Financial freedom is the goal for most freelancers. Freelancing means you can take control of some aspects of your life and be your boss. You have the freedom to manage your time and make decisions that affect your business. It also means less bureaucracy and more independence.
But let’s face it, there are also challenges to being a freelancer. One of the biggest challenges is managing business finances: paying bills, managing cash flow, and paying taxes on time so you don’t get into tax trouble with the IRS or state government agencies.
Fortunately, there are plenty of resources available to help freelancers manage their finances more effectively – including this article!
Tip 1: Cash Flow Is The #1 Priority
Cash flow is the #1 priority of business owners because it’s that all-important difference between your income and expenses. Your cash flow determines whether you can pay yourself, cover a mortgage payment or hire an employee. But how do you manage your cash flow?
The first step is to understand what it means for your business. Cash flow is the lifeblood of your business it’s the difference between profit and loss, success and failure.
Let’s say you have $5,000 in revenue over a given period (a month or quarter), but also spent $7,500 in expenses during that period ($2k on rent; $1k on advertising). You have negative cash flow: You spent more money than you made!
Tip 2: Remember That Cash Is King
Remember that cash is king. I know this sounds like a cliche, but the fact is that money makes the world go round and cash keeps you in your business. When you’re freelancing, you have to be ready for any outcome the project could be canceled at any time or it may not pay well enough to cover expenses.
Keep track of every penny spent on your business and every penny earned from it. This habit will help prevent overspending and keep an eye on future needs as well as current ones
Tip 3: Can Freelancing Be The Ticket To Your Financial Freedom?
Freelancing is not easy. It’s risky, it’s not for everyone, and it’s all kinds of lifestyle choices because you have to learn how to market yourself as an individual brand (more on this later). But if you have a skill that other people need or want, then freelancing could be your ticket to financial freedom.
We must define what “financial freedom” means for you: Is it being able to retire early? Freelance work will help with this goal, but if your goal is truly retirement and not just four days off per week then freelance work may not be enough by itself.
Is it having enough money in your bank account each month so that making ends meet is no longer an issue? There are many ways that freelancers earn money outside of their jobs like selling products they make in their spare time or writing blog posts about topics they enjoy talking about.
These side gigs can help supplement your income while also giving you something fun and exciting to do on the side!
Tip 4: Keep Track Of Expenses
One of the most important things you can do to keep track of your expenses is to use a tool that allows you to easily record and categorize them. If you’re working out of an office, like I am, this may mean keeping a spreadsheet on Google Drive or Dropbox. (If you have access to Quickbooks through your employer, that would be ideal.)
If you’re working remotely and need something more portable than a spreadsheet app on your computer, consider tools such as Expensify (my favorite), Wave, Toggl, or Timely, or even just good old pen and paper if all else fails!
Tip 5: Leave Enough Time For Invoices
If you want to be paid on time, it’s important to invoice as soon as possible. This can be tricky when you’re juggling multiple clients, but there are some things you can do to make invoicing easier for yourself.
First, make sure that your clients understand that their payment schedule is flexible and that they don’t have to pay you all at once. It’s much easier for them if they can break up a big check over several months or even years! You might also consider setting up biweekly invoices instead of monthly ones.
That way, if someone needs more time between payments (or hasn’t paid yet), they won’t feel rushed by an impending deadline every month.
Finally, don’t forget about taxes! Invoicing is all about making money in the short term but remember that any money isn’t yours until it’s been cashed in by the client and this means paying attention when tax season rolls around!
Tip 6: Outline Terms In Your Contracts
When a client hires you, they should be required to sign a contract outlining the terms of your engagement. The contract should include:
- What work is expected from you?
- How will payment be made (i.e., when, in what form, and by what method)?
- If there are any penalties for late payments or cancellations, make sure these terms are outlined as well.
Tip 7: Know When To Drop A Client
The most important thing to know when it comes to freelancing is that you have the right to choose who you work with. This means that if someone promises you something and doesn’t follow through, or if they are just an all-around bad person, don’t hesitate to drop them as a client. For example:
If a client is late paying you on time more than once, then maybe consider dropping them as a client.
If a client requires many revisions and doesn’t seem like they’re ever happy with your work, then maybe consider dropping them as a client.
If when talking about your work with another person (friend/colleague), they say something along the lines of “I see what you do for this [client] and I don’t think it’s worth it,” then maybe consider dropping them as a client!
Tip 8: Know If You Are An Independent Contractor Or an Employee
If you’re an independent contractor, then your employer will not be paying for any of your business expenses. This means that when they don’t pay you, they aren’t just taking money out of your pocket: it’s also taking away the money that could’ve been spent on equipment, supplies, and other things that would help grow your business.
Independent contractors are required to pay their taxes and fees (and sometimes even contribute to unemployment insurance). This can be a burden if you’re not making enough money or if there is no clear way to make more.
Employees don’t have this problem because their employers do all of this for them. They get paid every two weeks with no worries about whether or not they’ll be able to continue paying their bills on time!
Tip 9: Use A 1099 Tax Form For Independent Contractors
If you’re going to be an independent contractor, it’s important to know the difference between a 1099 tax form and a W-2. The W-2 is for employees and can only be used for employees. 1099 is for self-employed workers, which means that it can only be used by people who aren’t working as employees.
A 1099 form is used for income from self-employment, so if your company pays you in any way other than paying an hourly wage or salary (such as commission, tips, or bonuses), they may require you to fill out 1099 on their behalf at the end of the year if they paid more than $600 throughout 2018.
Even though this seems like something that only affects freelancers and independent contractors who are paid primarily by commission or other forms of compensation besides an hourly wage or salary, it’s quite common practice across all industries including those that don’t typically use freelance workers (like retail).
Tip 10: Be Mindful Of Irs Rules And Treating Employees As Independent Contractors
This is a really important tip, so I’m going to repeat it three times just in case you missed it. If you are an employer, when paying your workers and determining if they are independent contractors or employees, be mindful of IRS rules and treat employees as independent contractors.
When you hire a freelancer (or even if they offer their services pro bono), they are not just your employee they are also your client and customer. You should treat them with the same dignity as other clients or customers would expect to be treated by their employers.
Tip 11: Keep Good Records Of Work-Related Expenses
You may be able to deduct the cost of work-related expenses, but you must meet certain conditions. To qualify for a deduction, you must have:
- A trade or business (you’re self-employed).
- Legal duties and responsibilities that are separate from those of your employer.
- Ordinary and necessary expenses related to your work.
Deductible expenses greater than 2% of your adjusted gross income reported on Form 1040, Schedule C (e.g., your net earnings from line 31), Schedule E (e.g., rental real estate income), Schedule F (farming business) or Form 1040NR/1040NR-EZ (foreign earned income).
You can choose either the standard mileage rate or the actual expense method as long as it’s used consistently throughout the year.
If you don’t have any documentation to support an unreimbursed employee expense (such as mileage driven or home office space used), then you may use the standard mileage rate instead of at this time it’s $0.535 per mile for trucks and vans with a gross vehicle weight over 6,000 lbs.,
Plus 0.21 cents per mile driven within 50 miles of the home if it’s used solely for business purposes
Tip 12: Track Mileage For Tax Purposes
Track your mileage for tax purposes. If you’re driving a lot to meet clients or pick up supplies, it’s important to keep track of this mileage. You’ll want to make sure that you have enough records so that the IRS will award you with the proper deductions.
Keep in mind that if you are reimbursed for the cost of gas and car maintenance (or other travel expenses), then tracking your miles isn’t necessary. Be sure to save all receipts for any non-reimbursed travel expenses (parking fees, tolls).
Tip 13: Have A Backup Plan For Business Income When You Take Vacations, Get Sick, Or Have A Baby
If you’re thinking about taking a vacation, getting sick, or having a baby (or any combination of these), consider having a backup plan in place for how to cover your expenses if you are not able to work.
For example, some freelance writers may have an emergency fund set aside that they can use for their basic living expenses if something unexpected comes up. Alternatively, some freelancers may choose to take on writing jobs during their scheduled time off instead of using all their vacation days so they don’t lose out on the income from those gigs.
If this sounds like something that would work well for your business model, make sure you’ve taken the proper steps required by law before setting up such arrangements with clients and/or other professionals who expect timely delivery of services under contract terms established up front by both parties involved (i.e., both client and freelancer).
Tip 14; Claim Allowable Business Losses On Your Income Tax Return
You can use the loss in any year when you have taxable income from all sources, including your freelancing, to reduce other income. You can also use up to $3,000 of a net operating loss (NOL) to offset passive activity gains and income at the end of the tax year, or carry it back two years and then forward indefinitely to future years.
If you’re thinking about a freelance career, remember that it’s not for everyone. You have to be motivated, disciplined, and good at time management.
Whether you are a freelancer or an employee, knowing your way around the IRS rules and being prepared for unexpected situations is vital to maintaining financial security.
Carefully track expenses and keep separate bank accounts for business purposes and get in touch with an accountant or tax professional if you need help. Good luck out there!
Frequently Asked Questions
What Are The Benefits Of Freelancing?
You get to choose when and how much work you want to do, and you can work wherever you want. Plus, since you’re self-employed, you’ll have access to health insurance and other benefits that aren’t available through traditional employment options.
What Are The Downsides Of Freelancing?
Freelancers are responsible for managing their taxes and healthcare coverage so if those things aren’t worth it for you, then it might not be worth it for you! But if they are, then the freedom and flexibility of being your boss might be worth those extra responsibilities.
Do I Need Any Special Training Before I Start Freelancing?
No! Many people who start as freelancers have never worked before in a traditional office environment they’re just people who are good at what they do (and we’ll help you figure out what that is).
All we ask is that you bring a positive attitude and a willingness to learn new skills as they come up. You don’t even need a computer or internet access we’ll provide everything else!
Costantine Edward is a digital marketing expert, freelance writer, and entrepreneur who helps people attain financial freedom. I’ve been working in marketing since I was 18 years old and have managed to build a successful career doing what I love.