Being a freelancer gives you the independence to run your business as you like. This means unlike a normal office setting, you will be handling the financial part too. You will be filing taxes, making your retirement package, setting up savings and so on. Sadly, many freelancers do not have a good grasp on their finances. You can grow financially as your business expands by observing a few tips.
Take a paycheck
Learn to take a paycheck just as you would if were employed. This reduces financial strain and helps separate personal and business expenses. You can calculate your paycheck by taking the total of the previous year’s income and dividing by twelve. If you are starting out you can consider the paycheck of your previous job. Remember to account for taxes, health insurance, savings and retirement funds.
As a freelancer, saving is not optional but mandatory. You do not have a guarantee of a salary. Ideally, you should have money enough for 4-6 months in case you hit a dry spell.
Keeping your accounts separate is a smart choice. It will make your reconciliations easier as you track personal and business expenses and incomes. It will also be easier for tax purposes. Ideally, you should keep 4 kinds of business accounts:
- Personal account – This is the account for your personal expenses. You can transfer money to this account from your business account and consider it your salary.
- Business account – This is the account for all expenses related to your freelance work as well as income in form of payments from your clients.
- Taxes – You will need to do your taxes. Calculate taxes liable on every income and transfer to this account. This way, you will have the funds available when doing your returns.
- Savings - This is your safety net account. Build up the funds such that you have enough to run for 4-6 months without any other income.
If you are not a qualified CPA you will run into difficulties when your portfolio gets larger. It would be prudent to consider engaging the services of a qualified accountant. You can concentrate on your business without bothering about non-essential but crucial details like taxes.
Do it soonest
It is tempting to ignore details like income and expenses when starting out as a freelancer. This would be a terrible mistake. Start taking care of financial details as soon as you make the first payment for your co-working desk. This will help assess if what you are doing is worthwhile, as well as avoid running afoul of the law.