Going freelance for the first time? If so, congratulations! It’s a huge step that is slightly risky, but if you pull it off you are opening yourself up to a brand new world and your success will be entirely down to you.
But let’s not beat around the bush – being a freelancer can be tough. From the moment you start out on your own, you will be responsible for your taxes, expenses, insurance and all kinds of other financial issues that your old boss used to take care of on your behalf. And the truth is that there are plenty of pitfalls in your way, and you will have to learn a lot while on your feet.
With this in mind, here is a brief guide to the kind of financial mix-ups that can affect you when you are a freelancer. Some can be irritating; others can be devastating. But if you want your freelance career to soar, you need a sound financial platform to take off from. Let’s get started with some of the basics.
Track your expenses
When you are self-employed – as a sole trader, for example – you will be taxed on all your profits – in this case, all the money you receive each year from your clients. But you shouldn’t be paying taxes on the money you spend (exclusively) on your business. Things like home office expenses, retirement contributions, fuel and even professional development can all be taken off your tax bill. However, you need proof of purchase, so make sure you are tracking all of your expenses as you go, to save both lost receipts and time spent worrying about tax season.
Submit your 1099s
If you start hiring other contractors to help you complete client tasks, it’s essential that you monitor your payments. The IRS will expect you to provide a form called the 1099-MISC if you pay more than $600 a year for them, so don’t forget. You’ll need to collect W-9s from every freelancer you use and submit those 1099s after payment. Again, do it as you go along if you want to avoid those tax season headaches and problems with lost forms.
Insure yourself
It’s easy to forget about insurance when you are a freelancer. But you’ll need it – quite a lot, in fact. Take some time to learn about insurance for health and disability, just in case you are struck down with illness or injury and can no longer work. Don’t forget, when you are a freelancer you get next to nothing in benefits – you have to pay and arrange everything for yourself.
Remember your retirement
When you are just starting out in the world of freelancing, your retirement is probably the last thing on your mind. After all, you have decades ahead of you and plenty of time to catch up, right? Well, the truth is that when you freelance, you will often find that your income is different every month, and there will be many periods of quiet when you have to look for clients. And unless you have a retirement plan sorted out already, the chances are that you will keep on forgetting. Set up an IRA now, get into the habit of making payments every month, and keep up to date. Even if you only save $50 – $100 a month, it is still well worth your while.
Create personal and business budgets
As we mentioned above, when you are a freelancer you will go through periods where money isn’t coming through the door. It’s essential that you allow for this and run a strict budget – both for your business and personal life. If you find yourself in the middle of a quiet period without a budget, you may have to borrow to fund your lifestyle and business spending. Similarly, if you are spending every cent during boom times, you won’t have anything left when the quiet times arrive. Be sensible, regulate your spending, and always have cash available.
Don’t forget your tax
We’ve already discussed the tax season, but this is such an important point we should underline it. It is critical that you put aside enough money to cover your taxes – and preferably a little more – so that when tax season arrives it won’t be overwhelming. A lot of freelancers get into trouble and face fines from the IRS because they spend all their income and don’t have any put aside when they have to pay their taxes. It’s the worst possible start to the financial year, too – after paying a large tax bill you will find you have to borrow, and by the time you get yourself back on an even keel, it will be close the tax season once again.
Pay yourself a salary
One good way of making sure you have taxes put aside is to pay yourself a salary. Treat yourself like a business, and make sure that you only deposit a ‘wage’ into your spending account, rather than all of your income. It can be tough to do, especially when money is short – but it is essential to your success. Not only can you build up your taxes owed, but you will also find you have a lot more money to invest in your business with. Plus, of course, it will give you that essential backup you need for quiet weeks or months.
Don’t go money crazy
Finally, be careful of stretching yourself too thin. When you are just starting out you will be desperate for clients, and probably willing to take on every single one that shows an interest. But here’s the reality – there are only so many hours in the day. And if you end up overcommitting, the chances are that you will run out of time, annoy some clients, and ruin your reputation before you even get a chance to shine. The right way to do it is to fill your time, and then slowly raise your prices so you end up with fewer clients that pay you a higher rate because of the success you bring them. Good luck with the freelancing – let us know how it goes!