This is Day 6 of the Freelance in 40 Days series where you’ll learn to freelance just by taking it one day and one task at a time. Today’s tutorial will cover financial preparation for your freelance business.
The Favorite Chore of Freelancing
Probably one of most feared and neglected aspects of freelancing is keeping track of all that money coming in and going out of your business. We smile in joy after receiving those nice project checks and grimace when we have to shell out for that little thorn in our side called taxes.
The tendency is to “put if off for later” but, make it a habit, and the more your business can be in disarray as a result. The bottom line is you want to know how your business is doing and making sure you are staying out of the red. Plus, you really don’t want the hassle of spending hours inventing expense receipts come tax time.
Let’s face it. Keeping up with your finances isn’t fun either. Actually, it downright sucks (apologies to all bookkeepers out there). This is a necessary part of any business though. After all, in order to know how your business is doing, you really have to keep track of:
- Net Income (or Loss): Are you meeting your income goals?
- Money Pits: Are there expenses you can cut so your net income increases?
- Tax Liability: The man has to take a cut. You don’t want to give him any more than you have to.
Start With The Basic Accounts
Luckily maintaining your own finances as a freelancer isn’t as bad as it sounds. First, though, we have to set up the basic financial accounts that every freelance business should have:
- Checking Account: Instead of using a personal account for expenses and to receive payments, it is far better practice to set up a separate business account for these instead. Income and expenses are much easier to track this way.
- Savings Account: A separate savings account is also useful for depositing taxes you are liable for as you go. Tax laws vary worldwide, of course, but transferring around 30% of your payments into this account will keep you from having to scrape together a huge payment for a tax bill when its due.
- PayPal Account: Though there is a fee of around 3.5% to receive and transfer payments to your bank account, it’s major use comes from the ability to accept payments worldwide.
Accounting For Freelancers
As for handling your accounting, unless you are an actual accountant/bookkeeper or can afford one, it isn’t very feasible to hire one for your business since they can be pricey. The alternative is to do it yourself (or “put it off for later” which isn’t recommended). There are two tools I personally found useful,which were from a Freelance Switch article on affordable online bookkeeping for freelancers. I also highly recommend them:
- Freshbooks: Tracks your income by recording client invoices and payments received. Pricing ranges from free for minimal services, then 19 USD/month on up for expanded services.
- Shoeboxed: Tracks your expenses by scanning, categorizing and keeping sum of your receipts. Pricing ranges from free for minimal services, 9.95 USD/month for basic and up to 49.95 USD/month for premium services.
The Best For Last: Taxes
Since every country has their own tax laws, it would be impossible to cover every single one here. There is likely some online tax resources for your country that can be found through a simple Google search. It is highly recommended, though, for you to consult with a local tax professional. It is not unheard of that they can sometimes pay for their service through savings on your tax payments.
For those in the U.S. there is a great tool in Outright (also in the Freelance Switch article) which can integrate with Freshbooks and Showboxed mentioned above and is free of charge. Turbo Tax is another easy to use tax tool for those from the States.
One little tip is if you are allowed deductions for expenses, is to have a look at Wise Bread’s 101 tax deductions for freelancers and bloggers. Although these apply mainly to U.S. taxes, it doesn’t hurt to check if these expenses can reduce tax for those in other countries.
Your Homework For Today
It will definitely take you more than a single day to apply everything in this tutorial to your freelance business. It is important to have these in place before you really start your freelance work though. So take the time you need to, but have these all in place:
- Set up your business checking account.
- Set up a business savings account for saving 30% of received payments for taxes.
- Set up a PayPal account.
- Set up a method of bookkeeping whether hiring an accountant, using Freshbooks/Shoeboxed or another method of your choice.
- Utilize a local tax service (or use online service for U.S. taxpayers).