For as long as I've been consulting, I've seen this same trio of money issues pop up for 99% of contractors, including moi. These are also front-and-center for newbie freelancers to think about for future decision-making. For us old-timers, we get to weigh them year after year, depending on market conditions, work opportunities, and, well, just dumb luck (or not).
The number cruncher: W-2 versus 1099
W-2 income, some might argue, defeats the purpose of going on your own if you're someone's employee. But it's more complicated than that. Sometimes to work with a client, particularly larger companies, you need to go through a temp staffing firm ("pass-through agency"). In fact, many big corporations these days remove themselves from the hiring and payroll process altogether as a buffer against lawsuits and other headaches. On the plus side, some of these agencies offer healthcare benefits if you work 30 hours or more a week. Consider this a huge win if you're employed through the agency full-time. What's not the win? They take a cut of your hourly rate for the duration of the gig.
On the other hand, 1099 revenue provides business income as a sole proprietor. You'll bring in the entire amount you earn and pay quarterly estimated taxes (but you'll shell out more taxes than W-2 income). To be hired directly with a company, you may have to prove that you have other clients, along with other requirements. In other cases, you may still have to go through an agency, but some agencies allow you to go 1099 if you fight for it (I have, and it's worked about half the time). Did I mention it's complicated? (Side note: for more confusing fun, keep your eye on AB5 and the PRO Act.)
There is a third option: a "mixed earner," which doesn't get discussed much but is a reality for many freelancers. It can be acceptable for some, however, if you're trying to secure a home or credit card loan, this can be problematic because a portion of your income that year won't count—literally. Your W-2 or 1099 income may be used to prove income, but not both together. The pro for mixed earner is um…well at least you're earning money.
The balancing act: Project fees versus hourly
Another common financial fork in the road is whether to charge a flat fee or an hourly rate. As usual, the correct answer is: It depends. The pros of project fees are that you know you'll earn a certain amount, and some projects lend themselves quite well to this model. For instance, as a writer, a well-defined brochure or website writing project is a good fit (especially for a colleague of mine who is a speedy writer). But there are no guarantees it will go as planned, particularly if it's the first time working with the client, whether it's bloated rounds of edits or scope creep. Contract terms should be crystal-clear to eliminate potential issues.
On the flip side, hourly rates can be a help or hindrance. From the client's perspective, if you estimate it will take you 20 hours to do a project, you want to stick with it or come under the amount, of course. Basing hours on previous jobs can sometimes prove useful, but each project has its players, nuances, and challenges, so you may have to end up asking for more money or eat the cost if it's a few hours (no one likes to do either of these things). Another route, if available, is to have an open purchase order (PO) in which you can run down your hours for each project. This is more typical when you have a long-term relationship with a client for ongoing work. I have done this many times and has the least amount of issues.
The lifestyle maker: Full-time contract versus projects
The question goes back to: if you left your full-time job willingly, why would you commit to a 40-hour workweek as a contractor? It's all about your motivation. For me, project work is my sweet spot, so whenever I've taken on full-time contracts over the years, I regretted it. I would still take clients on the side and get overwhelmed, leading to resentment, and it wasn't a good fit for me.
However, those who embrace the 40-hour-a-week client love the simplicity of the approach. It generates a regular income (likely through a W-2 agency) and there are no complicated tax forms. It could even evolve from a contract to full-time with the company if there is a mutual desire.
Long and short of it? There are no correct decisions for these freelancer income quagmires. Some consultants are clear about their choices and never waver, while others pick and choose depending on the gig. Follow your heart. Your business instinct. Your bank account. Or all three. Whatever is the driving force for why you became an independent, the right answers will come to you…at least for that year.
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