Financial Toolkit for Freelancers and Entrepreneurs

Kate Dore

It’s easy to get lost in the excitement of your first freelance gig. It may be the start of a lucrative side business—or even a new career. Before pulling out your champagne flutes, though, it’s worth spending some time to get organized financially. Taking the necessary steps now may save you a lot of time, money, and stress later.

1. Separate your personal and business money.

One of the first things experts recommend is keeping business income and expenses in a separate bank account.

“Not separating business and personal [expenses] is a huge repetitive mistake,” says Eric J. Nisall, a Florida-based freelance accountant who blogs about entrepreneurship and personal finance.

Some worry two bank accounts means double the work, but Nisall says just the opposite is true.

Keeping business expenses separate from the beginning will save you from painstakingly combing through statements at tax time. A separate account also makes it easier to save money to reinvest into your business, instead of using all your income to cover living expenses. As an added bonus, it may prevent you—or your future accountant—from overlooking legitimate deductible expenses.

If you’ve already established yourself as a legal business entity, Nisall recommends opening an actual business account to further professionalize your operation. The required documents will vary by bank. You may be asked for a business tax ID number, your legal business name, “doing business as” name, business start date, location, and other personal details.

2. Yes, contracts are essential. Here’s what you should look for.

In many cases, freelancing happens suddenly. Someone notices your work, asks for help, and before you know it your first gig begins. The company may seem trustworthy, but you still need to protect your interests.

Chasing down late payments and being asked to do more without extra compensation are issues freelancers face every day. A contract protects you if the scope of the project changes or your invoice goes ignored.

According to Freelancers Union, your contract should answer these questions:

  • What does your project include?

  • Who owns the project once it’s complete?

  • How many changes or revisions are allowed?

  • What are the deadlines?

  • How much will you be paid?

  • What is the timeline for payment? Are there late fees?

  • Is there a kill fee if your project doesn’t get used?

  • Will you be reimbursed for expenses?

  • What happens if you or your client ends the relationship early?

If your client tells you they don’t have a contract system in place, that doesn’t mean you are off the hook. You can create your own standardized agreement through the free, step-by-step contract creator from Freelancers Union. Remember, a fully executed contract is a good thing for both you and your client.

3. Be proactive to ensure timely payments.

Any freelancer will tell you chasing down payments is one of the most frustrating parts of the job. In fact, 71 percent of freelancers struggle to get paid at some point during their career. Fortunately, there are some steps you can take to increase the likelihood of being paid on time.

Our first recommendation probably won’t surprise you. A fully executed contract—with signatures from both parties—outlining your payment terms and late fees will lay the foundation for getting paid promptly.

Sending an invoice immediately after your work is done may help expedite the process. But if switching between creating and invoicing is too distracting, you can reserve a block of time every week specifically for administrative work.

All too often administrative tasks like these fall by the wayside. But clients can’t pay you without an invoice. If following up is where you struggle, some accounting software has automatic reminders built in. It’s certainly not an exciting task, but invoicing promptly and checking in—especially after your first project—may motivate your client to process payments more quickly going forward.

4. Stay organized by tracking your income and expenses.

Once you have landed a few freelance gigs, you may start spending more on your business—things like the cost of your website, software, office supplies, or professional membership fees.

It’s possible some of these expenses may reduce the amount of taxes you owe. But only if you are carefully tracking your income, expenses, and receipts. Nisall, who created an entire course on this topic, says there isn’t a one-size-fits-all approach to freelancer bookkeeping.

Like budgeting, it may require experimenting with spreadsheets, apps, or even just a pen and paper before you figure out an expense-tracking system that works for you. He says the best tools are the ones you are willing to use consistently.

5. Don’t forget to pay quarterly estimated taxes.

Taxes are intimidating, and if you have ever owed more than you expected, you know it’s not a mistake you want to make twice. Most employers automatically withhold half of your FICA taxes and pay the other half for you—a total of 12.4 percent of your wages go to Social Security and 2.9 percent to Medicare. But as a freelancer you are responsible for 100 percent of this tax.

Hiring an accountant to help with your first tax year of freelancing may help set you up for success. If you take the wheel after that, you can always refer back to what was done previously.

There are a number of deductions that may reduce the amount you owe, and the recent tax overhaul does offer some potential benefits to certain small business owners, but your bill still may be higher than you think. This is why the IRS requires quarterly estimated tax payments from filers who don’t have taxes automatically withheld and will owe more than $1,000.

The deadlines for quarterly payments in 2018 are:

  • April 17, 2018

  • June 15, 2018

  • Sept. 17, 2018

  • Jan. 15, 2019

Nisall suggests thinking about taxes immediately. “The IRS doesn’t care about your lifestyle. If you have earned it, you have the money to pay taxes on it,” he warns. Thus, Nisall recommends a very conservative approach—saving 40 percent of every penny you earn and keeping it in a bank account apart from your primary business account. If you owe less than what you’ve set aside, the extra money is yours (we suggest allocating it to a retirement or emergency fund).

So what happens if you don’t make quarterly estimated tax payments? You may be slapped with a penalty. An accountant can use this form to calculate the new amount you owe.

You’ve landed your first freelance client. Now what?

Let’s face it—starting a new business is a lot of work. When you are hustling 24/7, finances may be the last thing on your mind. But dedicating some extra time now could mean faster payments, a lower tax bill, or simply more peace of mind as your business grows.