Covid-19 launched the world’s largest remote-working experiment. For those who have appreciated the extra time with family, the flexibility or the break from commuting, it may be tempting to make it permanent by going freelance.
However, the pandemic also showed the real downside of being self-employed. Work can dry up quickly and leave you with little protection. While governments put some support measures in place for the self-employed, in most cases it was relatively limited. It is possible to mitigate the risks, but we believe that anyone considering a freelance career should weigh a range of considerations.
1. Know yourself
While in no way suggesting that you need to take time on a psychiatrist’s couch, it is important to have the right temperament for freelance work. A study from MIT found that successful self-employed people tended to exhibit a range of character traits including self-confidence, a sense of personal responsibility, low fear of failure and a tolerance of ambiguity.
Inevitably, freelancing involves a certain degree of salesmanship – you will need to negotiate pricing, attract clients and agree terms. For creative types, this can be uncomfortable. Meanwhile, you may find yourself spending a lot of time alone. This may suit an introvert, but some people are liable to feel starved of company. Co-working spaces or smaller business partnerships may suit certain individuals better, although you’ll need to ensure that the sums add up.
Freelancing can seem like a seductive way to manage your own time. However, it also means that if you don’t work, you don’t get paid.
2. Time management
Freelancing can seem like a seductive way to manage your own time. However, it also means that if you don’t work, you don’t get paid, which makes holidays more expensive than for salaried employees with paid annual leave. It is very difficult to turn down work – even experienced freelancers worry that if they do, they won’t be asked again. As a result, you may be working longer hours and, far from getting rid of a bad boss, subject yourself to a whole portfolio of them.
Financial discipline is an important attribute for freelancers. Tax is not removed imperceptibly from your salary month by month – it’s your responsibility to make sure it gets paid. A freelancer will usually have the status of a sole trader, partnership or limited company. Each structure has a different tax treatment and different reporting deadlines. In many countries the tax authorities will deduct payments automatically every month, although there may still be a settling-up process at the end of the tax year.
You also need to ensure you remain entitled to social security benefits, particularly state or other mandatory pension provision. Contributions may be deducted along with income tax, but it may be more complicated if you are operating as a limited company, leaving you with the responsibility for ensuring payments are made on time.
Businesses and sole traders with annual turnover of more than €35,000 must register for VAT in Luxembourg, which brings certain reporting requirements, but means that you can also deduct VAT from purchases. The normal VAT rate in Luxembourg is 17% with reduced rates for essentials such as heating and lighting, rental payments and fuel.
Personal pensions are relatively easy to set up and should be part of financial planning for any freelancer.
5. Pension provision
When you leave the security of permanent employment, you leave behind not just a regular, fixed salary but various other benefits, often including private pension provision, medical insurance and death-in-service benefit, as well as possible extras such as gym membership.
Self-employed people are liable to lack pension provision. However, personal pensions are relatively easy to set up and should be part of financial planning for any freelancer. It is good to know here that Luxembourg’s supplementary pension system, formerly reserved for contractual employees, is open to independent professionals since 2018.
6. Your family
For the most part, if you suffer serious injury, illness or death while working for a company, your family will receive a lump sum (usually a multiple of salary) that should at least help them through any short-term financial difficulty. This disappears when you embark on a freelance career. The problem is readily solved by insurance against death, accident, illness or disability – which is a deductible expense for a company.
You should also consider the short-term impact on your household finances. Home loan providers generally want to see two or three years’ accounts before they will consider lending, so it can be better to be patient or to apply for a mortgage while you are still in a job.
7. Career progression
In a corporate career, there is a natural path. Best scenario: You climb the ladder, getting promoted from time to time, before eventually retiring, ideally with a comfortable pension, largely paid for by your company. As a freelancer, the path is not mapped out. While this is part of the excitement of working for yourself, it can require a change of thinking.
8. Work out how best to organise and pay yourself
This may not be clear from the outset. It can take time to get your business established and the merits of different options can change over time. However, there can be significant tax advantages to setting up a company, paying corporate income tax at 17% (15% if turnover is less than €175,000) and being able to deduct expenses. However, in the grand duchy there is also a solidarity tax of 7% and a municipal business tax of 6.75% in Luxembourg City. It will also entail in most situation an additional administrative burden – if your revenue is sufficient, employing an accountant is often a good investment.
While there are practical advantages and disadvantages of freelance life, particularly the administrative aspects, it almost invariably offers a way to establish a better work-life balance. There can also be real satisfaction in knowing that if you work a little harder, it is felt directly in your household’s income. Some people find this hugely motivating, far more so than working for a large corporation. Get the administrative aspects right, and freedom beckons.
Financial discipline is an important attribute for freelancers. Tax is not removed imperceptibly from your salary month by month – it’s your responsibility to make sure it gets paid.