Are you making the switch from employment to freelancing? Maybe you’re not exactly sure what you’ll need to do in terms of accounts and taxes, or you’re worried that you’ll miss something important, making things difficult down the line.
Don’t worry! A former Certified Public Accountant (CPA), the author of CPA Exam for Dummies, and the Co-Founder of several blogs for accounting and finance professionals, Kenneth Boyd is to the rescue. Explore his ten practical tips on tax management and bookkeeping for freelancers to make these practices a breeze throughout your freelancing career.
10 Steps to Easy and Accurate Bookkeeping for Freelancers
#1: Make sure you’re set up to legally freelance
When you start freelancing in the US, you automatically become a “sole proprietor” through your business activities. All the income for your business is counted as your income, and you file taxes as an individual. You need to file (and pay) taxes each quarter.
However, it’s important that you obtain any necessary licenses and permits for running your business before you begin. These vary from state to state.
You may also want to consider registering your business as an LLC. This isn’t the best option for most freelancers when they’re starting out as it’s more complex and costly than being a sole proprietor, but as your business grows, the LLC structure offers a number of potential advantages. For instance, you won’t be personally liable for debts incurred by the LLC.
#2: Keep your personal and business accounts separate
As soon as you begin freelancing, you should open a separate account for your freelance income. This doesn’t necessarily need to be a business account: a second checking account could work fine when you’re getting started.
Make sure that you can easily access your business account online. You’ll want to be able to quickly and easily check what money’s coming in and going out.
Don’t be tempted to receive freelance income straight into your personal bank account. It’s perfectly legal, but it’s likely to make things very confusing when you’re trying to keep your accounts up to date.
#3: Consider whether moving to a different country would work for you
According to AIS-CPA, some of the best countries for freelancers are Chile, Bulgaria, Mauritius, and Hong Kong. These have relatively low taxes and often a lower cost of living, and if you want to travel, the “digital nomad” lifestyle of working on the move might suit you well.
Keep in mind that even if you live abroad, you will normally still need to pay US taxes. However, if you meet certain criteria, you’ll be entitled to Foreign Earned Income Exclusion (FEIE).
If you want to stay in the US, you might look at whether moving to a different area would work for you. As a freelancer, you’ll generally be able to work from anywhere with an internet connection. Moving to a city with a low cost of living could make things much easier for you, especially when you’re just starting out.
#4: Plan your expenditure
While occasional unexpected expenses might crop up, most freelancing expenses are predictable and can be planned ahead of time. For instance, you might need to pay an annual or monthly fee for things like:
- Your website hosting, if you have a website to advertise your freelance services.
- Software you need to do your work, such as Photoshop if you’re a graphic designer.
- Software that helps you run your business, such as actiTIME – the #1 tool to keep everything organized and to make freelance accounting easier.
- Home office supplies, such as printer ink and paper if you need to print documents.
You’ll also likely have some one-off purchases: for instance, you might want to budget for buying a new computer or a better desk chair.
Make sure you plan out your expenditure ahead of time, and figure out what you can afford.
#5: Track your income and expenses regularly
Many freelancers put off their bookkeeping, only pulling together all the details they need when they have to file their taxes. But regularly tracking your income and expenses is essential, because you need to know how profitable your business is in order to make decisions.
For instance, if you realize that your income has dropped recently, you could take on more client work or raise your rates. If you’ve had several large unexpected expenses recently, you can balance that out by cutting costs or delaying other purchases.
#6: Send invoices promptly to a schedule
Another task that freelancers tend to put off is sending invoices. But if you don’t send your invoice promptly, you’re certainly not going to get paid promptly. It’s also helpful for your clients if they know roughly when to expect your invoice.
Most freelancers find that it works best to either:
- Invoice straight away upon completion of a project or milestone. This works well for larger, one-off tasks.
- Invoice at the end (or just after the end) of each month, for work completed that month. This works well for clients who have lots of small tasks each month.
However, you decide to manage invoices, make sure you set aside time for sending them promptly.
#7: Put aside money for tax in a separate account
As a freelancer, you’re going to have to pay tax. It’s important to start putting aside money for this from day one. As a rough rule of thumb, you should be saving 30% of everything you earn for your taxes. (You may find your tax ultimately comes to a bit less than this, but it’s better to set aside the full 30% so you don’t run into any nasty surprises.)
Keep the tax money in a separate bank account, so that it’s clearly separated from the rest of your business’ income. If possible, you’ll want to lock it into a savings account with a good rate of interest.
#8: Purchase annual rather than monthly subscriptions where possible
Often, you’ll be faced with the choice of an annual or monthly subscription. This probably applies to software packages that you subscribe to, magazine subscriptions, your website hosting, and more.
Where possible, purchase an annual subscription upfront. You’ll normally save money (sometimes quite a significant amount) versus paying each month.
#9: Raise your rates as you gain more experience (and more clients)
Many freelancers undersell their services. If you’ve taken on as many clients as you can handle and you’re still getting inquiries, it’s definitely time to start raising your rates.
Keep in mind that, as you gain more experience as a freelancer, your work becomes more valuable. This is particularly true if you’re charging per hour rather than per project, as you’ll probably find that you speed up as you get more experienced.
#10: Get professional help and support
Finally, do seek professional help and support with your accounts and taxes if possible. A good accountant can help you save money and give you peace of mind, too. Even outsourcing bookkeeping can help free you up to focus on your work and on growing your business.
While accounts and taxes can seem complex, by taking things one step at a time, following the simple tips above, and getting professional help when you need it, you’ll find that you can keep your administrative time to a minimum – letting you concentrate on building a strong freelancing business.
