Managing finances and taxes comes with a learning curve for just about anyone, and freelancing seems to come with its own set of rules. From navigating quarterly tax estimates to setting up an LLC, there’s a lot to think about when you set out to work for yourself.
If you’re new to the freelancing world or you’re just looking for some expert tips on improving your financial well-being come tax season, here are some tips for freelancers to make life a little easier.
1. Use a simple spreadsheet for bookkeeping
If the process of bookkeeping feels so burdensome that you avoid it until the end of the year, try using a simple spreadsheet system instead. A simple spreadsheet detailing your monthly income and expenses is perfect. This will give you all the information you need as a business owner to understand the health of your company, it makes filing taxes a breeze, and the best part — it’s easy to maintain.
2. Create standard operating procedures for bookkeeping
Without specific procedures to update your bookkeeping every month, you’ll not only be overwhelmed when tax season comes — you may have to pay more taxes. Write down your processes and pick a day every month to perform the tasks.
3. Create a system for managing receipts
Since many purchases are tax-deductible, it’s important to keep track of your receipts. But managing all your expenses amidst the daily chaos of running a business isn’t necessarily easy. Choose an expense or accounting tool that also offers a smartphone app (such as Freshbooks, Quickbooks, or Wave) where you can quickly snap photos of receipts when you receive them. You can also create a dedicated folder in your email inbox where you forward electronic receipts. Then, once a month, forward these emails to your accounting software.
4. Plan for your retirement
Just because you’re self-employed doesn’t mean you shouldn’t invest in your future.
Your pathway might be less clear cut than a W-2 worker with ready access to a 401(k) or other employer-provided plan, but freelancers still have the ability to set aside money in tax-advantaged ways.
One route available to anyone with earned income is the individual retirement account.
5. Set aside self-employment taxes in a separate account
Self-employment taxes are the biggest surprise for new freelancers. A portion of the taxes is deductible, so set aside 10% of you net income (gross income minus profit margin) in a separate account to ensure you always have enough in reserve to pay your self-employment taxes on a quarterly basis.
6. Budget for federal, state, and local income taxes
Since your taxes won’t be automatically deducted from your paychecks, make a priority of budgeting for what you’ll owe.
7. Pay yourself periodically from a separate business account
Once you have an adequate amount set aside for taxes, distribute funds from your business checking account to your personal account on a periodic basis.
8. Get a business credit card
As a freelancer you want to maximize earnings by spending as many hours as possible on billable activities, and minimizing unbillable administrative work. Getting a separate credit card for all your business expenses will make it far simpler to isolate and identify all your business expenses, not only for your own profitability analysis, but for taking deductions at tax time.