As a freelancer, you may enjoy setting your own schedule, but chances are you do not enjoy the other benefits that salaried employees do like frequent salaries, automated tax withholdings, and paid vacationing. This is why managing your finances is very important as a freelancer. You must remember to set aside money for retirement, pay taxes, and still have enough set aside to cover your living expenses – decisions which affect your ultimate goal of finding out if freelance work is for you or not.
Here are some valuable tips on finance management for freelancers that will help you build your nest egg, cover your tax obligations, and stay organized.
Organization is Key
Besides keeping client projects organized, keeping track of your client projects, keeping track of your expenses will undoubtedly be the most important part of your day to day organizational activities. Organization will take a lot of the guesswork out of how you track your business transactions. You don’t want to lose track of any deductions related to your expenses so keep all your receipts and record the dates, times, a description of the expense and the business purpose for the expense.
The rule of thumb on taxes
If you’re a freelancer, you probably don’t have an account on the pay roll deducting your estimated quarterly taxes for you so you will need to divide your paycheck to allow for this. Therefore, freelancers should be setting aside at least 25% of each paycheck to cover their tax obligations to prevent from falling victim to any IRS penalties.
In addition, you can opt to pay your taxes quarterly, or by the 15th of January, April, June and September, for the previous tax year. Some freelance writers find this advantageous since paying their taxes in smaller amounts than paying one lump sum every 11 months in much easier.
Why are mobile apps and cloud-based software ideal for freelancers?
Cloud-based software, like many financial management tools and accounting software programs used by small businesses can be accessed from any device that has access to a private or public network like the internet. In addition, the Software as a Service (SaaS) pricing models are associated with the use of the service, not the price of purchasing individual copies of the software packages. In addition, they usually follow a predictable monthly pricing model which requires significantly less money to operate.
Add in the fact that many cloud-based accounting software packages now provide you with an option to accept credit card payments through your tablet or smartphone and managing your finances just got a lot easier, especially as freelance writers trying to make it.
For more information on how you can leverage mobile payment technology to cut overhead costs and increase productivity check out the Gopayment mobile payments blog.
Watch out for audit triggers
As a freelance or small business owner there are a few things you may do on your tax return that can trigger and audit. Three of the most common audit triggers to watch out for include:
Reporting the wrong taxable income – While it’s okay to make a small mathematical error, we all do from time to time and the IRS will correct it. However, fudging on how much you’ve made throughout the year is not, even if you are a freelancer so you’ll need to keep accurate records of your business expenses.
Deducting lavish dinners with clients – The rules are strict and unlike deducting half the cost of a reasonably priced dinner entertaining potential clients, deducting the cost of a lavish dinner as a entertainment and then again as a travel expense is not allowed.
Using your car for business – The general rule is that if you are using the vehicle for the sole purpose of conducting business you’re good to go. However, if you’re dropping the kids off at baseball practice and running errands then you won’t qualify for this deduction.
There are more deductions available and many more “urban legends” about what will trigger an audit to go along with them: passive losses, home office deductions, you name it. You can literally drive yourself crazy as freelancers trying to predict what the trigger will be. The best advice is if you don’t have a solid claim on the deduction you wish to claim with good records to back it up, don’t claim it.
These are the joys of freelancing we tend to miss, right? Perhaps. Just care for your finances correctly, and you’ll flourish.