The Creative Freelancer's Guide to Setting Up a Business and Getting Paid

Posted by

Ana Wang

Published on

May 20th 2020

The world of freelancing comes with an entirely new set of challenges: you're not only responsible for getting clients, doing the work and developing your professional practice as a creative, you're also operating the engine of your independence. That means deciding what you're worth, closing the sale, and managing your cash flow.

But if any of your previous jobs wasn't accountant, lawyer or operational kingpin, it can not only feel challenging but foreign altogether to even talk about money, much less ask for it and know what to charge. What if they say no? Is it too high, is it too low? This is why work experience before making the freelance leap is for more than just improving your craft - it also gives you a major leg-up when it comes to understanding the business side.

I remember very fondly the very first $15 I made as a freelancer; when I was 11, I was pitching bad poetry to teen zines. My mom was very proud. My goal in life at the time was to get the $50 gig reviewing books. Turns out, I was not destined to become the Roger Ebert of kids books and since then, I’ve worked as a freelancer then left and now work in a job where I get to collaborate with a roster of freelancers, each a part of the wonderful constellation of skills and people it takes to build beautiful and useful things in the world.

In part one of this series, we covered the most important part of freelancing: getting clients, and we used the internet to do it. (If you don’t have any clients yet, head back to part one and tackle that first.) Now we’re going to dive into the super fun stuff: money, contracts, proposals and other legal bits. This is the no-nonsense, beginner-friendly but value-packed guide to figuring out your freelance rates, what to put in a contract and proposal that’ll wow your clients, and how to manage your finances as an independent creative. In part three, we cover taking your engine and turning it into a beautiful machine of independence that grows as you do.

Whether you’re a freelance designer, developer, writer, social media strategist, or artist, or anything in between - this is the practical guide to making and managing money, tips included.

This guide covers:

What should I charge?
Hourly vs flat rates
Figuring out if the clients you want can pay your rates
Should I do free work?
When to increase (or decrease) your rates
How to increase your rates (aka giving yourself a raise!)
I’m making money but I don’t know how to manage my finances.
Build an emergency fund and pay off any high interest debt
Set aside at least 20% for taxes
Plan for health insurance
Go see an accountant
Keep good books
Take payment at the start of projects
Pay yourself a salary
How do I make sure my business is set up legally?
I have no idea how to write a (insert fancy freelancer doc here).
How to write a freelance proposal
How to create a freelance contract

What should I charge?

As a freelancer, your clients aren’t just paying for your time; they’re paying for you, your skills, your experience, your process, your taste, and your point of view. And when it comes to figuring out what to charge, you have to reverse engineer things a bit so that you aren’t pulling numbers out of thin air just because they feel right. Sometimes, we’re not the best judges of our own value. Thinking, Fast and Slow by Daniel Kahneman dives deep into understanding when and why our guts are actually very often wrong and driven by bias.

We’re going to do things a bit differently and start from you and the life you want to live as the baseline benchmark, and use that to help you determine your perfect freelance rates.

  • 1. Track your expenses and figure out what you need to live: What’s the bare minimum you need to make to pay the bills and keep the lights on? And then what’s your ideal?

    Let’s take an example: add up your monthly expenses and add a tiny buffer and come out to a total of $2000. You know you need to consistently make at least $2000 a month to keep doing it. Ideally, you want to be making more than your bare minimum, so let’s say $4000 feels good to you. Now we know what our benchmark is: somewhere between $2-4k per month.

  • 2. Once you have “your numbers”, plug them into this very simple, rough formula: (monthly expenses including insurance + at least 20% for tax) x 12 to find your minimum annual salary:

    You should speak to an accountant but some napkin math can be useful as you’re starting to plan your freelance life.

    So in our example, let’s say we’d like to make a minimum of $28800 (($2000 + $400) x 12) as an absolute baseline. I’m going to round it up so it’s an easier number to remember, to $30000. Great, that’s your minimum annual salary!

    If you make it here, you can support yourself full-time.

  • 3. Next, we’re going to take a creative approach to billable time. You need to figure out what feels good to you when it comes to the number of hours, days or weeks you’d like to spend doing client work.

    You can’t work all the time, and you should be building that into your formula, the same way that you still get paid when you go on vacation in a salaried position.

    There are 365 days in a year, but lets deduct weekends and holidays; we’re left with about 250 working days. This is where things start to vary and you’ll want to spend some time thinking about and planning for your optimal number of vacation days. For example’s sake, I’m going to say I want 20 vacation days, so from there, I have 230 working days left. I’m also going to give myself 10 sick days, so that leaves us with 220 working days.

    You’re now your own employer: identify what you need and plan for it.

    How many days does it take you to complete a project? If it’s 10 days, you can take on 22 clients. With 22 clients, you need to charge them each on average $1635 to meet your annual salary goal. From there, you know your absolute minimum flat project rate is around $1600. Remember, this isn’t about what you’ll charge necessarily: it’s about the peace of mind you’ll get from knowing exactly what you need.

    You could also take the same principle and apply it on an hourly or weekly basis - I prefer days because I find that I’m a bit more productive when I work on one thing at a time, rather than try to do too much context switching. I also know the number of hours that aren’t billable but sticking to days allows me to get that work done and do client work. That said, in some professions and industries, it may be more common to juggle multiple clients at once.

    As always, there isn’t a right or wrong way. But the above formula considers the human behind the work (you!) and what you need to make a living and continue going sustainably. We’ll talk about growth beyond your baseline later on.

    There are also many resources you can use to help calculate your freelance rates: check out ilovecreative’s freelance rate calculator and AIGA’s approach to freelance rates.

Hourly vs flat rates

If you have the power to set your own rates, and unless you work in an industry or for specific clients that require hourly or day rates (example: agencies or ongoing contract work without a clearly defined end deliverable), go for flat, project-based rates. You’ll hear a lot of freelancers working with hourly rates - it’s very common in the beginning of a freelance career, especially if you don’t have enough experience to understand how to scope effectively. At that point, hourly rates can be easier to deal with.

But let’s look at this objectively. In most cases, flat rates are win-wins on both sides: you don’t get punished if you’re working productively and your client knows exactly what to expect, no surprises. Think of it as a parallel to the transition between hourly and salaried work when you’re employed.

Here’s another option to explore: a combination of flat and hourly, most commonly seen in this type of scenario - a flat rate for the project, and then an hourly fee for add-ons or a retainer.

Even if you’re charging hourly to start because you don’t have a grasp yet of how much time projects will take, start tracking your hours over time and figure out how to get to project-based work as soon as you’re able to.

Super-tip: with flat project rates, just as it’s common to work more uncompensated hours when salaried, scope creep* can be common. Make sure to align on deliverables early on and get things down in writing.

Scope creep = any changes in a project’s previously agreed upon scope, at any point after the project begins.

Figuring out if the clients you want can pay your rates

Once you have your numbers, you’re not quite done. At this point, you should have the confidence to know what you need to make on projects to survive, but you also need to do some low-key market research to figure out if the type of clients you want match up with what you need.

Are they going to pay? Or even, are you too cheap?

As an example, here are some very rough ranges for one type of freelance creative service, to give you an idea of how the same work could be priced very differently:

  • Individual: 0-5k
  • Small, independent business: 1-10k
  • Large contracts: 10k+

SuperHi CEO Rik and ex freelance developer wrote a guide on freelancing with some insights on pricing yourself as well: there are different standards depending on location that you’ll need to consider. For example, in London, day rates are more common, whereas in New York, hourly rates are preferred.

If the rates you came up with above don’t even touch close to these ranges, what do you do? Give up and get a job? No! Short of changing your lifestyle and downsizing, you can supplement your client work with other kinds of work (ie teaching, consulting, products), or rethink or repackage your services and upskill to bring more value to your clients.

“Pricing yourself depends heavily on your skills and how in demand those skills are. A web developer is going to demand higher fees than a print designer for example. Learn to code or teach yourself some design skills and you’ll be able to reach a larger market and therefore can charge more.” -Rik, How to Go Freelance

Don’t let the numbers trick you into thinking the big fish lies one way or another, though:

There’s a creative revolution at play: it used to be that you could only make a good living working only with certain types of clients. With the rise of the internet, it’s now possible to reach more people who may perhaps pay less on a 1:1 basis, but in this space, the market is much bigger and the opportunities are much wider.

Should I do free work?

Charging less when starting out can be a good idea to get things rolling, even doing pro bono projects. Tread very carefully though: I’ve found a lot more satisfaction and leverage by creating my own projects to use as part of my body of work, rather than take on work that doesn’t align with what I want to do with, working with someone that doesn’t match my sensibilities.

When I was first learning to code, I was eager to take on as many projects as I could: I once spent basically all my free time for months working on a brand and website for my sister that ended up not being used because she wanted something that suited her tastes, whereas I wanted to push the envelope with my design and code skills. She didn’t like it, and I ended up getting bored. It was a lose-lose on both sides.

I don’t think anyone should do free work outside of the beginning stages of your business when you’ve yet to establish yourself. The only exceptions to the rule are:

  • Charitable causes - if you want to give back and have the time and space to, this can be a great way to lend your skills to a cause you support
  • Your BFF who has an amazing idea, great taste but somehow no money - it goes without saying though, worse case scenario you could end up burning a bridge both ways so try to avoid this if you can. Try a family and friends discount or build up a network and refer people for a win-win all around!

I’ve seen a few different strategies to kick off a freelance business: offering an early bird price, working with charitable organizations, being extremely choosy about clients and turning down anyone who isn’t a 100% match for your market and tastes, even going to freelance service marketplaces - I tend not to recommend staying in this realm for too long because I believe in aiming to stand out rather than compete in a marketplace environment (although there are many people who are quite successful using these platforms). But, it can be a good way to kick things off if you’re brand new. More on kickstarting your freelance business in part one.

Super-tip: If you’re asking this question, it’s time to explore a much more impactful alternative: check out our article on how to project manage your learning to design projects that actually move your portfolio and career forward.

When to increase (or decrease) your rates

Congrats! You’re about to give yourself a raise. Increase if:

  • every single prospective client you talk to says yes
  • you can’t go on vacation because you’re booked full and backlogged for months - it’s time to trim your client roster
  • you’ve added on new services or increased the value of current ones
  • you’re booked up, things are going well and you feel like you deserve a raise

Business is mostly just trial and error but sorry, for now, you’ll be taking a bit of a paycut. Decrease if:

  • a lot of prospective clients seem to be ghosting you after asking about your rates

How to increase your rates (aka giving yourself a raise!)

What an amazing perk of being an independent freelancer: your boss is you, and you get to decide when it’s time to make more money. But that also means you’re responsible with the possible fallout. So here’s how to increase your rates gracefully:

  • Give current clients as much advance notice as you can, and start with the clients you’d least mind dropping (this is a good way to test your communications and ease into the discomfort). Most of your clients will probably stick with you (unless your raise is a major leap), but expect that some may stop working with you. Prepare yourself financially for this.
  • Build rate increases into your freelance contract. It’s a good idea to protect yourself legally and include the possibility of rate increases in writing here.
  • Consider if you’d like to grandfather any existing, long-term clients on previous rates. This is something to consider to keep your existing clients, if you enjoy working with them. Let them know about the rate increase anyway so that there’s no miscommunication for any possible referrals that may come your way through this client.
  • Update your marketing materials or website if your rates are listed there.

I’m making money but I don’t know how to manage my finances.

Personal financial management gets more complex when you’re a freelancer, as you have a whole other set of accounting challenges to deal with - as if it wasn’t an already intimidating enough subject to start with and building a business itself isn’t challenging enough! But let’s go over some basics that will help make work and life easier.

Necessary disclaimer: I’m not a lawyer, accountant or personal finance expert. Consult these folks - they know what they’re talking about.

Build an emergency fund and pay off any high interest debt

We’ve mentioned this in part one but this should be a prerequisite for anyone who is actively deciding to jump into the world of freelancing, whenever possible. It’s just too stressful to live any other way, unless you have the full financial support of a partner, friend or family member to fall back on, and most of us don’t.

For the rest of us, no matter how much time you think you’ll have to make money once you quit your job, there’s so many other things to think about and the money usually doesn’t come as fast as you think it will.

I recommend at an absolute minimum 3 months (as in: don’t even think about quitting unless you have 3 months of living expenses saved up), but 6-12 months is much better for peace of mind. If successful, low-stress freelancing is your goal, you may want to consider doubling down on saving (no spend month, anyone?). Everyone should have an emergency fund, or as writer Paulette Perhach calls it, an F*ck-Off Fund. If you’re in the majority that don’t, see if you can make it a goal this year.

This is not just a financial goal; it’s also very much a goal that supports your career and creative endeavours.

Tip: Keep your emergency fund separate of any investment accounts you may have in case you need to dip into it quickly for rent, food or mortgage payments.

Set aside at least 20% for taxes

As a freelancer, you’re 100% responsible for income tax deductions and in some countries, charging tax to your clients too. This usually means 20-35%, sometimes depending on your income bracket as well as what you can expense as a business.

Just to give you an idea of the difference between 20% and 35% on a 50k income, that’s a whole $7500 more. And that’s a lot to leave up to chance.

Here are some income tax calculators for various countries, very helpful to determine roughly how much income tax you’ll need to pay (just don’t forget that apart from income tax, you may need to charge and submit other kinds of tax):

If you’re US-based, The Creative Independent wrote a great guide on income tax for artists.

Plan for health insurance

Every person’s situation is different and every country has a vastly different approach to healthcare, but this is something that, in most cases, is one of the biggest challenges and differences between the world of employment and the world of the self-employed.

Health insurance can cost anywhere between a dinner and a designer handbag. Look into your options before making the full-time leap, if you can, and budget this into your rates formula.

Go see an accountant

Go! Just do it. They’re allies to your business and can walk you through everything you need to know, specific to your business and geographic location. This includes any deductions you can make on business expenses (yes, you may be able to expense your WFH office), as well as suggestions on ways to allocate your income (similar to how employer contributions to an IRA or an RRSP work in the US and Canada) to lower your taxable income.

Keep good books

You may not need to work with a dedicated bookkeeper (yet), but you should still be keeping good books from the very start of your business. Set aside a defined time on a regular basis to check your records and make sure everything is updated.

You should be keeping track of:

  • how much each project costs
  • all payments from clients
  • all expenses and payments you make (keep your receipts!)
  • how many hours you’ve worked (even if you don’t bill hourly)

If you’re just starting out, you could easily do this all for free using something like Google Sheets, Excel or Notion, but here are some tools specific to accounting:

Many of these platforms also include other services to help you automate and systemize your freelance business as a whole.

Take payment at the start of projects

If you work primarily on projects with larger scope and higher pricing structure, it’s a risk to start working on something without payment. A lot of us learned our lessons from experience, whether it’s personal or from second-hand stories.

Here are two of my favorite approaches:

  • A 30% deposit to save the client’s spot, a 30% payment upon start of work, and 40% upon completion.
  • A 50% deposit upon start of work and 50% upon completion.

Keep in mind that it’s about reducing risk on both ends: the client wants to reduce the risk of you backing out of the project or not claiming a spot in your roster and someone else taking priority, and you reduce the risk of spending your precious and finite hours on a client who doesn’t end up paying.

Build this into your contract and client onboarding process.

As for invoicing, there are so many tools you can use and it doesn’t really matter which one. I’ve used two freelancer-specific invoicing programs but I’ve also just used Paypal as well as a combo between Google Sheets and Transferwise. Clients sometimes have their preferred methods of payments too so keep in mind you won’t always be able to dictate things, so it’s best to have a default system but maintain some flexibility.

Pay yourself a salary

Our last finance tip for creatives is to pay yourself a salary, rather than stick to the default of mixing personal and business money.

This doesn’t work for everyone, but it’s a nice little trick to maintain a sense of normalcy and can help you better manage your income even during the fluxes and waves of freelance life.

It’s a fairly simple concept to put into practice: open a separate bank account where all business transactions and payments take place, away from your personal finances. Pay yourself a salary by transferring a consistent amount of money from your business account monthly or biweekly. When you have busier months, feel free to give yourself a pat on the back and a monetary bonus (define for yourself what that bonus should be, rather than draining your business account dry). When you have a lean month, hopefully you have some money in your business account that you can still contribute to your salary so that you don’t ever get behind on your bills, making things feel urgent and scary when they don’t have to be; it’s just business as usual.

How do I make sure my business is set up legally?

We’ve covered bits and pieces of setting up a freelance business throughout this article but let’s pull it all together. Generally, you’ll want to look into the following (note that legal requirements vary widely from country to country, but you can use the following as a checklist of things to look into):

  • [ ] Registering your business and applying for a business license if needed
  • [ ] Setting up a business bank account
  • [ ] Speaking to an accountant
  • [ ] Speaking to a lawyer and creating a freelance contract

That’s pretty much it. When you don’t know what you need, this can seem like a complex question but that’s just four things to make sure you’re doing things legally and by the books.

One of the best ways to go about it is google (of course) but also asking people you know who are geographically close to you, if they have advice or referrals. You’ll probably get a better answer than what I can tell you (our students come from over 80 countries around the world so it’s hard to give one-size-fits all advice here).

I have no idea how to write a (insert fancy freelancer doc here).

How to write a freelance proposal

A proposal (also called a Statement of Work or a SOW) is a document that gets you work and puts into writing, in clear terms, what you’re proposing will happen. It usually comes after some sort of verbal agreement that this client wants to work with you and before the signing of an official contract.

You won’t always need a proposal for every project but it’s definitely a good idea to have a standard system for one, and it’s also a good idea to make one for every project, especially larger ones that carry higher risk.

You’ll usually be able to intuitively gather if a proposal is needed or if your prospective client is already saying yes and is ready to go. But remember that clients often aren’t the experts and sometimes you’ll need to guide them through the process, including creating a proposal - even if they’re not requesting one, even if you think you’re on the same page.

Here’s what a proposal should include:

  • A summary of the project - what and why
  • Project cost, broken down into as much detail as possible
  • A timeline and process outline - when and how
  • Payment terms

How should it look and how do you make one? When in doubt, go for simple and clear. Really, a Google Doc converted into a pdf is fine. If you’re a designer or work in an industry where visuals and branding are important, you can include elements of your brand (although… if you’re a designer, I’m sure you were thinking about this long before I brought it up) - but make sure these elements don’t overpower your document. You want to give your client and the project the spotlight.

How to create a freelance contract

Okay, so now we’ve got the what, how, when, why. The other really important document of freelance life is the freelancer’s contract. This is the legally binding agreement where both parties promise themselves to each other - the client promising to pay for the work, and the freelancer promising to work for the pay. Yes, it’s all very romantic.

This document is meant to protect everyone involved, not just you as the freelancer.

When I started out, I wrote a very simple contract myself. I won’t ever know if it had any real legal weight (shhh!) because most of us hope not to reach the point of requiring legal involvement, and thankfully, I never did. That’s always the worst case scenario. But worst case scenarios do happen and having a contract in place is a great way to filter out possible bad clients, before you even start working with them. (If they refuse to sign one, that’s a huge red flag.)

So don’t ever consider starting work until you have that contract signed and delivered, the same way you shouldn’t quit your job for another one without a signed offer.

What does a contract look like? A contract includes, in much briefer form, some of the same elements as a proposal. It will include cost, scope, timeframe and delivery and obviously a spot for signatures! But it will also include a lot more details about things such as ownership rights and usage, specific of payment terms, a termination clause (if the project is cancelled for whatever reason, what are the terms? are they still required to pay you?).

Consult a lawyer if you want to make something ironclad, a great idea if you’re taking on high profile, high stakes projects and/or you’re running a studio with more risk on the line. Otherwise, you’ll find plenty of templates floating around the web. Make it your own; however, where you do have a bit more leeway with branding and design with your freelance proposal, it’s best to keep the contract simple, clear, even on the dry side.

Here’s an example contract from AIGA, for designers. Does yours need to be 80 pages long? No (and remember the longer it is, the less likely your clients are going to read any of it), but it will give you a good idea of some of the things you might want to include.

We also cover more about project documents in our Digital Project Management course, applicable to both people working on projects as part of a larger team and for freelancers as well.

Summary

Oh, wow. We made it! Congrats on getting through the basics of the business side of freelancing. In part one, we covered getting clients and kickstarting your business. And in part three, we’re going to talk about scaling and growing your freelance business - everything from streamlining your workflow to moving beyond client work. Wherever you’re at right now, don’t be intimidated. Keep your eye on the ball (clients and sales - don’t ever forget that) and if this list seems like too much right now, pick one thing to try right now and do that, one thing at at time.

Now go out and get your money, money, money.

Illustration by Adamastor