Working as a freelancer is a blessing for many people who can’t stand having a boss, but want to do the business their own way. When you’re a freelancer, you can set your own work hours, as well as your holidays and organize your life in accordance with your personal preferences.
Still, there’s one thing you should do at all costs: avoid the financial mistakes that could ruin your entire freelance effort. Due to inexperience and impatience, freelancers are prone to such mistakes. This guide will teach how to avoid those mistakes and skyrocket your freelancer career.
Deal with taxes on time
If you’re a freelancer, you’re probably registered as a self-employed person. The best form of business for that kind of business is the sole proprietorship.
While it’s a less complex business form, it has one significant drawback: your private possessions aren’t separate from your business assets. This is extremely dangerous for new freelancers who fail to pay their taxes on time.
Therefore, one of the basic principles of a successful freelancer is making the tax payments when you’re legally obliged to do so.
You’ll hear that many business owners usually complain about taxes in April. That’s because the fiscal year ends in April and that’s the last deadline for filing tax returns.
Still, sole proprietorships don’t have to wait until April to deal with their taxes. The better option is to report your taxes on a quarterly level. That way, you’ll pay your annual tax obligations in four installments and avoid the tax-induced stress and mess in April.
Another clever thing to do is put aside about 30% of your monthly income just for taxes. That special account should be kept apart from your emergency fund. By saving this amount of money, you won’t have any problems to pay your taxes quarterly and you’ll never have trouble with the IRS. What’s more, perhaps you won’t have to spend all that money on taxes, so you might even save a cent or two that way.
Of course, you should read more about taxes for the self-employed and get yourself a licensed tax preparer, just to make sure you cover the basics of the taxes
Form an emergency fund
People who were company employees before they launched their freelancer careers might need some time to realize that there’s no such a thing as salary in this form of employment. While you might have long-term clients and a smooth cash (in)flow, being a freelancer is an insecure career. You might face some periods when your clients won’t need your services for a certain amount of time.
Since you have to pay the bills and live all the time, not only when your freelance income is on the high tide, it’s important for a freelancer to form an emergency fund with their income as soon as possible.
When it comes to numbers, it’s hard to tell a business individual how much they should put into that fund monthly. This amount will largely depend on your income, as well as on your expenses. Even if you don’t manage to save too much money in the first few months of your freelance work, don’t be too hard on yourself. It will take some time to get things rolling and start making a substantial income.
Therefore, it might be more accurate to speak in percentage when we’re talking about this emergency fund. For instance, try to save at least 10% of your income. As your income keeps growing, this 10% could increase to a nice sum of money over the course of time.
Also, if there are some assets left after you’ve covered all your business and living expenses, as well as your taxes, add that extra money to the emergency fund.
Save before you start freelancing
Launching a freelance career is something that takes a lot of thinking and planning. The worst thing you can do is quit a steady job without some kind of plan or vision.
When you start feeling that your 9-5 job is exhausting you and that you need something different, consider what options you can count on. Many hours of hard work and contemplation need to pass from the moment you realize that you want to be a freelancer until the moment you hand in your resignation and start your independent career.
One of the most important things to do while you’re still a full-time employee is to start saving for the dawn of your freelance career. We’ve already mentioned in this article that you’ll hardly manage to put too much aside in the initial phase of your freelancing. This feeling of insecurity and instability might turn out to be too stressful for some rookie freelancers.
Contrary to that, when you know that you have some backup cash, saved during the last stage of your full-time employment, you’ll be able to start freelancing in a more relaxed and creative way.
For example, you can start doing side jobs while you’re still a company employee. The benefit of this experience will be twofold. On the one hand, you’ll test your will and see if you can work as a freelance in the first place. On the other, you’ll have additional assets for a special fund that will support the initial part of your freelance career.
Think about your retirement
When you’re young and successful, it’s easy to splurge everything you earn. The risk of spending all the money you make is extremely high for freelancers. That’s why every new freelancer should start thinking about their retirement from day one of their freelancer career.
Beginner freelancers are often unaware of different retirement plans and will probably sign a contract with the first retirement agent they meet.
However, you should first find out more about some basic plans and consult several retirement advisors before you make up the final decision on the right plan for your needs.
For instance, you can save your retirement money with a myRA plan (my retirement account), where your money will be kept by the US Treasury. To be more precise, it will be an investment in a US Treasury bond. This is considered a low-risk retirement plan, plus, you’ll be paid a certain annual interest. At the moment it’s about 2% per year.
You’re eligible for a myRA plan if your yearly income doesn’t exceed $132,000. It sounds more than a reasonable limit for a new freelancer.
Since every retirement plan has some sort of limit, myRA isn’t an exception. Here the limit is 30 years of saving or $15,000. The moment you meet any of these two conditions, you need to move your money to a different account.
Also, if you decide to withdraw the money you’ve saved before the expiration of the agreed period, you won’t have to pay any additional fees or penalties.
Conclusion
The nature of work is changing in the modern world. A growing number of employers and workers support freelancing these days. The “gig” economy, i.e. the economy based on freelance jobs now employs about 57 million Americans, which is 36% of the entire US workforce. Many other parts of the world follow suit. Still, if you’re thinking about becoming a freelancer, don’t rush into it. You should spend some time thinking and applying the strategies presented in this article. When you’ve prepared your wits and your finances for freelancing, keep up the good work and run a lucrative freelance career.
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