The coronavirus pandemic has forced us to redesign work procedures. The gig economy has significantly risen over the last few years, changing the way we think about ‘traditional’ work. In the midst of all these changes, freelancing is an employment choice that is quickly rising in popularity.
The Freelancing in America study conducted by Upwork last year found that 51% of all freelancers say no amount of money would get them to take a traditional job. The study found that freelancing is becoming more of a long-term career choice. The share of individuals who freelance full time increased from 17% in 2014 to 28% in 2019.
Freelancing is growing in popularity for many reasons. Most freelancers can work from home and have more control over their work schedules. It enables opportunities for those who otherwise might not be able to work, with 46% of freelancers agreeing that freelancing gives them the flexibility they need because they’re unable to work for a traditional employer due to personal circumstances. The downside is that freelancers face other challenges. A UK study found that 61% of freelancers over-serve their clients. Additionally, almost one-third of freelancers have, at some point, not received payment for the work they’ve done.
It’s therefore extremely important whether you’re a part-time or full-time freelancer that you keep your finances in order. Here are four key financial tips to help you freelance like a pro!
- Know Your Worth
When freelancers are first starting out, they often charge too little because they fail to take into account all of the things their former employer used to cover. Start off by creating a budget. Outline your expected income and expenses and find the appropriate figure you need. This is known as your break even number. You need to set your rate high enough and get enough work to pay for the benefits you must provide yourself.
Costs to consider when you set your rates include:
- Insurance
- Taxes
- Savings
- Daily expenses (e.g. food, transport)
- Monthly bills (e.g. WiFi, Continuing Education)
- Take Your Taxes Seriously
It’s easy for first-time freelancers to forget they must pay their own taxes! Freelancers are considered self-employed by the IRS. If you earn $400 or more from freelance work in any given year, you must pay taxes on those earnings. In addition to regular income tax, freelancers are responsible for paying the self-employment tax of 15.3%. On the other hand, because you have business expenses, you are entitled to some tax deductions.
Your best bet is to save 25–30% of every paycheck in a separate savings account to cover the taxes. You could use a smartphone savings app to automate your savings and make the process easier. Stay on top of your taxes so that you don’t get a nasty shock come tax season!
- Start an Emergency Fund
Employment can sometimes be unpredictable for a freelancer. It’s crucial that you start and maintain an emergency fund, should rainy days lie ahead. Most financial planners recommend saving enough to cover at least six months of unemployment. Everyone’s situation is different, however, so think about your budget and the maximum you can afford to save each week. Take advantage of apps that automate your savings to make it a smooth process.
- Keep Track of Your Income and Expenses
As a freelancer, you could be working for several clients at once. These clients may pay in different methods: bank transfer, PayPal, Venmo, etc. Plus, your income may vary from month to month. It’s a lot to keep track of so use a business account to separate personal and work expenses. Save your receipts and record what the expense was for (this will help when claiming tax deductions). Use a spreadsheet or mobile app to track income and categorize expenses. David Ehreberg in a Forbes article notes; “If you’re ever audited you’ll have pristine records and be able to validate anything in question.”
Freelancing is a great way to bring in extra income and start your own business. With these tips, you are sure to set yourself up for success. If you have more questions or comments, drop them below!
