Being a freelancer or independent contractor certainly can be freeing. Making your own schedule, and working on the projects that you want instead of what your boss wants? Who wouldn’t want to work for themselves!
But when you get down to the nitty-gritty details (aka the money management), things get a little more complicated. Taxes, business loans, and even your paycheck can all be up in the air. How are you supposed to keep track of it all?
Luckily there are plenty of other freelancers out there in the world that are willing to lend you some advice on this subject. How can you keep track of your finances as a freelancers and make it all a little easier? Here’s where you can start.
Taxes: Quarterly, Annually, and Everything In Between
In the United States, taxes are often treated as a major burden by employees. Yet, the burden of taxes is even more difficult when you’re a freelancer; you don’t just have to deal with it in April, but year-round!
When to File
As a freelancer, you often have to keep track of your own net-income and report it on a quarterly basis. This is known as estimated taxes, and determining if you owe changes, based on the previous year’s taxes as well as the percentage of income you make from your freelancing work.
Since businesses big and small have to take out taxes from their employee’s paycheck, and freelancers simply get paid for their work without having those taxes automatically withheld, you have to do double duty on tax filing. As Colin Lalley wrote with Policy Genius:
“The IRS works on a rolling basis with this withheld money, so they don’t like freelancers paying it all just once. As something of a compromise (so they don’t have to file taxes each time they get payment for a job), freelancers pay estimated taxes quarterly. The exact statement of the IRS says that ‘As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.’”
Thus, the IRS also wants freelancers to report their income taxes in April, during the traditional tax season. Although legally you must report all freelance income, you will normally only receive 1099 paperwork from any client that paid you over $600 that given year.
Before you start panicking: If freelancing is your side-hustle, and not an actual full time job for you, then filing in April is all you will have to worry about. But if you’re a full-time freelancer, get ready for the paperwork! Luckily, there are plenty of computer services that can help you keep your taxes, paychecks, and invoices in line. They can even help remind you of when your quarterly estimated taxes will be due. However, given the nuances of freelance finances and the tax code, you may be better off working with a tax professional when you file, rather than continuing to rely on online or prepackaged filing software. They can help prevent slip ups, as well as find the best ways for you to save money when filing.
Of course, there are some other perks to being a freelancer: one of which is deductions. Unlike being an employee — where purchasing necessary items for work isn’t always compensated by the business — you can use any essential business item you purchased as a “write-off” or tax deduction for your business. Need a new computer to do all your online shop-keeping? That $1,200 MacBook can be a write-off for your business. Same with any home office remodels, or potentially any supplies you might need. Although this won’t always prevent you from owing money, it might help in reducing the amount you owe at one time.
The most important part about taxes for freelancers is keeping all your invoices and receipts organized. Some professionals even advise keeping receipts for up to (or over) six years. As one tax professional, Jonathan Medows, told Forbes Magazine freelancers tend to be at a higher risk for audits from the IRS: “You don’t want to cheat yourself, but you also don’t want to cheat the government. You want to be able to look someone in the eye and explain and justify your deductions.”
The Importance of Keeping Your Personal and Business Score in Check
As a freelancer it is still vital to keep your personal credit score in line. Despite the separation you might put between your personal self and your business self, banks and credit card companies will still look at your personal history to determine much of your standing. Even if your business has pristine financial history — but you don’t — your bad credit score could haunt your business.
Business Credit Score
However, freelancers can also build up their business credit score. In fact, when filing taxes, if you file as a sole-proprietor for your business you can apply for an Employer Identification Number (EIN) from the IRS. Once you have that, it acts as your business’ “Social Security Number” or Tax ID and can have a business credit score tied to it.
Just like when you start out as a teenager, your credit score will begin at 0 and will need to be built up from there. However, the score looks a little different from a traditional personal score. For one, the number system is smaller: either 0-100 with Dun & Bradstreet (the most popular credit reporting agency for businesses) or 0-300 for FICO. Until you have built up a stronger score (the higher the number, the better your score), many banks and loan offices will look at your personal credit score to determine if you’re a trustworthy lender.
For more information on credit scores and how they can affect your personal business, visit our credit score resource and learning center.
Avoid the Business Credit Card
Even then, applying for a business credit card or business loan might be a little tricky until you get your bearings. Business credit cards are often meant for high-spenders, and have rewards that are catered towards those frequent borrowers. Freelancers who work from home don’t often fit that bill, and should probably avoid signing up for a business credit card when first starting out.
However, having the extra cushion of a high-spend personal credit card might fair better for freelancers that are first starting out. In addition, it will really help with keeping your financial paperwork in line. You can track all your spending for the business on one card, and make sure that your personal and business finances don’t intermix.
Are Freelancers Really Financially Free?
Despite the looming threat of being audited by the IRS, and the uncertainty of being paid by clients who seek out your services, being a freelancer can be extremely liberating. You may still have deadlines, taxes, and stress, but your life is considerably more flexible.
Yet, joining the freelancer community (known by economists as the “gig-economy”) does come with its own challenges. Particularly in relation to money flow and income. There will be months where you’re waiting for checks to come in before you can pay the bills, and months when you’ll feel like you’re the richest you’ve ever been. The trick is to be frugal about your money, and start creating a cash cushion as soon as possible. That way when the bad months come (and they will come), you’ll have something to fall back on.
In a similar fashion, freelancers don’t have the luxury of a sponsored retirement plan. So it’s important to start saving up and possibly start investing when you have a steady flow of income. Over time, you will be able to build up a solid portfolio and have a plan for the future.
Financial uncertainty aside, freelancers are beginning to take over the working world. If you’re one of the many people considering freelance work — or if you already are one — then be sure to get smart about your finances. Freelancing works best when you’re financially stable!
For more tips, check out our small business resource center.
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