Freelancing can be a dream come true or one of the most hair-raising experiences you’ll ever have. On one hand you are your own boss, you make your own schedule, your income is limited only by your own efforts, and you get more tax deductions. On the other hand, everything is on you when you are a freelancer. You have to get all the work done, no teams, partners, or significant others to share the load.
When you are freelancing doing things like writing or transcription jobs, you have to do all the administrative work yourself as well as your billable work, including billing for goods and services, paying any invoices, collecting on invoices so you get paid for your work, and pounding the pavement for new business. Sales and marketing and social media promotion take a big bite out of a freelancer’s week. Time management takes on a whole new significance when time really is money because you are looking for more clients while trying to keep current clients satisfied with quality work and excellent services.
It can be a difficult balancing act to produce profitable goods and/or services, keep a positive cash flow, and stay happy and productive while doing it. So what’s an industrious freelancer to do? Consider the following tips for managing your money while freelancing, so you have more money coming in than going out and can better focus on increasing your income.
Build a Nest Egg
When you’re a freelancer, you don’t get the 401(k) with employer match, or stock options, so savings take on a new urgency. Start out by building up an emergency savings fund of three to six month’s living expenses. Build this up and put it aside and don’t touch it unless something happens and you really need it. It’s also a good idea to save funds for special contingencies, such as vet emergencies (or euthanasia and burial) and car repairs. Retirement planning and funding is just as important when you’re freelancing as when you work for an employer. Roth or traditional Individual Retirement Arrangements (IRAs) are important retirement planning vehicles. The goal should be to put 15 to 20 percent of your income away for retirement in accounts like a Simplified Employee Pension Plan (SEP IRA or Solo 401(k)).
Track Your Spending
When your income is not always consistent, tracking how and when it gets spent is important to keeping more of it in your pocket. Keeping track of your spending is as easy as pulling out your smart phone and logging expenses in an app. Free online tools, such as Mint.com, YouNeedaBudget.com, and GnuCash.com help you quickly and easily set up a budget and keep track of what goes in and what comes out of your bank account. If you use your smartphone for texting, surfing the web, and playing games, it’s time to put it to work on more than fun and diversion. Use it to track your money and to learn how to tame your freelance finances with resources like Mint.com’s “Financial Management for Freelancers.”
Take Advantage of Tax Deductions
When you’re freelancing, unless you are already independently wealthy, have a rich uncle, or are sitting on a tidy trust fund, tax time is time to keep more of your income with tax deductions. Freelancers can take advantages of tax deductions that others can’t. Take a look at the following and see if you are taking all the tax deductions your freelance life entitles you to take using Schedule C, Form 1040.
- Home Office
Just because you work at home with a desk and a chair doesn’t mean you can take the home office deduction. You have to meet the IRS requirements to qualify. Those requirements are exclusivity, using your office only for business; regularity, using your home office on a regular basis; and precedence, using your home office most of the time to conduct your most important business activities. There are two ways to claim the home office deduction, with the simplified method that gives you $5 per square foot of home space used for business for up to 300 square feet, or using the standard method to calculate your deduction with Form 8829. Here’s where you use your receipts for all those “home officey” things you bought like printer ink, wireless printer, dedicated phone line, and business cards.
Yes, you can deduct business insurance when you are a freelancer. The portion of your home you use for your home office and a portion of the accompanying renter’s or homeowner’s insurance that you spend on it can be claimed in your home office deduction. Not an expert in insurance needs of freelancers? Not to worry. Talk to your friendly local insurance agent about insurance options like adding on to a home or tenant policy, an in-home business policy, or a business owner’s policy.
- Other Freelancing Deductions
You may not even realize all the freelancing costs and expenses that you can deduct from your income at the end of the year to lower your tax liability. Don’t forget about costs for things like domain and web hosting, telephone and Internet, advertising, office supplies, and business meals. Using apps like Expensify or Bench to upload and itemize your meal receipts is as simple as snapping a photo of your receipt.