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Freelancers, independent contractors, gig workers — call us whatever you like, but it's estimated that by 2020, 40% of the workforce will be freelancing. Personally, I chose freelancing and love it, though I’ve encountered some tough challenges with self-employment. It’s not all sunshine for everyone, though. For many, freelancing isn’t an opportunity but a burden. The freelance economy is complex, so if you're part of it, let's break it down.
Freelancer vs. Gig Worker
Before diving into potential earnings as a freelancer or gig worker, let’s clarify the difference between the two. Both are self-employed, but there’s a key difference when it comes to income potential. After all, you’re more likely to hear about someone earning six figures as a consultant, tax expert, or even a writer, than about someone pulling in six figures with Uber.
When the gig economy is discussed, it's usually referring to the sharing economy: platforms like Lyft, Airbnb, and TaskRabbit, which hire independent contractors to offer various services. A recent Pew study revealed that nearly 25% of Americans make some income from these platforms.
John Liston, Strategy and Operations Manager at All Set, pointed out that it’s crucial to distinguish between different types of gig services.
'People often lump all aspects of the gig economy together,' Liston said. 'But there’s a clear difference between contracting with a service that sets your prices and controls when jobs are available, and working with a service that gives you tools and marketing to connect with customers without controlling the terms.'
Uber and Lyft are examples of services in the first category. Your earnings depend on how much time you're available to work. The company determines your rates, and if you want to earn more, you simply need to work more hours.
'These services can provide a quick income boost for gig workers but may hinder long-term career stability,' Liston warned.
Freelance is a broader term that can include gig workers but also covers writers, web designers, or individuals running their own consulting businesses. While the IRS doesn’t distinguish much between gig workers and freelancers, the key difference is that freelancing suggests the ability to charge higher rates as you develop a specific skill or expertise.
The second type of service, where you set your own terms when working with customers, offers the potential to start your gig part-time and grow it into a full-time career if successful.
Services in the second category include platforms like Upwork or Liston’s company, All Set. Even with his involvement, Liston explains it well. The primary differences between freelancers and gig workers are the opportunity for growth and the ability to set your own rates.
How Much Do Gig Workers Earn
It’s difficult to determine the average earnings of a gig worker because their work varies greatly. People work different hours and in different roles. For example, a Priceonomics and Earnest analysis found that 85% of side gig workers (Airbnb, Lyft, Etsy, TaskRabbit) earn less than $500 a month. However, there are important nuances to consider.
First, this doesn’t take into account how many hours are worked, which pretty much renders the finding irrelevant. If the average person works 20 hours a month, then $500 isn’t so bad. But if it’s 160 hours, the earning potential is much worse than it appears.
Priceonomics highlights another caveat in a blog post. They sourced data from users of Earnest, an online lender and student loan refinancing service, so it’s not exactly a random sample:
'This data reflects only Earnest’s user base, which is mainly people refinancing student loans. These individuals may be more likely to view these services as a ‘side-gig,’ unlike other service providers who might treat it as a full-time job, resulting in different earning potential.'
Finally, it doesn’t account for the significant differences in earning potential between platforms. Comparing Uber and Airbnb isn’t exactly fair. Airbnb generates more passive income, while Uber demands much more of a worker’s time.
Let’s take a look at how much the average Uber driver earns. According to Josh Mohrer, Uber’s former GM in New York, drivers make $25 an hour. That would suggest Uber drivers earn over $50,000 a year, but that doesn’t quite add up. BuzzFeed News interviewed several drivers, checked their pay stubs, and analyzed the data. They reported (with an emphasis on hours):
The eight drivers earned hourly wages of $15.22, $21.17, $27.54, $32.90, $36.88, $37.12, and $38.25, not counting one-time referral bonuses or deductions. Their weekly hours ranged from 5.78 to 42.65. On average, their combined hourly wage was $31.61. It’s important to note that this doesn’t factor in weekly expenses like gas, car payments, maintenance, and wear and tear. If we assume an average wage of $21.90 per hour, accounting for some driver expenses, and assume drivers work 30 hours a week (which is a middle range of the hours worked by the drivers we spoke to), we can estimate an annual salary of $34,164.
This is before taxes, of course, and it might not sound too bad for driving your own car and setting your own hours. But keep in mind, it doesn’t include retirement benefits, vacation or sick days, and most importantly, the cost of health insurance.
How Much Freelancers Earn
A major critique of the freelance economy is that companies save money by not providing health insurance or other benefits, while giving workers the false impression that the setup benefits them because of its flexibility. In doing so, companies exploit workers who are desperate for jobs, paying them less and convincing them they can take on additional work elsewhere. This is a valid criticism.
On the flip side, freelancers often make it work. As a freelancer myself, one of the reasons I continue freelancing is that it allows me to work for other clients and earn even more money.
If you're making twice the amount as a freelancer compared to a traditional employee, you might not mind covering your own health insurance.
With a full-time job, you enjoy income security — your salary won’t go below a set amount — but you don’t have the opportunity to earn significantly more,” said Diane Elizabeth, a freelance consultant and blogger. “As a freelancer, you're typically working on a project-to-project basis, meaning you aren’t bound by a set number of weekly hours. This flexibility allows you to take on more clients and potentially earn much more.
Bloomberg reports that the number of freelancers making six figures is on the rise. However, there’s an important caveat: most of these are independent contractors with specialized skills, like engineers, who could earn that much in a full-time job as well. Time highlights that “45% of full-time freelancers report they earn more money working for themselves than they would in a traditional role.”
Here’s the thing: as a freelancer, you should be earning considerably more than you would in a traditional job due to the extra costs of freelancing. According to Bloomberg, the average freelancer works 36 hours a week at a pre-tax rate of $21 per hour, which is roughly the same as the average Uber driver’s pay. So while freelancing can offer more earning potential, it seems that, in general, most freelancers earn a below-average income when you factor in all the additional expenses.
So, what are these costs? And how can you increase your earnings as a freelancer?
Additional Expenses for Freelancers
Apart from occasional business-related expenses (like car insurance if you drive for Uber or Lyft), health insurance becomes the most significant cost for self-employed individuals. Zane Benefits reports that the average individual’s monthly premium (without subsidies) for 2017 is $393, and the average annual deductible stands at $4,328. While the Affordable Care Act offers some support, how long will this last?
In other words, the rapidly evolving workforce makes the prospect of losing affordable healthcare especially daunting for many workers.
Freelancers also must consider retirement planning. While not all full-time employers provide retirement benefits, many do, and this helps encourage employees to begin saving early.
Without this benefit as a freelancer, saving for retirement likely doesn’t cross your mind. It may not seem like a pressing issue, but many experts warn that a retirement crisis is on the horizon.
Diane Oakley, executive director of the National Institute on Retirement Security, points out that 40% of the workforce isn't saving for retirement, and this could have serious consequences in the next decade. Retirement isn't about lounging on a beach in some far-off paradise — it's about ensuring you have enough money to live on when you’re no longer able to work, covering essential living costs like healthcare.
On top of that, freelancers and gig workers must also consider taxes. While everyone has to pay taxes, many independent workers don't realize that their earnings aren't automatically taxed. Come tax season, this can lead to a nasty surprise. Self-employed individuals must pay estimated quarterly taxes throughout the year. You can calculate your payments using tools like this, but to avoid penalties, accuracy is key. The IRS mandates that you either pay 90% of your current year's tax (even if you haven’t figured it out yet) or 100% of last year's tax to avoid penalties (for earners over $150,000, this jumps to 110%).
Taxes are just one of the many administrative headaches that come with self-employment. There's also invoicing and more complex budgeting. Plus, it feels like you're always waiting for payments to come through.
That said, freelancing can definitely be rewarding in certain situations — it’s just a matter of making it work for you.
How to Make Freelancing Successful
If you're aiming to make freelancing more profitable than traditional employment, it all boils down to two essential factors: securing the right clients and mastering negotiation skills.
Look for companies hiring in your area of expertise and offer your services as a freelance consultant. You can charge higher rates because the company saves on taxes and benefits they'd normally provide as an employee. You'll also likely work fewer hours, since freelancing is project-based, and gain experience with renowned companies. This is how I’ve secured most of my high-paying clients,” said Elizabeth.
This isn't an easy task, but one helpful tip is to put yourself in the shoes of your potential client. What do they need? How can you help them solve their problems? At Growth Lab (Ramit Sethi’s project), they phrase it like this:
Take some time to reflect on WHY you decided to go independent and the value you're offering to your clients. After all, if you don't know why someone should choose you, your clients won’t figure it out on their own.
It’s easier said than done, but it’s necessary if you want to make freelancing work. In other words, start by putting yourself in their mindset. Writer Paul Jarvis offers additional client-finding strategies, which we’ve covered here, some of which include:
Provide Your Perspective on an Existing Product: Offer to enhance something that the client already owns. For example, if you’re a web designer, you could suggest improvements to a part of their underperforming website.
Leverage Your Current Connections: Reach out to the people you know, and use your network to connect with potential clients.
Create Varied Content and Make Your Presence Known: Build a platform for yourself and don’t hesitate to promote your work and expertise.
The most effective way to attract new clients is to simply excel at your craft, so make sure you’re continuously learning new skills and improving the ones you already have.
As a freelancer, you determine your own rates. This is where many people get overwhelmed and end up severely underpricing their services,” Elizabeth shared.
This is a painful truth. When I first started freelancing, I fell into the trap of thinking freelance writers get paid poorly. And guess what? I was paid poorly. Then I began researching negotiation techniques and, as an experiment, asked my clients for higher pay. To my surprise, every single one agreed, and it completely shifted my mindset and gave me the confidence to embrace negotiation.
Don’t shy away from asking for what you deserve—there are plenty of potential clients willing to pay for high-quality work, even if it means facing a few rejections,” Elizabeth advised.
Ultimately, if you’re looking to boost your freelance income, it’s beneficial to approach your work with the mindset of running a business, even if you’re not officially an LLC, Elizabeth explained.
“In many respects, freelancing is essentially the same as being an entrepreneur. You set your own rates, define your own schedule, generate your own leads, and are completely accountable for the results of your work,” she said.
