The Ultimate Guide to Building Freelance Income

Editor's Note: This story originally appeared on FlexJobs.com.

Are you interested in starting a freelance business? If so, you’re not alone. Whether you’re a stay-at-home parent looking to make extra income or a seasoned professional seeking more flexibility and freedom, freelancing can be a great way to earn money and work on your terms.

When you feel limited or frustrated by your current job, it can be tempting to quit and strike out on your own. However, a freelance business is not something you should jump into without a solid foundation. You need to clearly understand your skills and strengths, your niche market, your target clients, and your unique value proposition. In addition, you need to have a plan for marketing your business and generating leads.

Without these things in place, it’s doubtful that you’ll be successful as a freelance business owner. So, if you’re considering making the switch to freelancing, take the time to consider the following tips and prepare first.

Launching a Successful Freelance Business

Starting your own freelance business can be an exciting and profitable venture, but it’s important to know what you’re getting into. From taxes to networking, a lot goes into growing your craft beyond simply showing up every day. It may take a little longer to get started, but it will pay off in the long run.

Keep Your Day Job for Now

Realistically, being someone else’s employee does have its advantages (like health insurance and a regular paycheck). Instead of quitting your job, try taking on a freelance side project or two. Most successful freelancers will tell you that it’s best to keep your day job while giving freelancing a test run. It gives you time to learn about the life of an independent contractor, adjust your processes, and prepare yourself for the full-time freelancer role.

During your test run, it’s a good idea to save your freelance earnings until you have an amount that equals at least three months of your regular salary — although six months is ideal. That gives you a safety net to tap while building your client base.

Anticipate the Loneliness

While building your business, one of the most challenging aspects of your new venture might be that you’re suddenly alone all of the time. Gone are the daily chats and lunches with coworkers, meetings with your team, and other social events you are accustomed to. Mitigate that by finding freelancers or small businesses that offer similar or complementary services or products to what you offer. Do a little digging to discover if any local or online professional associations seem like they might be a good fit.

This gives you “colleagues” you can bounce ideas off of, the potential to find a freelance mentor, and a much-needed social boost when you’re feeling the solitude. Even one or two days a month working at the local coffee shop can help ease the isolation many freelancers experience. You could also consider logging some hours at a local coworking space once in a while.

Embrace All of Your New Titles

Running your own business means you get to be the boss. But it also means you’re the director of a new company, account manager, customer service rep, bookkeeper, accountant, IT department, social media manager, and janitor.

If you want to be a successful freelancer, you’ll need to handle the customer service from beginning to end, but beyond that, you’re in charge of creating the foundation that generates a successful business. You can outsource these jobs if you’re honest about your strengths and weaknesses. But you’ll need to be realistic about your budget and your abilities so you can put a plan in place.

Understanding Your Freelance Finances

When you’re a freelancer, you are often no longer working for just one employer. Working for yourself frequently means multiple streams of income, multiple streams of paperwork, and staying on top of taxes. Beyond the advice of “get and stay organized,” you need to know a few crucial things about freelancers and taxes.

Save Everything

The last thing you want to do is declutter all your receipts. Save everything.

It doesn’t matter if it’s in a shoebox or a fancy online system. Keep them for at least seven years. Why seven? The IRS has six years to start an audit after you file a tax return, and you’ll need those receipts to back you up. And yes, you need the actual receipt, not a copy of the receipt or a line in your ledger.

Track Your Income

Similarly, you’ll need to keep track of all your income. Because multiple clients pay you (instead of one employer), you need a way to make sure everything is reported correctly on your taxes.

Any company that pays you more than $600 must send you a 1099 form. To ensure you receive a 1099, send a W-9 form to each of your clients. The W-9 form has your name (or business name), your tax ID number, and some information about your tax rate.

Make Your Quarterly Tax Payments

You also have to pay the self-employment tax in addition to your regular income taxes. The self-employment tax is what your former employer took out of your paycheck to cover Social Security and Medicare taxes.

Since you’re now the employer and employee, it’s up to you to pay it regularly. Regularly paying your taxes as a freelancer means “quarterly.” The IRS’ estimated tax payments are due on April 15, June 15, Sept. 15, and Jan. 15.

Each due date covers a specific calendar period. For example, June 15 covers April 1 through May 31. And don’t forget that you also have to file your regular tax return on Tax Day, which is usually April 15.

Your Taxes Are an Estimate

These quarterly payments are “estimated payments” based on what you paid in income taxes last year. That number is divided by four, and that’s what you pay to the government on the due dates.

On April 15, you complete your tax return and determine if you overpaid or underpaid, then proceed accordingly. The tax you pay that year is used to estimate your payments for the following year.

Understand Your Deductions

While discussing taxes, we should mention that freelancers can deduct things they can’t as W-2 employees. However, those deductions are subject to many rules. For example, you can claim a home office deduction as a freelancer. However, that home office has to be used exclusively for your work.

So, if your “office” is the kitchen table where people eat breakfast, you can’t deduct that space as your home office. You can deduct travel, meals, certification classes, and even some office supplies. But the IRS has some strict rules, so make sure you talk to a trusted accountant before deducting anything.

Handling Health Insurance

Health insurance can be tricky for freelancers, and getting it isn’t always easy. If you’ve got a spouse or partner, you can likely get your health insurance through their plan. But if you’re single, you’ve got to find health insurance as a freelancer somewhere else.

No matter where you buy your health insurance, as a freelancer, you can deduct your health care premiums for medical, dental, and some long-term care insurance. However, you cannot deduct the total amount for all of your different types of insurance, and again, the IRS has many rules and regulations regarding the deductions.

How to Get Paid

One crucial but often overlooked tip includes sending all of your clients a contract or other type of formal, written agreement before you start work. And that includes receiving signed copies back from your client. If your client doesn’t offer a contract upfront, you should request one (or have a contract ready).

Reputable clients will have no problems signing or providing a contract. Less-than-reputable clients may balk. A contract protects both you and your client, so anyone not willing to sign one is a client you should consider walking away from. It’s better to leave potential money on the table than do all the work and never get paid.

Using invoicing software can make your life substantially more straightforward. Most programs let you upload a custom logo and even create multiple templates. You can also set up recurring billing for clients that pay for the same thing every month. These programs also make it easy to resend invoices, cancel them, and remind clients that they need to pay.

Growing Your Freelance Network

Be cautious about depending too much on one client to supply most of your income. You could suddenly find yourself left high and dry, with no go-to source to replace your lost income stream. Instead, you want to be prepared for your current workload to fluctuate — possibly sooner than you think. One of the best ways to keep your pipeline flowing is to be in a continual networking rhythm. Even though you work alone, there are multiple ways that you can grow your professional network.

Share Your Business With Your Contacts

A strong business is built on both what you know and who you know. And one of the best sources of finding fresh clients is starting with those you already know. So, reach out to former bosses and colleagues — or even friends and family — to let them know that you’re freelancing. After all, the people who like you can be your most prominent (and most enthusiastic!) advocates and spread the word about your business.

Embrace Social Media

In today’s digital world, one of the best starting places is online, optimizing your social media profiles for freelance work. Update your LinkedIn profile with your new freelancing status and establish a Twitter account and Facebook page for your business. Depending on your work type, it may make sense to have a Pinterest page and Instagram account.

Once you’ve established your online presence, you need to update your accounts frequently. Some potential clients will gauge how serious you are as a freelancer — and if they will hire you or not — by how often you update.

Attend In-Person Events

Local events are an excellent way for freelancers to network and build a contact list. Check for trade shows, the local chamber of commerce, and any events hosted by the Small Business Association. And don’t rule out the power of volunteer work. Anywhere you can meet with other people face-to-face is an excellent opportunity to network.

Create Your Freelance Success Story

Undoubtedly, freelancing has many benefits. But it also comes with its fair share of challenges. If you’re realistic about the work that is required — and take the time to set up a strong foundation for your business — you’ll be ready to handle the challenges so you can move on to enjoying the freedom and flexibility.