If you don’t fix these six freelancer financial mistakes, you will be struggling to make ends meet forever. Listen, I am far from being the poster child for perfect financial health, but since I’ve been freelancing since 2013…I’ve learned a lot of these lessons the hard way. So, I’m here to save you the trouble.
Are you making any of these common freelancer financial mistakes?
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1. You’re not saving for taxes.
Gasp! Taxes? What are those??
If you’re a freelancer, you are most likely a sole proprietor. You pay your business taxes along with your personal taxes, which are due every April 15 (give or take a day).
How much you owe in taxes varies widely and depends entirely on how much you earn, what your business expenses are, where you live, etc. But, a good rule of thumb is to set aside 30% of all your freelance income for income taxes.
Here’s how I do it:
- Every first of the month, I log into my business bank account’s online portal and look at all deposits received into that account over the past month.
- I then take 30% of the amount of deposits received in the last month and transfer that 30% to a business savings account. This is the money I am setting aside to pay my income taxes.
- When quarterly estimated tax time comes, I pay the IRS online from my business savings account.
You can work with a good accountant on this. If you need a recommendation, email team [at] whereverwriter.com.
2. You’re not paying taxes quarterly.
What’s with this tax thing again??
*Takes you by the hand* It’s gonna be all right.
Technically, businesses are required to pay their share of income taxes every quarter (January, April, June, September). These are known as your quarterly estimated taxes.
The good news is if you haven’t been doing this you’re not going to jail or getting slammed with a HUGE million-dollar fine (although, who knows, I guess in some weird cases that could be possible?). You just will have a teeny penalty to pay whenever Income Tax Day (generally April 15) rolls around.
3. You think a deduction/tax write-off (business expense) “saves money.”
LISTEN: A tax deduction is not a dollar-for-dollar deal. Just because you buy a MacBook Air for your business for $1,000 does NOT mean you will pay $1,000 less in taxes next year.
Let’s hear from a professional account, Eric of AccountLancer:
“You may only get a $.20/$1 benefit from all of that spending and missing out on a huge opportunity for your business to explode.
To put it another way (in a very, very simplistic manner):
Let’s say you spend $100 on your business. You may save 15.3% in self-employment taxes and another 20% in federal taxes. That’s $35 in taxes kept in your pocket and $65 spent. But, if you didn’t spend it at all, you’d be paying $35 in taxes and keeping that $65. I don’t know about anyone else, but when I’m given the option, I would always choose to keep the larger piece of the pie. Again, this is assuming you’re spending frivolously for the express purpose of reducing your tax liability.”
In other words, in the above situation, you would essentially spend $65 for the sake of saving $35, which makes zero sense.
4. You’re not tracking your expenses.
I am guilty of this, STILL. I am hooked up to accounting software (Xero) that automatically logs all my transactions, yet I STILL fail to categorize them and organize them. Oops.
Anyway, you could hire a bookkeeper to take care of this for you, but as a freelancer, your expenses should be pretty minimal.
It literally can be as simple as starting a spreadsheet and logging every time you spend something on your business. Here’s a sample of some typical monthly expenses for me:
- iMark Interactive WordPress Support – $47
- SiteGround web hosting – $14
- Xero accounting software (Try it for free for 30 days!) – $29
Doesn’t need to be fancy, it just needs to show how much you spent, what it was on, and what purpose it serves your business. That way, on Tax Day, you can hand it over to your accountant and she can know how many deductions to take so you pay less in taxes (legally, of course).
5. You’ve got your pricing all wrong—and that’s why you’re struggling to make ends meet.
You keep getting clients, but you’re late on your bills. What the heck is happening? In many cases, freelancers who are talented often are not charging enough or are not charging in an optimized way.
If you are struggling to make ends meet, check out my guide on how to price your services as a freelancer.
6. You’re not saving for retirement.
If my Personal Finance professor were to see this, he might have a heart attack: I didn’t open a retirement account until September 2016—nearly four years after starting my freelance career. (THINK OF ALL THE LOST COMPOUND INTEREST!)
Okay, not everyone is personal finance savvy (heck, I’m not), so let me state this in simple terms: The time to start saving for retirement is now because of a principle known as compound interest. In other words, the interest (extra money you earn on an investment) grows on TOP of the previous interest. Therefore, the earlier you start, the more money you will gain. Time is on your side here.
Tons of personal finance gurus will tell you tons of different opinions, but here’s mine: The simplest thing to do is open a Roth IRA. I did it in like an hour through Vanguard. I put in $1,000 because it seemed like a good starting point. If you can though, it’s best to max out your Roth IRA. If you’re under 50, you’re allowed to contribute up to $5,500 a year to your Roth IRA.
Have you caught yourself making any of these 6 freelancer financial mistakes?