The freelancer lifestyle is one envied by most employees who have a conventional nine-to-five. In their minds, freelancers work from home, on the couch, in pajamas, when and if they want, and in an ideal world, they’re doing work for which they have some degree of passion. What most don’t understand about a freelance career is that everything falls on their shoulders, including sales, client retention, and worst of all, wrangling the finances. Money management can be challenging enough when you have a steady paycheck rolling in; add in the inconsistency of freelance work the things get even more complicated.
Whether you’re a freelance pro, new to the freelance life, or considering giving up the grind of conventional employment, here are steps you can take to ensure your financial life stays on track.
Plan Ahead For Taxes
As a freelancer, you run the show, including paying the IRS. Employers withhold a portion of employees’ paychecks for state, federal, social security, and medicare taxes, but freelancers have no such luxury. Instead, every dollar earned comes directly to you, business owner. To make sure you do not have an oppressive tax liability during tax season each year, siphon off a portion of your earnings into an account specifically for tax payments.
The general rule of thumb is that no less than 30% is set aside each time a check comes in since you are also responsible for self-employment tax if you have no other job outside of freelancing. The IRS offers some direction on how to pay taxes owed throughout the year, so your total bill isn’t so alarming. You should also make sure that you don’t forget to make tax free IRA contributions each year!
Keep Personal And Business Separate
Whether you have an established business where you freelance earnings flow into or you act as a sole proprietor without an official company, it is important to maintain a degree of separation between personal and business cash flow. Any expenses not related to your freelance work should flow through one bank account or credit card, while the income and spending for your business should flow through another. Not only does this give you a clear picture of business revenue, and ultimately, profit, for the year, it also makes filing your taxes a less complicated endeavor.
Pay Yourself A Salary
Inconsistency in income is a major hurdle for most newbies to the freelance world. No matter what work you provide to clients, there is an ebb and flow of how much work, and subsequently, how much pay is generated in a given month. To help ease concerns over not having enough to cover financial necessities, establish a system to pay yourself a salary on a monthly basis.
Every time a client pays, place the money into your business account; set up an automatic transfer into your personal checking or savings account once per month or every two weeks for a set amount that you know will be available. It may take some time to feel confident implementing this strategy, but once you do, you can say goodbye to anxiety about your next paycheck.
Plan For The Future
For freelancers new and old, it is pertinent to have a backup plan. As unfortunate as it is, there are times when clients don’t pay on time – or at all – which makes it a challenge to take care of your financial needs. Setting up an emergency fund or having access to fast, easy lending or credit can go a long way in keeping you in the freelance business for the long haul.
Additionally, looking beyond the next month or two of life is helpful in reaching your longer-term money goals. Securing the right business and personal insurance, and considering smart methods to set aside for retirement are necessary components of financial well-being – ones you cannot overlook as a freelancer.
Taking the leap to start your own business or begin a side hustle with freelance work can be the right move for some people. However, it is crucial to consider the financial implications of being a freelancer, and understand how to protect yourself from the inevitable ups and down of the job.