Many people find themselves freelancing. For some, it was a choice made in pursuit of more freedom and opportunity. For others, it was the only income opportunity available.
Regardless of the reasons for becoming a freelancer or independent contractor, first-timers need to know a handful of essential financial tips. Doing so will save time and money while eliminating hassles and headaches.
With this in mind, let’s take a look at five financial tips for first-time freelancers.
Start Saving Right Away
Saving money is something everyone should be doing, whether they’re freelancing or not. However, given the unpredictable nature of freelance income, freelancers must save as much money as possible whenever they have the chance. Doing so creates a cushion for the next time work runs dry for a week or two. If you’re able to stave off lulls in income, the savings just keep adding up, making this a win-win situation for freelancers operating as independent contractors.
Determine Your Borrowing Options
If you’ve ever borrowed money before, you probably had to present paycheck stubs to prove income. Since freelancers aren’t employees, they aren’t receiving paychecks, making it hard to borrow money. With that said, there are several loans for independent contractors, including secured loans and debt consolidation loans. Having several options in your back pocket – even if you never have to use them – provides peace of mind during stretches where work is hard to find.
Separate Business and Personal Finances
Freelancers should consider themselves small business owners. That way, it’s easier to determine which spending is personal and which is related to freelancing. This means opening a business checking account and applying for a business credit card. Have all payments sent to this checking account and pay all expenses using this credit card. Doing so makes it so much easier to file taxes and stay financially organized as your freelance operation expands.
Keep Track of Income and Expenses
The reason it’s so crucial for freelancers to keep income and spending organized is it helps with filing taxes. Instead of sorting through piles of papers and rows upon rows of archived emails, freelancers can simply consult their banking records to determine how much money was coming in and how much was going out over the course of a year. That way, you don’t run the risk of overpaying or underpaying your taxes.
Stay on Top of Tax Payments
Freelancers should be sending tax estimate payments every business quarter. Generally speaking, it’s best to send anywhere between 20 to 35% of your gross income for the quarter. While that’s a hefty sum to send to Uncle Sam, you’ll get back anything over what you owe. The alternative is to find yourself owing hundreds if not thousands of dollars at the end of the year. This tax debt is saddled with fees and interest that adds up to even more money over time. Besides, who doesn’t like getting a refund back? Even if it’s only a few hundred bucks, it beats owing money to the government!
Like many things in life, understanding freelancer finances takes time and patience. Mistakes will be made, but the key is to learn from them going forward. As time goes on, you’ll find yourself fluidly managing the day-to-day financial aspects of life as a freelancer.
Do you use your car for your freelancing duties? If so, make sure to track your mileage! The current mileage deduction is 56 cents per mile. That adds up to hundreds or thousands, depending on the amount of driving you’re doing in a given year. For instance, many rideshare drivers rack as much as 50,000 miles of professional driving each year. Added up, that’s almost $30,000 taken off your taxable income!