In general, freelancers are considered "independent contractors" under federal tax law, and do not have taxes withheld from their earnings, which are reported on Form 1099. That means you're responsible for setting aside some of those earnings and paying your own taxes. Your freelance income is reported on Schedule C, and you pay a higher tax rate ("self-employment tax") to make up for the Social Security contributions an employer might pay on your behalf. Very few of us like to pay extra taxes. So, it's important to keep good records of your work-related expenses, which can be deducted against your income to produce the profit (or loss) for the business for the year. Be aware that while most businesses don't show a profit in the first year, the IRS prefers that you show one in three years out of five — otherwise, your business may be reclassified as a "hobby." The IRS has strict rules for claiming deductions for a home office. If you hope to do this, do your research and consider consulting a tax pro (maybe as a barter arrangement for designing a flier or website!).

Most freelancers find their business goes in cycles. If you have the luxury of time to plan your freelance career, it may be wise to have a plan for what you'll do during the startup phase (when paying work is likely to be sparse) and during any subsequent "famine" phases. While you're scrounging up those first few clients, you may also want to start planning for what will happen when you have too many jobs! Yes, it can happen, and if you overcommit yourself you'll wind up burning yourself out and disappointing your clients. A few suggestions: — Keep good records so you can tell which clients are wasting your time or providing insufficient profit for the energy you invest in them. — Stay on top of what your competitors are charging, and raise your own rates when you start attracting bottom feeders. — As you network and market yourself, build relationships with others who are in your field, and take note of those who seem trustworthy and intelligent. You may want to subcontract work to them later!

Why are you freelancing? If it's just to fill some time until you get another full-time job, you may not need to do a lot of long-range planning. But if this is how you see yourself spending at least the next few years, it's worth sitting down with your family and/or financial advisors to figure out how freelancing is going to work with your overall goals. For many freelancers, a long-term financial plan involves getting paid for last week's job and finding another job to do next week. Especially if you have a family, this kind of short-sighted thinking can turn a rewarding career into a bad financial decision. Hard questions to ask include: — Where do I want to be in my career five years from now? — What happens if I become temporarily or permanently disabled? — If I'm not making enough money to meet my goals, what do I need to do to make more money? — What are my plans for retirement? — What happens to my business if I die? — How am I going to reach other financial goals (college for the kids, buying a house, etc.)? The answers may not be easy ones. Proper financial planning helps you have enough money to cover all of your expenses and reach your goals. Thinking about these questions and making some basic arrangements and plans gives you an advantage as you make choices about the type of work you accept.