Freelancing is a tempting prospect for many people stuck in the slog of a 9-to-5. The allure of flexibility, independence, and self-sufficiency is certainly an easy sell—but with this freedom comes the hidden costs of freelancing. These expenses, often overlooked by those eager to dive in, can impact your financial stability and throw the success of your business off course. 

Understanding and managing these costs is key to a sustainable freelance career. Below, we’ll cover the hidden costs of freelancing and strategies for managing them effectively.

10 Hidden Costs of Freelancing

1. Irregular Income
2. Health Insurance
3. Taxes
4. Retirement Savings
5. Equipment and Software
6. Professional Development
7. Workspace and Home Office
8. Marketing and Promotion
9. Insurance and Liability
10. Administrative Tasks

1. Irregular Income

One of the biggest financial mistakes freelancers make is failing to plan for unpredictable income. Unlike a regular salary, freelance earnings can fluctuate monthly. Some months may bring in more than expected; others may leave you struggling to make ends meet. This can be a particular pain point for those who rely on regular income to pay bills, support a household, and cover expenses. 

How to manage it

• Save, save, save: It’s absolutely critical to establish a solid budget and build an emergency fund. If you can, aim for three to six months’ worth of expenses. Be especially proactive in saving money during high-earning months in anticipation of slower months. This is something you can ask a financial advisor about if you think professional advice could help.
  
• Diversify where possible: Don’t depend on one or two clients for the bulk of your income. You should diversify your client base to ensure a steady flow of projects. You could even consider a retainer model for more regular payments.

2. Health Insurance

In the U.S., employer-sponsored healthcare is an undeniable benefit of traditional employment. As a freelancer, you don’t have this “luxury.” This can mean bearing the full cost of medical coverage for yourself and your family.

How to manage it

• Get a Marketplace insurance plan: As part of the Affordable Care Act (ACA), you have access to plans of varying costs and levels of coverage via Healthcare.gov. Some states also have their own Marketplaces. You’ll need to enroll during the Open Enrollment period, which occurs once a year; this typically runs from Nov. 1 to Jan. 15. You can also qualify for special enrollment outside of this window if you experience a “qualifying life event.” This would include things like a marriage, divorce, job loss, or birth of a child.
  
• Stay on your parents’ plan: If you’re under the age of 26 and your parents have health insurance, you can remain insured under their plan. This is a provision of the ACA.
  
• Join your spouse’s plan: If applicable, you can obtain coverage through your spouse or domestic partner’s employer-sponsored health plan. Note that this will likely raise their monthly premiums.
  
• See if you qualify for Medicaid: If you have limited income, you may qualify for Medicaid. Eligibility largely depends on your income level and varies by state, especially since some states have expanded their Medicaid programs under the ACA. You can apply for Medicaid any time of the year through your state’s Medicaid agency or through Healthcare.gov.
  
• Join a professional association: Some professional trade organizations and associations offer group health plans. These groups leverage the collective bargaining power of their members to negotiate health insurance plans with more favorable terms than individual freelancers might find on their own. Examples include the Freelancers Union or the National Association for the Self-Employed (NASE). Note that joining one of these organizations typically involves a membership fee.
  
• Find a health sharing plan: Health sharing plans are not traditional insurance, but they can be a cost-effective alternative. Members pool their resources to cover each other’s medical expenses, often through a faith-based or nonprofit organization. To join, you’ll pay a monthly fee that acts as a premium, and when you need healthcare, you’ll submit your medical bills to the network to request payment. Because health share plans are not insurance plans, they are not bound to the same requirements and set their own rules on what they will and will not cover.
  
• Consider a short-term plan: If you need to bridge a gap—maybe you missed your open enrollment period, for example—you can consider short-term or temporary health insurance. These plans will typically cover you from a period of a few months to up to three years. It’s important to note that short-term plans are meant to be just that—short-term solutions. They provide basic coverage for emergencies and are not regulated by the ACA, which means you will be subject to medical underwriting. They are also not available in every state.
  
• Use your COBRA coverage: The Consolidated Omnibus Budget Reconciliation Act (COBRA) generally applies to group health plans offered by private-sector employers with 20 or more employees. If you’re preparing to leave a traditional full-time job, you can extend your current coverage for at least 18 months. COBRA coverage typically costs more than the health insurance you paid for while working. This is because your employer is no longer paying their share of the premium. Before you go this route, you may want to compare your COBRA coverage against plans on the Marketplace, which may be cheaper.

3. Taxes

You can escape the 9-to-5 grind, but you can’t escape taxes. As a freelancer, you’re responsible for figuring out your own withholdings and tax obligations—including self-employment tax—and making quarterly estimated payments. This can be a substantial financial burden (not to mention a recipe for confusion) if you’re not prepared for it.

How to manage it

• Keep detailed records: Being meticulously organized with your books will go a long way in preventing tax-related hiccups. This includes invoices, receipts, and bank statements. Keeping accurate records not only makes it easier to calculate your taxable income but also to claim legitimate deductions, ultimately reducing your tax liability.
  
• Set aside money for taxes: Be proactive in setting aside money for taxes throughout the year. Unlike employees who have taxes withheld from their paychecks, you are responsible for paying your taxes on your own. Many tax professionals recommend setting aside at least 30% of your income in a dedicated tax savings account if you’re freelancing for the first time. After that, you can use your income from previous years to estimate your tax burden moving forward.
  
• Get professional help: While getting professional tax help will cost money, the peace of mind can be priceless. Hiring an accountant or using tax software specifically designed for freelancers can provide expert guidance, help maximize deductions, and ensure that all tax obligations are met on time. They can also help you navigate any complex tax rules or regulations that apply to your specific freelance business. 

4. Retirement Savings

Without access to a company-sponsored retirement plan, saving for retirement falls entirely on you. This can be a challenge; data from SCORE notes that 34% of small business owners do not have a retirement savings plan at all. Whether it’s a lack of options or inconsistent income, you can find plenty of reasons to put retirement savings on the back burner. But this is an important thing to prioritize; the sooner, the better.

How to manage it

• Solo 401(k): These plans are designed for self-employed individuals and their spouses (with no other employees). You can make contributions to the plan as both the employee and employer. As of 2024, this total contribution limit is $69,000. If you’re over age 50, you can make an additional $7,500 catch-up contribution for a total of $76,500. Solo 401(k) contributions are made with pre-tax dollars—lowering your tax liability now. Funds grow tax-deferred until you withdraw them in retirement (after age 59½). At that point, they’re taxed as ordinary income.
  
• Traditional IRA: Contributions to a traditional IRA (individual retirement account) are made on a pre-tax basis. The funds grow tax-free until they are withdrawn in retirement. For 2024, you can contribute up to $7,000 to your traditional IRA, with an additional catch-up contribution of $1,000 if you’re over age 50. You can take withdrawals from your traditional IRA penalty-free starting at age 59½. After age 73, required minimum distributions (RMDs) are necessary.
  
• Roth IRA: Unlike a traditional IRA, contributions to a Roth IRA are made with after-tax dollars, meaning there’s no tax deduction for you now. However, withdrawals—including earnings—are tax-free in retirement (after age 59½) and there are no RMDs. If needed, you can also withdraw your contributions (but not your earnings) penalty-free before you reach retirement. Roth IRAs have the same contribution limits as traditional IRAs, but note there are eligibility phase-out ranges based on your modified adjusted gross income (MAGI). For some people, this may mean you can contribute a reduced amount, or not at all.
  
• SEP IRA (Simplified Employee Pension plan): A SEP IRA is a retirement account designed for self-employed individuals and small business owners. It allows business owners to contribute funds on behalf of themselves and their employees. Contributions to a SEP IRA are tax-deductible, and the funds grow on a tax-deferred basis until they are withdrawn in retirement. SEP IRAs allow business owners to contribute the lesser of $69,000 (in 2024) or up to 25% of compensation or net self-employment earnings. Like other tax-deferred retirement plans, you must take RMDs at age 73 and there are penalties for withdrawals before age 59½. It’s also worth noting that as the employer, you are required to contribute an equal percentage of salary for each eligible employee. You also count as an employee.
  
• Personal investment account: Anyone can use a personal investment account to save for retirement. All you have to do is contribute a portion of your income into a diversified portfolio of stocks, bonds, and other assets, and let time do the rest. As a plus, there are no age-based penalties for accessing your funds before retirement, and there are no contribution limits. It’s important to regularly review and adjust your investment strategy based on your risk tolerance and financial goals.

5. Equipment and Software

It’s easy to overlook the cost of equipment, software, licenses, and other business management tools when calculating expenses. These items can be quite expensive and can add up quickly, especially if they need to be replaced or upgraded over time. It’s important that you’re carefully documenting these expenses and accounting for them in your budget.

How to manage it

• Make sure you’re getting the best price: No matter what it is you’re buying, do some research to compare prices before you pull the trigger. Make sure you’re looking for any possible deals, including sales, bundles, subscription plans, or even buying pre-owned.
  
• Try before you buy: If your freelance job involves physical equipment—maybe you’re a photographer, for example—see if you can rent or borrow a piece of equipment to test drive it first. This will help ensure that you’re really purchasing an essential and that it’s the right product for your needs.
  
• Use free or open-source software: Software licensing costs can add up very quickly. If possible, search to see what free or open-source alternatives are out there.

6. Professional Development

Staying competitive in the freelance market often requires ongoing training and professional development, which is something you’ll have to seek out and pay for on your own. This can include attending workshops, taking online courses, or joining industry associations to stay updated on the latest trends and skills. 

How to manage it

• Start small: You don’t have to dive straight into costly classes or conferences. Look for free or low-cost resources you can use to your advantage. Check out online courses, webinars, or podcasts about your field.
  
• Network: Take advantage of learning opportunities within your existing professional communities, both online and offline. This is a great opportunity to put yourself out there and build relationships with other professionals.
  
• Set aside some funds: Create a bucket in your budget specifically for professional development. Set aside funds regularly to invest in your growth, whether that’s for one big event per year or several smaller events throughout the year.

7. Workspace and Home Office

Working from home can save money in many ways, but if you don’t already have a dedicated home office, the costs of creating one can pile up. You’ll need furniture, equipment, and office supplies—and you’ll also need to factor in the expense of utilities like heat, electricity, and internet. If you choose to rent an office or coworking space, expect to pay anywhere from $50 to several hundred dollars per month.

How to manage it

• Go local: There may be areas throughout your community where you can find a free, quiet place to work. Your local library or neighborhood cafés are a good place to start.

8. Marketing and Promotion

Marketing is essential for businesses of any size, including freelancers. At the very least, you’ll need a professional website. If you intend to advertise your services either online or through traditional media, there are additional costs, too. 

How to manage it

• Get social: Building a strong social media presence is one of the easiest ways to market your business for free. Research what platforms your customer demographic is most active on, and focus your efforts there. Use the account to showcase your most recent work, engage with your followers, and provide valuable, shareable content to grow your audience.
  
• Ask for reviews: Forty-six percent of consumers feel that online reviews are as valuable as personal recommendations from friends and family members. Positive reviews act as social proof, which can help you build trust and credibility with potential clients.
  
• Think outside the box: There are other effective ways to market your business for free. Consider starting a blog, attending networking events, joining online communities relevant to your field, and leveraging word-of-mouth referrals.

9. Insurance and Liability

Depending on your field, you might need liability insurance, which can add to your expenses. This is particularly important for fields like photography, consulting, and event planning where an unfortunate accident or legal issue could spell financial ruin for your business.

How to manage it

• Shop around: Don’t settle for the very first quote you receive. Instead, compare quotes from different insurance companies to find the best rate for your needs and budget.
  
• Opt for a higher deductible: Typically, when you choose an insurance plan with a higher deductible, you’ll pay less in premiums. This can be an effective way to lower your insurance costs upfront.
  
• Bundle your policies: If you already have a home or auto insurance policy, you may be able to save on business or liability insurance from the same insurance provider. Many companies offer multi-policy discounts.

10. Administrative Tasks

As a freelancer, you’ll undoubtedly have an administrative to-do list full of non-billable but necessary tasks. This can include things like bookkeeping, invoicing, contract negotiation, and scheduling. Why is this a hidden cost? These tasks take time and effort that could otherwise be spent on client work or acquiring new projects.

How to manage it

• Get help: If these tasks are taking up a significant amount of your time, consider outsourcing them to a virtual or freelance assistant. Note this is only worth your while if the cost of missing out on client work justifies the cost of hiring help.
  
• Use software: Look for tools and other programs that automate and streamline administrative tasks like invoicing, time tracking, and project management.

Author