For many new freelancers, navigating the process of getting paid as a freelancer can feel overwhelming. In traditional employment, the details of your income are sorted out for you by your employer: salary or wages are predetermined, payment is automated on set dates, and taxes are automatically deducted from your paychecks. As a freelancer, you’re responsible for managing every step of that process, so it makes sense that many freelancers aren’t even sure where to begin.
In this article, learn the basics of where to begin with managing freelance income, including: how to calculate your freelance rates, write an invoice, and manage your taxes the freelancer way.
Paying taxes as a freelancer
(Note: The information in this guide is for informational purposes and should not be relied on for tax advice. We suggest researching tax laws in your area and consulting with your own tax advisors.)
Since freelance clients won’t take out any of the taxes that a traditional employer would from your paychecks, it’s 100% your responsibility to pay taxes accurately and on time as a freelancer. Before you even begin to calculate your freelance rates, it’s important to understand how to pay taxes as a freelancer and how that should factor into your rates.
In the United States, tax season comes once a year—right? Not true for freelancers. If you earn money as a freelancer, it’s best practice to tackle tax season four times a year. The simplest way to approach that is to estimate your taxes due and pay the IRS at the end of each quarter. You might even incur a penalty fee if you only pay your taxes annually as a freelancer. Plus, paying your taxes quarterly can help you manage your finances more easily—paying smaller amounts four times a year can be less of a hassle than scrambling to make sure you have enough money to pay one large sum once a year.
How you choose to approach tracking, saving, and filing your taxes is up to you, but here are a few useful starting points:
It’s generally best practice to save at least 25% of each freelance payment to go toward paying your quarterly taxes.
Tracking your freelance income in some way will make managing taxes a lot easier. For example, collect all of your paid invoices in one place, or use an accounting software extension to stay organized. Some clients might send you a 1099 tax form, but it’s not required, so it’s wise to not rely on receiving that form and track your income with your own methods.
Wherever your freelance business is based, make sure you research and adhere to the tax requirements of your area, as they can vary based on your city, state, county, or country.
Get more advice for managing your accounting
Calculating your freelance rates
There are many factors that go into calculating what you should charge as a freelancer. It’s important to consider all of them when setting your initial rates. Over time, you can—and should—raise your rates in order to keep up with inflation, your experience level, and the market rate in your field.
Calculating your initial rate should take into account three main categories: what you need to earn, what you want to earn, and what clients are willing to pay.
What you need to earn. This category includes everything you absolutely need to be able to pay for each month. That might include: rent or mortgage payments, bills, groceries, business expenses (like software, equipment, or space rentals), health insurance, taxes (at least 25% of your income), and savings. If you’re planning to start freelance part-time in addition to a full-time job, take these considerations with a grain of salt, but don’t sell yourself short.
What you want to earn. Each person’s comfortable standard of living varies, but chances are you know what yours is already. Take into account the types of shopping and activities that you know bring you a better quality of life, plus other purchases on your radar, like saving for travel or bigger commitments like buying a house or starting a family.
What clients are willing to pay. This one depends on the demand and current market rate that typical clients in your field expect to pay for your type of services. That rate might be a range, where you’d need to use your judgment and knowledge of your own skills and experience to determine what point in that rate range your work lands. Research what competitive rates freelancers in your field are charging to gauge a starting point.
Setting different types of freelance rates
Once you’ve listed out all of your monthly expenses (both necessary and desired), determine what your minimum rate and minimum hours per month would need to be in order to meet the minimum salary you need to make each month to live comfortably.
Let’s look at this problem in action: Maybe you’re a web designer whose total cost of living is currently $3,000/month. If you’re planning to freelance full-time as your only source of income, you’d need to set a rate that would help you hit that $3,000 minimum. You’ve also done your research and found that web designers with your level of experience charge about $75/hour.
In order to make at least $3,000/month, these are the most common rate options and how they would work in that scenario:
Charge an hourly rate of $75 for projects that you know will take you a total of at least 40 hours to complete. Hourly rates are common, but always make sure you’re tracking your hours dedicated to each client. Some clients might question where your time was spent when it comes time to pay, and it’s useful for your own time management to know how long specific tasks are taking you to complete.
Set a fixed-fee rate for each of your services that would help you reach that minimum income. For example, if you know that designing a logo typically takes you around seven hours, you could charge $600/logo, knowing that means you’d need to book at least five clients who need a logo design each month.
Agree on a monthly retainer fee with clients who require ongoing work from you. This option not only helps you build a steady client base, but could also help you meet your minimum income requirement in a more reliable way. That would open up your income potential and mitigate risk when quoting rates to other clients.
For example, you could charge a $3,000 monthly retainer to one of your clients, knowing that they require about 10 hours of work per week from you. Feeling secure that your minimum income requirements will be met with that one client at 40 hours per month, you’d still have plenty of bandwidth to take on more clients, charge them other rates, and earn above and beyond your monthly income minimum.
According to a 2019 Statista survey, around 48% of freelancers use a fixed-fee rate structure, while 29% are setting hourly fees exclusively, and 23% use a hybrid structure that alternates between fixed and hourly fees, based on the project. Regardless of which structure works best for you, it’s important to always quote an additional rush rate to clients. Rush rates should be at least double your typical rate, as they’d only be applied to projects that require a turnaround of 24 hours or less.
Remember that whatever rates you set, these are just your baseline. As you grow your audience, skills, and reputation, you’ll be empowered to raise your rates down the line.
Managing freelance invoicing
Once you’ve set your rates and landed your first client, you’ll need to be prepared to send your first invoice to that client. Invoicing is the most common way to get paid as a freelancer. An invoice is a document that states the services you’re completing and the price of those services that your client has agreed to pay. You can then send that invoice to your client as a PDF or use an invoicing management software. Always make sure your payment method options are clear to clients, so they know how to actually get the money to you.
Invoices are pretty straightforward, but it’s important to be meticulous about how you write an invoice as a freelancer, since including key details are crucial to getting paid accurately and on time. The two most important parts of an invoice are the payment terms and the amount due—learn more about those below.
Learn how to send branded invoices on Squarespace
What are the different invoice payment terms?
It’s common to send an invoice either at the same time you’ve signed a contract with a client, or at the point when you’ve completed services. The option you choose depends on the type of payment terms you agree on and the rate type you charge. For example, if you charge a fixed-fee rate or retainer fee, you could send the invoice right away. If you charge an hourly rate, it’s wise to wait to send the invoice until you’ve tracked the actual number of hours you worked for that client, not just an estimate.
Payment terms are an agreement you and a client make together about when you expect to get paid by them. Some of the common payments terms include:
Invoicing clients for 100% of payment due at a specified future date. Typically, freelancers set these as NET 30 invoices, which means that payment is due 30 days after issuing the invoice.
Invoicing clients for a percentage of payment up front. Depending on the project and previous relationship with the client, freelancers might charge 50% up front and 50% NET 30, or in rarer cases they might charge 100% up front.
For services that are customer-facing and appointment-based—such as certain types of photography, coaching, or strategy consultations—freelancers might forgo invoicing altogether and charge for services through online scheduling software. For example, with Acuity Scheduling, you can set your services and rates per service, then share them via an online scheduler on your website or social media platforms. From there, clients can simply pay you at the point of scheduling via credit card.
What should be in a freelance invoice?
The key elements of a freelance invoice include:
Identifying information. Include the name, address, and contact information for both you and the client at the top of the invoice.
Services. Create line items where you write out the types of services you’ve contractually agreed to complete for that client.
Your rate. Beside those services, state your agreed-upon rate (fixed, hourly, hybrid, retainer) for each of those services. If hourly, add a column for the number of hours you worked on each service. If applicable, replace your normal rate with your rush rate beside any services that you’d been contracted to complete within 24-hours.
Total amount due. Based on those rates (multiplied by hours worked, if applicable to your rate structure), calculate the total amount owed to you by that client.
Date issued. Add the date when you are issuing the invoice to the client.
Date due. Clearly mark the date when the client is required to pay you the invoice total without incurring a late fee. For example, if you agreed to 50% up front and 50% upon completion, mark both of those due dates. If you’ve agreed to NET 30, mark 30 days from the date issued.
Late fee. Note the late fee you’ll charge the client if you don’t receive payment by the agreed-upon due date. Your late-fee should be clear in both your invoices and client contracts. If a client sends payment past your agreed-upon terms, you have the right to charge them a flat-fee or percentage of your amount due. For example, you could set your payment terms as NET 30 with a 10% late fee if you don’t receive payment within 30 days of invoicing the client.
See more best practices for client invoices
Getting paid accurately and on time
No matter how and when you choose to get paid, it’s ultimately up to you to look out for yourself and make sure you get paid accurately and on time.
Here are a few tips to help you to that end:
Track your time spent on each project in a spreadsheet or relevant software. If you’re charging an hourly rate, this is crucial, as it’s best practice to communicate that hourly progress with clients. But even if you’re charging a fixed-rate, it’s useful for you to know how much time you’re spending on certain projects or tasks—if it turns out that you’re spending more time than expected, that data could help you figure out how to raise your rates or create more efficiencies in how you do the work.
Be your own advocate. Your time and skills are valuable, and you deserve to be paid fairly for them in a timely manner. Setting expectations around payment deadlines should be enough for most clients, but there might be times when you’ll need to remind clients about late fees and nudge them to pay you. Remember that if you work with a client who consistently does not pay you on time or at all, it is within your power to sever that client relationship.
Keep in mind that most freelancers are learning as they go. You’re not alone. Mistakes are normal—just be patient with yourself and your clients, and gently course-correct when you discover which methods work better for you. Once you’ve laid the groundwork in setting your rates and learning how to write an invoice, you should be prepared to start looking for your first clients.