From Employee to Freelancer: How to Cautiously Make the Leap

From Employee to Freelancer: How to Cautiously Make the LeapBy Holly Reisem Hanna

Hi Holly,

At the beginning of the year I will be making a huge switch from my full time position to freelance in order to get rid of my long commute and be closer to home and my two year old. To say I am nervous for the transition is an understatement. Do you or your readers have any tips? Freelance is a new venture for me and brings tons of anxieties around benefits, 401K, how to withhold for taxes, ahhh!

Thank you in advance for any suggestions, Rebecca

Hi Rebecca,

I know what you mean about anxiety and fear! It took me many months to get all my ducks in a row, before I felt confident launching my business. Even then I still made mistakes along the way. But with a little pre-planning and the right tools you’ll prepared to handle whatever comes your way.

Health Insurance:

Before you give up your existing coverage, you’ll need to have a plan for getting coverage, whether it’s through your spouse’s plan, COBRA, or another provider. This is one area where I was lucky, because I was able to get on my husband’s insurance plan without any wait or issues.

If you need to look for a new provider try looking at, HealthSherpa, GetInsured, or on these sites you can add your age, income, and family members to get quotes from various companies. On a couple of the sites I was able to find coverage for around $200 a month for myself. If your income is low enough, you and your kids may qualify for Medicaid or the Children’s Health Insurance Program.


When I switched from employee to entrepreneur, I was totally clueless about what to do with my existing 401K and how to plan for my future. Luckily, my husband and I were able to come up with a plan that works well for us as a family.

First, you’ll probably want to rollover your existing 401K into an IRA (Individual Retirement Account), SEP IRA (Simplified Employee Pension) or a Solo 401K, so that you can continue to contribute to your retirement plan. Each type of account has its own pros and cons, so meeting with a financial planner can take a lot of the guesswork out of the process. I was able to meet with one at my bank branch. It took a couple of meetings to get the paperwork filled out, filed, and the account setup, but once everything was in place it’s been little to no maintenance to keep up.


When I started my business, I knew I had to keep track of my income and expenses, so I used a spread sheet to record everything. While this worked (kind of) it made tax time a huge hassle. Nothing was categorized correctly, and I had to jump in between tables to locate all of the information that I needed. Not only that, but I had no idea that self-employed individuals needed to pay quarterly taxes, so I was hit with a tax penalty — ouch!

While it can be tempting to save a few dollars on expenses, don’t scrimp when it comes to managing your finances. Using a spread sheet to track your income and expenditures is not only time consuming and segmented, it also doesn’t calculate how much you owe in quarterly self-employment taxes. Use a simple online accounting system like Outright to help automate, organize, and track your finances. Not only will this make your bookkeeping easier, but it saves you time and headaches when tax time rolls around.

Business Structure:

The second part of your tax equation will depend on your business structure. As a freelancer, you can choose to run your business as a Sole Proprietor, General Partnership, Corporation, or a Limited Liability Company (LLC). Again each one has its pros and cons and meeting with a tax attorney can take the guesswork out of which is best for you. It’s easiest to get started as a Sole Proprietor, because you don’t need to have a separate business bank account or an Employee Identification Number (EIN), but I would recommend setting both of these items up. Another item to consider is when you’re working as a Sole Proprietor your personal property and your business are considered one, which could be problematic if your business is sued or has bad debt. Forming an LLC provides a buffer between your personal property and your business.

Stay Organized:

It’s easy when you first start out to manage your clients “in your head“ or by using a simple calendar. But once business starts to pick up and you have multiple clients, it becomes very difficult to remember what needs to be done, and when. One of the easiest ways to manage and run your freelance business is by utilizing Customer Relationship Management (CRM) software. CRM software allows you to organize, automate, collaborate, notify, gather data, and track your freelance projects all in one place — which simplifies and streamlines your business. And there is no reason to worry about price — Trello is not only easy to use, but it’s totally free and can be used on both your desktop and smartphone.

Peace of Mind:

One of the biggest stressors for new freelancers is lack of money. Unless you’ve started moonlighting (taking clients at night while you’re still at your current job) you’ll probably be starting out from scratch — no clients and no income. To help alleviate some of this financial stress, it’s wise to have an emergency fund. Experts usually suggest having 6 months worth of essential living expenses (rent, food, utilities, etc) in your savings account. During this time you’ll also want to modify your budget to cut out non-essential spending while you’re ramping up your business. You may also consider doing some side tasks to bring in a little extra money.

Starting a new freelance business can be a scary endeavor, but once you start planning and executing your dream, you’ll become more at ease with the process and lifestyle. Just keep placing one foot in front of the other.

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