Working as a freelancer has its perks: the autonomy that comes with being your own boss, flexibility to work when and how you want and control over how much you earn.
That's probably why 53 million Americans — more than one-third of the U.S. workforce — are now working on a freelance basis.
For some, the decision to freelance is a no-brainer, but taking the leap is more involved than you might think. There are some substantial differences in the way that freelancers need to budget, pay taxes, protect against liability, protect their income and save for retirement. Being unaware or unprepared for any of these things could spell trouble down the line.
A freelancer's pay schedule can vary quite dramatically, compared to that of a salaried employee. Instead of receiving regular biweekly paychecks, freelancers often have to wait several months to be paid for a project.
"Managing your budget and cash flow … becomes a challenge, especially if you're freelancing full-time," said David Weliver, founder and publisher of financial blog Money Under 30.
"If you expect a paycheck every two weeks then aren't getting paid for six months, that can be a problem," said Weliver, adding that "you need to have a cushion of savings or cash-flow fund before you start freelancing full time to get you through periods when you're waiting to get paid."
You should also have separate accounts to help track your money, Weliver said. He recommends having three accounts: one account where your freelance money is deposited, a checking account for spending (perhaps also a reserve savings account linked as a backup for tough months), and a savings account from which to pay your taxes.
When you receive income as a freelancer, employment taxes (Social Security and Medicare) and income taxes aren't withheld. It's your job to pay them — and the Internal Revenue Service requires you to do so every quarter.
Moreover, since you are considered to be self-employed, you must pay both the employer's share and the employee's share of the employment taxes.
Failure to pay these taxes every four months could result in penalties and interest, said Douglas Coats, a tax attorney with Gordon Feinblatt LLC in Baltimore. (Information on how to calculate estimated taxes can be found on the IRS website.)
The good news, Coats said, is that if you're filing as a Schedule C taxpayer, as freelancers do, "you're entitled to fully deduct all of your ordinary and necessary business expenses."
For instance, if you use your car for business travel or primarily work from your home office, in many cases those can produce beneficial deductions. You can also deduct 50 percent of business-related meals and entertainment.
But be aware that you can only deduct these expenses if you're freelancing to earn a profit, Coats said. Otherwise, there's a good chance the IRS will recharacterize what you're doing as a hobby and won't allow the deductions.
Tax regulations for freelancers are pretty complicated. Advice can be found on the IRS's Self-Employed Individuals Tax Center. However, most experts agree it's wise to consult a tax expert who can help with your specific situation.
Many experts suggest setting up a limited liability company if you're going to be working as a freelancer. In the event that someone sues the LLC, its owner generally isn't personally liable for any debts that it needs to pay.
An LLC's protection isn't foolproof, as it could be challenged in court. However, Coats said "it's better than having no protection."
"It can't hurt to form an LLC and doesn't cost a whole lot of money to do it, so it's kind of a no-brainer," he added.
According to Coats, people sometimes attempt to lower their employment tax bite by creating an S Corp rather than an LLC. The reason? An S Corp allows you to pay out dividends, which are not subject to employment taxes, whereas compensation income is.
In these instances, they would take no (or extremely low) salaries, then pay themselves as a dividend to avoid the employment taxes.
However, he said, that's a bad idea. "If you do that and get audited, the IRS will most likely recharacterize the dividends as compensation and you will owe the employment taxes."
"As a freelancer, one of your most important assets is your ability to earn income," said Douglas Boneparth, a certified financial planner and partner at Longwave Financial. That's why it can be important to protect yourself from an insurance standpoint in the event that something should happen, since you won't have access to the types of group insurance that companies generally offer their employees, he said.
Boneparth believes disability insurance is among the most important. "If something happened to you, the loss of that income could have a dramatic financial impact on your life," he said.
However, Boneparth added, it's important to understand the different types of policies out there, as they vary greatly based on several factors, such as the circumstances in which will pay out, how long they will pay and what kind of residual benefits or riders they offer.
"Some protection over your income is better than none," he said. "But anytime you shop for insurance, you need to understand what you're buying and what you can afford."
Retirement planning is one area where freelancers have a leg up on salaried employees.
"The first thing most freelancers should remember is that traditional and Roth IRAs are still on the table for you as long as you don't earn more than the income limits," said Weliver of Money Under 30, adding that those are the places to start saving.
"If you want to and are able to save more, then you [could consider] a solo 401(k) or a SEP [individual retirement account]," he said. "These are available to self-employed people and enable you to save a lot more for retirement in a tax-advantaged way than with just an IRA."
These accounts have similar restrictions as other retirement accounts, but the maximum contribution amounts, which are based on a percentage of your business income after deductions, are much higher — $53,000 each in 2016.
"That's a huge amount of money that you can put away in a tax-advantaged way for retirement," Weliver said.
— By Jennifer Woods, special to CNBC.com