Transition from employment to freelance life can be a double-edged sword. On the one hand, it allows for more flexibility and freedom, which may be crucial for creative jobs like writing careers. However, getting paid on time remains a sore spot among this group.
According to statistics, 68% of 1099 employees are worried about their income stability and report that the unpredictable nature of freelance work can make it difficult to maintain a consistent income stream. This article will explore factors that cause financial gaps among freelance writers and provide some practical ways to improve cash flow.
How Freelance Writers Really Make Money
Depending on what you write, there are several ways to get paid:
Invoices
Invoices are bills you issue to your client for the primary job, which is writing itself. This option is common for freelancers who write B2B content, landing pages, blog posts, SEO articles, case studies, and other copy for businesses. Some writers are paid per hour or per word, while others, primarily top earners, charge a set amount per project.
Advances
An advance is an amount a publisher pays an author upfront for the rights to the book. This is a guaranteed amount you earn, even if the publisher doesn’t sell a single copy. However, if the book sells well, the advance will be deducted from royalties.
Royalties
Royalties are rare for content-focused writing but are common for authors who are engaged in writing and publishing books. When working with traditional Big 5 publishers, writers can earn up to 15% on print books and up to 25% on ebooks per copy sold. Small presses usually pay up to 50% royalties, while self-published authors can earn up to 70%.
Why Freelance Writers Face Financial Gaps
Financial challenges are common for all freelance jobs. Below are the main factors that cause them, with a focus on writing careers.
Payment Issues
Freelance writers are typically paid on Net-30 to Net-60 terms. This means that clients need to pay in full within 30 or 60 days of the invoice date, respectively. At the same time, fixed monthly expenses, such as rent, utilities, groceries, insurance, software subscriptions, and taxes, still need to be covered on time. As a result, 54% of writers say it takes too long to get their money.
“According to our internal data, nearly 35% of all self-employed applicants seeking short-term loans name delayed payments as a primary reason for applying,” says Brandee Doyle, the Financial Expert at tremplocounty.com. “Loan amounts requested by freelancers range from $500 to $4,000, with emergency expenses and daily needs heading the top of the most common loan uses. This way, we see that the major problem lies in payment timing issues rather than in insufficient annual income.”
Royalty payments are also inconsistent. They are usually made semi-annually according to how many copies were sold during the counting period. This creates a gap between earned and received income, which also requires writers to build cash reserves to manage mandatory costs until payments arrive.
Unpredictable Work
Being self-employed requires you to look for new clients on your own. As long as you are not a big name in the industry, it will take time and effort to find a new gig or contract. As a result, freelance writers face insatiable jobs and a lack of predictability. Authors who work with books also have to find publishers who will be eager to pay an advance for the rights.
Lack of Savings
When income fluctuates, it may be difficult to build an emergency fund that prevents potential financial stress down the road. If unexpected expenses arise, freelancers often have no savings to dip into. This results in increased reliance on debt, which involves extra interest and may cause long-term financial problems if managed irresponsibly.
5 Ways to Improve Cash Flow
Writers and other independent contractors can’t improve their finances by simply raising prices or moving inventory. However, they have a few alternative ways to manage their cash flow. Here are practical steps to take to improve your finances as a freelance writer.
Create a Budget
Budgeting is key when it comes to financial stability. It helps you plan your spending, find areas where you can cut back, and ensure you know where your money goes. To get started, track your invoices to better understand how much you earn and when the funds will arrive.
Then, list your fixed, mandatory expenses by categories. Move to extra spending and make sure you account for things like food deliveries, coffee to go, and subscriptions. Review your bank statements so as not to miss anything, and indicate expenses you can easily do without.
Finally, choose a budgeting strategy that works best for your situation. This will give you confidence as you will know every dollar you earn has a purpose in your financial plan.
Invoice Promptly
Check the terms of your contract to see how frequently you can bill. In many cases, you may be allowed to invoice every two weeks or as soon as the project is complete. This will minimize cash gaps.
Additionally, make sure you invoice promptly and accurately. Include all the related details, including your payment terms, rate, the number of hours worked or words written, any project specifics, and your PO number, on your invoice. This will prevent confusion and allow for faster payouts.
To keep everything under control, create a spreadsheet of all invoices and track them regularly. This will make budgeting easier and help you chase any past due bills.
Save Money for Taxes
As a freelancer, you will have to pay your estimated taxes quarterly to the federal and state governments. To calculate the due amount, you need to figure out your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
If you do not plan for these costs, you can easily find yourself in a financial crisis while your next invoice payment is weeks or months away. To prevent such situations, create a separate savings account for tax purposes and set aside 30% to 35% of your earnings each time you receive a payment from your client.
Consider Forming an LLC
Freelance writers often face a high tax burden while they are considered sole proprietors. This status requires them to pay 100% of their self-employment taxes on all business profits minus deductible expenses.
By forming an LLC, you only pay self-employed taxes on your wages, while the remaining profit is distributed as dividends, which are subject to personal income tax. However, it may not be the best option for all freelancers, since it involves more paperwork, state fees, and administrative responsibilities.
Create a Retirement Account
Saving money on retirement via a Simplified Employee Pension (SEP) Retirement Plan can help you lower your tax burden by reducing your taxable income. The SEP plan allows you to contribute up to the highest of 25% of your annual income or $57,000. Besides being tax-deductible, these contributions make you more confident in your financial future.
Final Thoughts
Cash flow gaps are quite common in freelance writing careers due to unpredictable work, inconsistent income, and payment delays caused by Net-30 or Net-60 payment terms and semi-annual royalties. As fixed monthly expenses do not wait until the payment arrives, freelancers need more cash reserves to get through the month. To reach financial stability, you need to create a budget, set aside money for taxes and emergencies, and cut back on some unnecessary costs. Prompt invoicing and reducing your taxable income through LLC or retirement savings can also help improve cash flow.
The Lit Bitch 