Becoming an independent contractor is exciting. After all, you now have the freedom to select your own projects and work at your own pace. Plus, you get to choose what to charge your clients.
However, a major challenge is learning how to manage your finances.
Even though freelancing offers many rewards, your income may sometimes be inconsistent. You also don’t get employee-provided benefits and must manage your own taxes. Knowing all this, it’s critical to understand how to manage your money effectively.
Here are some strategies to learn how to become a financially savvy freelancer.
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You Control Your Financial Destiny
It’s both a blessing and a challenge to effectively manage your finances. Here’s a brief overview of what it means to be an independent contractor.
You’re Your Own Boss
Being an independent contractor means you are self-employed. You offer your services based on the terms you and the company specify. It’s rewarding being your own boss, but you’re in charge of your expenses, benefits, and managing your taxes. It’s a lot of responsibility, but you can handle it!
You Keep Track of Your Expenses
Remember that as an independent contractor, every dollar you make counts. Keep track of all business-related expenses, such as materials used for work or mileage driven for business purposes. You can deduce these expenses from your taxable income. So, you will owe less or even get some money back after filing your taxes!
Here are some everyday deductible expenses:
- Office supplies
- Equipment purchases
- Internet bills
- Business travel costs
You Must Manage Your Taxes
Traditional employees have their taxes withheld from each paycheck by their employer. As a freelancer, however, you must keep track of your taxes. Typically you set aside anywhere from 25-30% of each payment you receive. Then, you make quarterly estimated tax payments to the IRS.
At first, it may seem overwhelming. But over time, you will get the hang of things. Remember: Set aside the appropriate funds and pay your quarterlies on time. Otherwise, you get hit with fees and must figure out how much you owe when taxes are due.
Set Up a Business Account
As an independent contractor, you must learn to track your finances. A critical step in managing your finances is setting up a business account.
The first thing to do is choose the right bank for your needs. Consider factors like monthly fees, transaction charges, and online banking features. Some banks offer accounts specifically for independent contractors. So, find out if any accounts will benefit your freelance business.
After selecting a suitable bank, it’s time to open your account. This usually involves filling out an application form and providing documentation such as proof of identity and address. You’ll also need to make an initial deposit. The amount varies depending on the bank.
A significant benefit of having a separate business account is simplifying tax preparation. Having all your income and expenses in one account makes it easier to track business-related transactions.
Here are some more benefits of maintaining a separate business account:
Helps establish your brand: Having checks or cards under your business name reinforces professionalism.
Protects personal assets: In case of legal issues, separating personal from professional finances provides an extra layer of protection.
Eases bookkeeping: It helps streamline accounting procedures. All transactions stay in one place.
Managing money as an independent contractor can be complicated. Yet, with careful planning, you can avoid potential financial pitfalls.
Keep Track of Your Income and Expenses
You must also keep a tally of your income and expenses. To do this, keep track of what you make and how you spend your money.
Doing so, you’ll be better equipped to plan for the future, prepare for tax season, and make informed financial decisions. You’ll discover which systems work best by learning about your spending habits.
Decide on the Way to Track Income and Expenses
Consider using accounting software made specifically for independent contractors or freelancers. These tools automate much of the process, saving time and ensuring accuracy.
Consider using apps like QuickBooks Self-Employed or FreshBooks. Both offer features like:
- Expense tracking
- Invoicing capabilities
- Reporting tools
- Tax estimates
Do you prefer a more hands-on approach? Then consider setting up a spreadsheet. A simple spreadsheet can be a powerful tool to monitor your finances closely. However you choose to keep track of your money, make it simple to keep things current.
Keep Things Organized
Keeping all your financial documents organized saves you a lot of hassle. So, keep track of things like:
- The invoices you send out
- Payments received
- Bills you paid
- Trips you take for business purposes
These records will come in handy when preparing for tax filing. Or, there may be a time when you review your financial performance. Having all this on hand ensures the process is easy for you at that time.
Consult with an Accountant
Lastly, don’t hesitate to consult a professional accountant specializing in freelance work. They can provide tailored advice based on their experience handling similar financial situations.
As you grow your freelance business, remember there are always ways to make more money. Think outside the box as you grow your income and keep track of your finances. For example, you can learn hacks to make more money as an Uber driver. (You can read more about these tips here.)
Focus on implementing these financial strategies consistently over time. You’ll find managing your finances becomes less daunting—and more empowering!