Tag Archives: personal finance

5281316785_804d5d9ff1Today I’m going to talk about freelancing and smart management of your money. This information is for anyone who works freelance in the US, whether all the time or on an occasional basis.

I’ve freelanced regularly since 2008, and I’m embarrassed to admit that until recently, my freelance finances were messy. To be more specific, while my personal finances are generally well-managed and I do a good job planning and tracking my spending, I haven’t always been as rigorous with my business finances and lacked a clear delineation between my personal finances and my business earnings. A lot of people working on contract or freelance don’t think of themselves as business owners, but in respect to US tax law, they absolutely are.

Here are some steps that you can take to get your finances straightened out, be a better contractor for your clients and avoid unpleasant surprises at tax time. Keep in mind that I’m not “in” finance and I’m certainly not a tax expert.

Open up business bank account

It’s important that anytime you receive payment for your services, you set that money apart from your personal finances, then pay yourself out if it. This makes filing your taxes easier and will be helpful in the unfortunate event of an IRS audit. You may wish to file for an EIN (employer identification number) with the IRS before opening your account.

This is optional, but it’s another way to show that your business earnings and your personal funds are separate. It’s easy and you can do it online here.

Using an EIN also lets you avoid giving out your SSN on W9 forms. I can’t tell you how many times I’ve seen shockingly poor information security at startups and small businesses, and I believe anything you can do to protect yourself from identity theft is always worth doing.

You have a lot of options when picking a bank or credit union to use, and I recommend checking out to find the account that works best for you. Keep in mind that most online bank accounts (Discover, Ally, etc) don’t allow you to use them for business and they will close your account if they suspect that you’re using it to receive your business earnings.

If you have a good relationship with the bank that you do your personal banking with, you may want to evaluate their business banking options. Keep in mind that you probably won’t doing a great deal of in-person banking and that while fees are deductible on your taxes, they still come out upfront and can limit your access to funds. There are many options with other banks and credit unions that may offer you better features, like a higher rate of return on certain types of accounts, a better web banking experience and lower or no fees than your personal bank.

In my case, although I do my personal banking through a local credit union, I went with at Bank of America business account because that was what my then-primary client used and I wanted to make receiving payments from them as easy as possible. However, once I had dealt with Bank of America a few times, I realized why I had always avoided them (poor customer service, aggressive upselling, fees for everything) and switched over to Comerica, who were able to provide me a completely free account that met my specific needs.

Figure out what you’re going to owe and set it aside NOW

When we first start working freelance, we have to adjust to the idea that the money you we’re paid isn’t all ours. If you have always worked as a hired employee, your employer paid a portion of your tax liability for you. When you received a paycheck, the money was (almost) all yours. When you’re paid on a 1099 basis, no taxes are removed from your earnings and it’s your responsibility to set aside this money, and in most cases, send it to the IRS on a quarterly basis.You may qualify for what the IRS calls “Safe Harbor”, so read the conditions before you start sending payments.

For more detailed instructions on how to estimate your tax liability, read this article.

Ideally, you’ll be using your business debit card for all of your business related spending and saving all of your business related receipts as digital scans. You may also want to make a profit and loss statement for every month. It will help you keep track of your earnings and make liability calculations simpler so you can better estimate what you owe.

Be sure to create quarterly calendar reminders for all four estimated tax payment due dates, both State (if applicable) and Federal and remember they change from year to year.

I set aside the money I’ll use to make my estimated tax payments in a separate online savings account to reduce the temptation to spend it.

Set up a money flow and decide your salary

What you pay yourself will be up to you and can vary as needed. For example, sometimes you may need more cash on hand and decide to pay yourself a higher rate temporarily and other times you may wish to make up for being behind on your tax savings by paying yourself less.

Here is my money flow: Incoming payments go into my Comerica Business Checking Account. I pay myself once a month, at the end of the month and I typically somewhat under-pay myself to create a cushion for taxes. I write myself a check for  50-65 percent of my profit and deposit it into my credit union’s checking account. The remainder is transferred to my American Express online savings account, to be sent to the IRS.

Invoice efficiently

Try to always send invoices at the same time, whether that’s every week, every other week or monthly. Use the same format every time. Clients like it when you’re consistent. Create a positive experience for your clients by being consistent, but flexible, always willing to do what works best for them.

One way to do this is accepting multiple payment methods, like checks, Square, bank transfers or sending invoices through PayPal. I consider myself fee-averse and will always prefer cash or a check over anything that costs me and my client extra money such as Square or PayPal, even though it means waiting a longer time for a payment.

Know your worth

It’s important to know the market rate for the services that you offer, taking into account any regional variances that factor into what your client expects to pay for your work. As you become more experienced, I recommend regularly evaluating the marketplace to make sure that you are billing at a fair and reasonable rate.

When setting your rate, keep in mind that since you’re liable for more taxes, you need to build this into your billable rate, or you may end up working for far too little and hurting yourself in the long run. W2 earnings shouldn’t be used to set your 1099 rate, as your tax liability is at least 15.3% higher.

That said, it’s good to be flexible and sometimes you may want to work for less than market rate to develop a relationship with trusted or valuable client. Always be accurate and transparent about the amount of time that you work, and never, ever bill for things you didn’t do.

There’s a lot more to small business finance, and everyone’s situation will be unique, but these are the things that I’ve learned in my years as a freelancer. I hope they help you and let me know if there’s anything I’ve missed or inaccurate information

If you need financial help, consider using a fee-only financial planner. They are required by law to only give you advice that is in your best financial interest. Other financial planners and consultants may advise you in ways that are designed to benefit them at your expense.

Note: I’m not affiliated with any of the sites or institutions I recommended in this article.

Photo Credit: frankieleon via Compfight cc