It’s a great thing to be able set your own hours; choose your own jobs, and determine your destiny. Your money is determined by how much work you can do. Freelance work tends to be “feast or famine” in the sense that you may be overwhelmed with work one week and struggling to find new clients the next. That ebb and flow of work also makes your income vary, which is something you need to figure into your personal financial planning.
Don’t Mess with the IRS
One of the biggest mistakes that freelancers make is remembering that the Tax Man always gets his cut. Ticking off the IRS is probably worse than getting on Google’s bad side, because Google won’t come after your assets. According to research done by debtconsolidation.com, if you fail to pay your taxes before April 15th, it can lead to penalties as high as 25% of what you owe. In order to stay out of trouble, you need to be ready before tax day.
Just because a client cuts you a check for $1500, that doesn’t mean that all that money is yours. If you don’t set aside a portion of it for taxes, you’re going to get a financial right hook from Mr. Tax Man that will K.O. your bank account, or even worse, will put you in serious debt. A good rule of theme for estimating taxes it to set aside 30% of each payment. You also may want to check into filing estimated tax payments so you can spread your bill out throughout the year.
Can I Deduct That?
The upside of paying taxes is that as a self-employed business owner, you may be able to deduct a variety of things. There are situations in which you can deduct your home office expenses, business travel expenses, and possibly even some medical insurance deductibles. As good as tax preparation software is, your best bet is probably to consult with a professional tax accountant. A good accountant is likely to find deductions that you might miss on your own.
Keep in mind that in order to maximize your itemized deductions, you need to have receipts to prove what you spent. You should run your personal and professional life just like running a business. Carefully keep track of all your expenses and make sure that you organize your receipts so that you don’t have to spend hours trying to match up receipts with expenses. All the organizing and filing may seem tedious at the time, but it will pay off when tax time comes.
Separate Your Business and Personal Finances
Even though you are your business, you don’t want to necessarily have all your finances tied to your business. For example, you should have separate checking accounts for your business and for your personal expenses so that you can track your spending for each individually. Even though it makes for more work on your part, it will actually make things easier when you do your taxes and help you plan better for your own financial goals such as savings, retirement, etc.
Another good suggestion is instead of spending all your income, draw a salary from your freelance business just as you would if you were working for someone else. Set a fixed amount that you consider your “paycheck” and stick to that amount. If you earn more than that amount, set the extra money aside in savings account so that the times when you earn less, you can use the money in that account to keep your income relatively fixed.
Clients Come First
The livelihood of your business depends on communicating with your clients. That means that you should have all the terms and conditions agreed upon up front. It is a good idea to have some sort of written agreement before you begin a project to make sure that you are both protected. Make sure your clients know what service you can and can’t provide as well as what they will be charged for and why.
When you send a client an invoice, the last thing you want is for him or her to delay payment on that invoice because of a disagreement about the project. Getting invoices paid on time is the key to keeping your finances running smoothly. If you and your clients communicate well from beginning to the end of a project, then hopefully you’ll have fewer problems with clients disputing invoices and refusing to pay them.
Save, Save, Save
Many people are only one emergency away from a financial meltdown. This is even more so for freelancers because their income could dry up at any point. The best thing you can do to prevent yourself from hitting a financial roadblock is to make sure that you set money aside. Ideally, you should start off with a goal of having at least three months of living expenses stashed away, with a plan to reach a point where you have six months of expense money in your savings.
You may have to live frugally and cut back on your expenses in order to build up your savings account, but it is incredibly important. Try to keep from accruing too much debt as well. Debt just adds to your monthly bills and increases the burden on your shoulders if you start having trouble generating income. Remember that every time you take on new debt, you create a new bill that you need to be able to pay no matter what your financial circumstances are.
Good financial planning is something that everyone can use; however, the precarious nature of living on an income that varies makes it even more important for freelancers. If you have a large pool of clients and connections, then you have a certain amount of job security, that doesn’t mean you should take it for granted that you’ll always earn a certain amount of money. Spend and save wisely during the booming times so that the lean times are not so difficult.
Angela Quint is a full-time freelancer and mother of 3, juggling work and a happy family while trying to make sure Uncle Sam gets his share, too!