How to Start and Manage Your Freelance Business

Moderated by Danielle Cooley, Guest Speaker on How to Freelance
This is an abridgment; view the full video presentation here.

How Do You Start Freelancing?

I thought about moving to freelance while at a consulting company. I realized that they had a lot of non-billable people for which the end client was paying. I knew that the work they were getting would be the same as if they just hired me directly. I could make a lot more money, they could save some money, and we could get the same results. That was my thought process at the time. 

I had my first son and decided to take it easy for a while and see how things went. Then two hours after I got back from maternity leave, I was laid off.  So I said:  “I guess I’m an independent consultant now,” and I have been ever since. I have enjoyed it for 13 years and have yet to find an in-house position compelling enough to pull me away.

How Do You Prepare to Freelance?

Knowing what I know now, I would have maybe tried to shadow or learn a little more from the sales and marketing people. Many of us who go out on our own are good at what we do as it pertains to our subject matter expertise. But there is a lot to consider before you freelance, such as learning how to run a business, how to generate sales leads, and how to structure your proposals. Expert business development people are as proficient at what they do, as we are at what we do. So, I think I could have learned more from them. I’m not sure how I would have done that without saying, “I’m about to start my own business. Can you teach me some things?” But just seeing the templates they used would have helped me a lot.

What are the Risks of Freelancing?

When contemplating freelancing most people ask: “Can I do this and how risky is it?” I had a spouse with group health insurance and a magical paycheck that dropped from the sky every two weeks. We lived in a low-cost-of-living area and were not going to lose our house if I didn’t find work right away. If I didn’t have that security, I probably would not have become an independent consultant at that point. I would have needed more stability and predictability until I could build up more of a safety net of my own. 

The reality is that freelancing does cost more than you think. At least it did to me. People warn you about self-employment tax and it is high. And you do have to spend a lot of non-billable time finding the work, writing the proposals and contracts, as well as handling administrative duties. So, it’s not easy, but I think it’s worth it. And it gets easier over time.

Should I Bill Hourly or by Project?

I prefer to work on a fixed-fee basis where there is a project with a start and a finish and a well-defined scope and outcome. However, what you don’t get when you bill hourly is capturing the value of the knowledge that you provide. So, as a researcher, I provide these clients with amazing insights that affect their product design that ultimately go on to affect their bottom line in big ways. Because of my experience, I can do that fairly quickly. If I bill hourly for projects like that, I would need to have a pretty exorbitant hourly rate to make that happen. But framing it around the value of the information, knowledge, and insights helps to maximize their impression of the overall effort and understand that the work we’re doing is important and valuable.

That said, there are certain situations where billing hourly makes more sense, particularly if the scope is not very well defined. In a case like this, I would offer the client some sort of hourly or  retainer agreement. When I subcontract for other consulting practices, that tends to work out better hourly – they bill hourly so that helps them determine whether they can afford having me participate in the project. But generally, I advocate for fixed fee value-based pricing.

How Do You Determine Freelance Rates?

My general guideline and this is just a point with a wide range on either end of it, is to take the salary that you would be worth, then divide that by 1000. So, let’s just say for easy math you make $100,000 a year. Your hourly rate would be $100. If you made $200,000 a year,  then your hourly would be $200 an hour. And a lot of people come back and say, “But I worked 2000 hours for an employer, so my rate is half of that.” It’s important to remember that they were paying your employment tax, part of your health benefits, covering your tech support, and handling administrative tasks that you now have to take care of yourself. This is probably the high end of your hourly rate.

You may need to be willing to negotiate and take less per hour if you have a large project. You also need to include some guarantees. I’ve talked to consultants who lowered their rate and then the project got canceled three weeks in. So the reason they lowered the rate was that it was going to be 20 weeks of guaranteed work but it didn’t turn out to be that way. 

And then, sometimes it just comes down to how deep are the clients’ pockets. Startups aren’t going to have any money and corporations are generally going to have more but not necessarily. And often when you’re in the beginning stages,  you can just ask them for their budget and then you can scope that way.

What Are Typical Freelance UX Research Projects?

In terms of the types of projects that come up, it does vary a lot. In 2020, I did a large fixed-fee project. The client was redesigning their whole website and wanted my help with the navigation structure and information architecture. What I proposed for an ideal situation was way outside of their budget which they didn’t disclose upfront. Then they asked, “How much can you do for this much?” So, we agreed on one to two card sorting studies, then one to two tree test studies to validate what came out of those card studies, and one to two usability studies of the prototypes that came out of those navigation studies. 

I am also engaged with a large Healthcare client who I have done fixed-fee work for in the past. But right now, I’m working with them on an hourly basis to help with a variety of projects they have going on at the same time: their public-facing site, transactional material, and some information architecture.

Is an LLC or Corporation better for Freelancers?

I am an LLC and chose that option because my accountant suggested that it would be the easiest route for me. However, I now think that it’s not the right structure for me, and would like to change it. But it seems difficult to do so because I have a lot of momentum going at this point. I am a certified woman-owned business and changing the paperwork would cause a cascade of other things that I would need to change. But being an LLC is costing me a lot of money, so I should probably figure that out.

I am not a money person, an accountant, or a small business financial advisor. But my understanding is that organizing myself as S Corp would give me tax benefits that I am not currently realizing. There is also an option where you can have an LLC taxed as an S Corp, but you have to take regular owner drawings and pay yourself a salary. I would suggest talking to an accountant or financial advisor about which option would be best for you.

Bookkeeping and Tax Software for Freelancers

Hire a bookkeeper! That’s the best advice. That’s hard to do though. I do pay my estimated taxes on time, set reminders for myself as much as possible, and automate that at the beginning of the year, which I can do here in the state of Maryland. What I don’t do is calculate what my estimated taxes should be this quarter. I just send some money and if I made a lot of money that quarter,  I’ll send some more, and if I didn’t, then maybe I’ll send a little less. And it all works out in April when I do my returns.

As far as keeping the books I do use QuickBooks Online for about $25 a month which I think is kind of high for a one-person organization. There’s also a QuickBooks self-employed which is less, but I think it’s a lot harder to use, navigate and sync up. I used it for a year and then went to QuickBooks Online. There’s also a free tool called Wave which I liked a lot but they’re in Canada so they use an invoice-based (accrual) accounting system versus a cash-based accounting system such as we use here in the States. It is supposed to be easy to reconcile, but if you invoice a client on December 20th and they don’t pay you until January 10th then it will show up on your previous year even though you didn’t get paid until the next year. I tell people, it’s very Canadian; they just trust that you’re going to get paid if you get sent an invoice which in America is not a guarantee at all. So that is another option especially if you’re just getting started and you want to keep track of income and expenses and you want a handy way to create your invoices. 

What is the Pay Differential between the Bay Area or New York City and Smaller Cities?

Using a tool such as salary.com can help you identify pay scales, and look at comparable companies. You could see, for example, that Facebook, being in the Bay Area, pays well because they have to compete for that top talent, while other locations outside of the large metro areas would pay less. Understanding geography definitely is important in determining your rate.

If you’re in the Bay Area, New York, or Boston the salary that you would be commanding would be significantly higher than if you were somewhere smaller like Lincoln, Nebraska.

How Do You Access UX Research Tools as a Freelancer?

On a personal business level, I haven’t had trouble finding solutions. In terms of running the business, as I mentioned, I use QuickBooks online and have an annual  Zoom subscription license at the lowest-paid tier. A lot of times you can get away with the free versions for a while. But Zoom cuts you off at 40 minutes so that’s not super great. Trello is a great and free tool for organizing your thoughts and “to-do’s.”  and there’s probably a paid tier there. I pay for Dropbox for extra storage which handles all of my backups. Web hosting is relatively inexpensive as well.

Last fall I had a project that was going to require some heavier processing. Around this time, my then five or six-year-old Mac was not going to be able to handle it. A new Macbook would cost $1,500 or $1,600. But I realized that if I invested that money in this new laptop, I would be able to do this $25,000 project. So the math was pretty easy.

There are some non-negotiables. I do carry business insurance as many of my clients require that. It runs me at about $1,000 a year. But again, if I don’t spend that $1,000 then the many tens of thousands that I would get from these clients won’t come in.

I do sometimes run into trouble when somebody wants me to use something that’s only Enterprise-wide: mainly research tools. So a lot of clients are now targeting the Enterprise. But there are alternatives. I frequently use Optimal Workshop. You can buy study credits for $99 a piece, but you can also do a monthly and shut it off at the end of the month. So again, that math becomes easy at the end of the month. I’m going to spend $200 for one month of Optimal Workshop so that I can have this $15,000 project. And I do factor that into the bid, or I will straight up tell the client that there is a software license expense that we’re going to have to itemize here and just pass that cost right onto them. If I do enough of this kind of work, I get an annual subscription and consider that to be a part of my operating overhead. And sometimes clients have licenses you can access. On a recent project, for example, I was able to use one of the two seats of a client’s User Testing which only targets the Enterprise.

Can Former Employers become Freelance Clients?

Usually, it’s companies that I have worked with or people that I’ve worked with that have moved to another company. In my consulting work, I work with a lot of people and have been doing this for over 20 years. During that time, those people have been moving around and meeting other people. That’s mostly where I get my work from. I try to speak at conferences and publish here and there. Every once in a while, someone will say, “I heard you give this talk two years ago, and now I’m at this company that has this problem and I think you can help us.”

I will also hear about opportunities through the grapevine. I’m working with a medical device start-up right now and found this work when someone on my graduate program alumni page was looking for help and reached out to me. I also rely on lots of word of mouth. I definitely want to learn more about marketing and creating a lead sales pipeline – something that a lot of people understand very well.

How Do You Succeed in Freelancing?

I think the diversity of experiences that I’ve had have been a huge factor in my success. It is important to differentiate yourself, to pick a vertical line, such as Healthcare. But, for me to be able to say that I’ve worked with a variety of Fortune 500 clients shows that I’ve been successful in various industries the past. Also, my Master’s Degree adds to this “street cred.” I’m also going to add speaking assignments to this list because you can’t come in like a mouse as an independent consultant. You have to be confident that you know what you’re talking about. Your client needs to be convinced that they can count on you to do the work and that they don’t have to handhold. I think practicing having an opinion and point of view, and being willing to share and articulate it clearly, is very important.

 

About the author: Danielle Cooley has been working in design research and strategy for more than 20 years. She founded her bespoke consulting practice in 2009. She has a BE in Biomedical and Electrical Engineering from Vanderbilt University and an MS in Human Factors in Information Design from Bentley University. Learn more about Danielle at www.dgcooley.com.