Freelancing
is the dream, right? You wake up when you want, work a little, go to the beach.
MYTH. Freelancing is HARD. It’s can be challenging to be your own boss, be 100%
responsible for you and your business. That’s a lot of pressure. Your job is to
find clients, and keep them. And if you have a family -- work/life
blending (not balancing) is an added obstacle. And what about the business
side of the business—the finances. That alone can be scary and overwhelming. It’s
important to know how to handle the money you’ll be making in your new
freelancing career. And more importantly, to find a trusted accountant.
Several
Accounts
Freelance = feast or
famine. Either you are inundated with work, or not working at all. For this reason, it’s important to
always have a savings account to cover at least three months’ worth of expenses.
In addition to a savings account, you should keep your banking accounts separate:
for example, personal, business, and taxes. As a freelancer you are responsible
for paying your own taxes. So when freelance checks comes in, approximately 40%
should go straight into the tax savings account. 40%? Yep. You’re still
responsible for your share of income (including state), Social Security, and
Medicare taxes. Your accountant will advise you to pay quarterly taxes –and
what that minimum amount is--to avoid end-of-year penalties.
This really brings into account the importance of tax planning as many
freelancers have other investments, so it is important to look at all your
taxable sources to determine the proper tax savings amount. A good accountant
is priceless as a freelancer.
Benefits
If you are new to freelancing, the lack of benefits--like no health insurance or 401K—can be the scariest part of your new business. It’s important to research individual health/vision/dental plans to determine which plans fit your needs and your budget. Health plans can be quite costly, and you must account for this added expense. Also, you should talk with your accountant regarding tax-advantaged saving options such as SEP IRA, SIMPLE IRA, self-employed 401(k), or an IRA. Saving for retirement is important.
Benefits
If you are new to freelancing, the lack of benefits--like no health insurance or 401K—can be the scariest part of your new business. It’s important to research individual health/vision/dental plans to determine which plans fit your needs and your budget. Health plans can be quite costly, and you must account for this added expense. Also, you should talk with your accountant regarding tax-advantaged saving options such as SEP IRA, SIMPLE IRA, self-employed 401(k), or an IRA. Saving for retirement is important.
Track Everything
Track
every last penny. Keep all of your receipts. Use Excel, use a piece of notebook
paper, or buy proper software. This will be key in helping you and your
accountant determine your taxable income, and help support your deductions. Further,
your accountant may find more tax deductions of which you weren’t aware. Additionally,
you’ll want to keep these documents in the case of IRS audits.
Live Within
Your Means
While working from home does have its advantages—more flexibility, more family time-- it’s still not all glitter and glam. You’ll still have to live on a budget, which you’ll be more vested because you are controlling every aspect of your income. Finding new ways to live comfortable and within your means is part of being a freelancer. Perhaps, you’ll surprise yourself and discover ways to reduce your monthly expenses. With a little leftover, perhaps you’ll be able to experience something you’ve always wanted, or put some away for retirement. Finding the right projects and right clients that will allow you to achieve your financial goals while also living the lifestyle you prefer –that is the freelance dream.
While working from home does have its advantages—more flexibility, more family time-- it’s still not all glitter and glam. You’ll still have to live on a budget, which you’ll be more vested because you are controlling every aspect of your income. Finding new ways to live comfortable and within your means is part of being a freelancer. Perhaps, you’ll surprise yourself and discover ways to reduce your monthly expenses. With a little leftover, perhaps you’ll be able to experience something you’ve always wanted, or put some away for retirement. Finding the right projects and right clients that will allow you to achieve your financial goals while also living the lifestyle you prefer –that is the freelance dream.
I would love to hear what other freelancers are doing to manage their finances. Care to share?
