safe to say that the heyday of freelancing has come to an end. So, what's a freelancer, er... "temp employee" to do? Well, it doesn't seem like there are many options available.

1) Take a staff position - if you can find one.
2) Try to find as much work as possible at smaller agencies who still issue a 1099. Of course, the downside here is less work, smaller budgets and having to wait several months to get paid.
3) Continue working as a temp employee with all the restrictions that come with that classification.
4) Change occupations.

I do know that if the current trend to reclassify freelancers to temp employees continues with the smaller agencies then we'll all have one less option to consider.

You can find more info here:
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
http://en.wikipedia.org/wiki/Independent_contractor
http://en.wikipedia.org/wiki/Permatemp
http://www.contingentlaw.com/

If anyone has any thoughts, solutions or ideas regarding this situation I'd sure like to hear them.

Thanks,
Slim