Written By: Jennifer Larkin
Disclaimer: This blog post is provided for informational purposes only and should not be construed as financial or legal advice. It is not intended to be a substitute for obtaining financial advice from a professional financial adviser or legal advice from a licensed attorney.
You’re finally taking the plunge and becoming your own boss – it’s incredible.
Nothing compares to that feeling you got when you landed your first client. You go to bed excited for work in the morning. And you’ll never forget that moment when you realized, “Hey, I guess I don’t hate Mondays anymore.”
But the business side of the business is daunting. You aren’t just a creative anymore. Now you have to manage money too.
You aren’t sure where to start with invoicing.
You know you probably need to make a quarterly tax payment – but aren’t sure when or how.
Last month, cash was rolling in, but this month isn’t looking so good.
Someone mentioned retirement the other day, and you realize you need to start saving for that as well…
Freelance finances can be challenging. But you’re already doing hard things. You’re building your own business! You can do this!
Put this practical guide to use, and you’ll have the finance side of your freelance business figured out in no time. From one freelancer to another – I promise, this gets easier.
Use a Separate Bank Account to Manage Money for Your Business
When you start a freelancing business, one of the first things you should do is open a business bank account. This is a separate account that you’ll use to track all your business income and expenses. Depending on how your business is organized, it might legally need its own bank account. But even if your business isn’t its own legal entity, opening a separate business account is still a good idea. Here’s why:
- Professionalism – A separate bank account signifies that you’re actually a business. It makes you look professional, and it could help you out in the event of an IRS audit.
- Fewer Limitations – You may need a business bank account for certain types of transactions. Personal bank accounts aren’t meant to be used for business. So they may have stricter limits on number, size, and types of transactions than business accounts.
- Protection – To get paid, you may need to give out bank information to your clients. The more this information is shared, the higher the risk of fraud or identity theft. If you have a separate business bank account, you limit that risk to just your business funds.
- Banking Relationship – As your business grows, it’s helpful to have an established banking relationship. Right now, it’s just you. But who knows where your business will go in the future? Maybe you’ll decide to turn your freelance business into an agency and need a small business loan. Perhaps you’ll hire an assistant and want them to have a credit card for expenses. Establishing a business relationship with a bank now will pave the way for future growth.
- Organization – A dedicated business account makes bookkeeping and tax time a whole lot easier. More on this below.
Do a little research before you choose a bank for your business. There are benefits to opening a business account where you do your personal banking. You might have an easier time opening an account since you’re already a customer. And when your business and personal accounts are at the same bank, it’s easy to transfer money between them.
But there are other things to consider as well. Like monthly fees and the minimum balance required to avoid them. Or whether you want to do any of your banking in person, at a physical location. Many freelancers opt for online-only banks because they offer low-fee banking without a minimum balance.
Once you’ve got your bank account set up, you’re ready to start managing your money.
Budgeting for Freelancers: Managing Money Starts With a Plan
Most financial experts agree that budgets are important – for both individuals and businesses. People that use budgets generally save more money than people who don’t. As a freelancer, you’re juggling both personal and business expenses. Which means it’s even more important for you to operate with a budget in mind.
Budgets Don’t Have to Be Restrictive
Most people think budgets are restricting. But knowing how you’re going to cover your expenses each month actually creates freedom. When you know what your expenses are and how much you need to cover them, you also know how much you can spend on fun things.
Budgeting doesn’t have to mean tracking and planning for every dollar – although that’s one way to do it. Having a budget for your freelance business means having a plan. It means you understand how much money is coming in versus how much money has to go out. When you have a budget, you can see ahead of time if there’s a deficit – and you can do something about it before it becomes a problem.
Your budget doesn’t have to remain static. Sure, it’s good to be able to look at what you planned to spend versus what you did spend. But the biggest benefit of a budget is that it gives you a forward-looking view of your finances. As your business evolves, it’s okay for your budget to evolve too.
Freelance Budget Example
A simple budget for a freelance business might look something like this:
Figure 1 – Sample Freelance Budget
As you line up future work, you can add it to your projected revenue. You can also keep track of upcoming expenses, whether they happen monthly or not.
Your income goal is the amount you want to earn from your freelance business. You’ll have to determine your income goal based on your personal budget. People who want to leave a full-time job to become a freelancer often use their current salary as a target. If your goal is to freelance full-time, you can use a budget like this to help you determine when to make the transition.
In the example above, it’s easy to see that income goals aren’t yet met in October and November. When you know that in advance, you can take action.
If revenue is looking slim, you can always start lining up more work. This might sound like it’s easier said than done, but it’s part of being a business owner. If I can do it, so can you. One of the best ways to get work as a freelancer is cold emailing.
You might also be able to reduce expenses. Could you skip the conference you were going to attend in November? Are you paying extra bank fees because you’re not meeting the minimum balance on your account? Are you still using all of your subscriptions?
Even when you’re on track to hit your income goals, it’s good to review your budgeted expenses occasionally. Especially when bills are on auto-pay, it can be easy to keep paying for a service you stopped using months ago.
Comparing Budget to Actual Provides Insight Into Your Business
Having a budget is great, but we all know things don’t always go as planned. That’s why it’s also helpful to compare your projections to your actual income. If you find that your budget looks better than your actual, you might want to examine your expenses.
- Is there a monthly expense missing from your budget?
- Are there fees that you could eliminate?
Or, the difference could be revenue-related.
- Are clients paying later than expected?
- Did you plan on a project that didn’t come through?
Understanding what you missed last month can help you make a better plan going forward.
Speaking of your actual income, you’ll need a way to track that, too.
Managing Your Money Is Easy If You Choose the Right Bookkeeping Software
If the thought of bookkeeping makes you cringe – you’re not alone.
For a lot of creative freelancers, bookkeeping holds the same appeal as sticking your head in a hornets’ nest. But once you get comfortable with it, bookkeeping can actually be – dare I say it – kind of fun. I know, I know, you’re giving me the same look you gave your overzealous high school teacher when she said, “you’ll like this assignment.” But I’m serious, it’s so satisfying to watch your business grow! And bookkeeping is how you do that.
Bookkeeping in its simplest form is tracking your business revenue and expenses. You can do this with a spreadsheet and a shoebox if you want. But that’s not the easiest way. There are many applications out there that simplify bookkeeping for freelancers. Most of them connect to your bank account and categorize expenses for you.
Whichever tool you use for bookkeeping, you’re going to be in and out of it a lot. So make sure you choose one that works well for you. Most of them provide a free trial, so you can give them a test-drive before you commit.
I use Freshbooks, but there are a lot of great options out there. Besides Freshbooks, you may want to check out Dubsado, Wave, Quickbooks, and Hello Bonsai, to name a few. Here are some factors to consider when choosing a bookkeeping tool:
- Banking – Will it connect with your bank? This is key if you want to avoid gobs of manual data entry.
- Invoicing – Does it make it easy for you to send invoices?
- Payments – Can you use it to collect electronic funds transfers (also called ACH payments) and credit card payments from clients?
- Contracts – Do you want an all-in-one tool that sends contracts as well?
- Accounting – Does it do double-entry accounting? (Double entry-accounting means that assets and liabilities are tracked as well as income and expenses. If you’re running a one-person business as a single-member LLC or a sole proprietor, it’s not a critical feature. But if you have plans to expand your business, you might want to pick a tool that does this.)
- Cost – How much does it cost each month? Is there a discount if you pay yearly?
- Taxes – Does it help you calculate quarterly taxes? Does it generate reports for your tax accountant?
- Support – Do they have good customer support? If so, it can be a huge time-saver when something isn’t working the way you expect.
I haven’t found one bookkeeping tool that has all of these things, so you’ll have to decide what’s most important for you and your business.
Once you’ve landed on a tool, there are two secrets to painless bookkeeping…
- Do it regularly. Set aside time every week to do your bookkeeping. That way you never have to spend hours playing catch up. Frequent check-ins also help you detect errors early on – while they’re still easy to fix.
- Automate as much as possible. Connect your bookkeeping software to your bank account. Run all your business income and expenses through that account. This way, anytime you pay an expense or collect income, it will automatically be accounted for. You will still have to reconcile your bank account with the bookkeeping tool. But matching is way easier than entering everything by hand. And most tools make this really easy – it only takes me a few minutes per week.
If you do these two things, it doesn’t take much to stay on top of your books.
Of course, managing your books doesn’t mean much unless you’re getting paid.
How Do You Get Paid as a Freelancer?
Getting paid as a freelancer means setting prices, sending invoices, and collecting payments. If doing all of this on your own gives you the jitters – you’ve come to the right place.
Here’s what you need to know to get paid as a freelancer, broken down into 3 simple steps.
1. Agree on a Price With Your Client
Before you join that first client call or meeting, understand what your services are worth. Most new freelancers sell themselves short. Or they forget to take into account their business expenses when they set their prices. Research what other successful creatives are charging and set your prices accordingly.
But don’t let reservations about pricing hold you back from moving forward. As Sarah Turner tells her Write Your Way to Freedom students, it’s a learning process. The best way to learn to price your work is to practice. Sure, you might wind up getting paid less than minimum wage for a project. But you’ll learn from that experience. Next time, you’ll up your price accordingly.
Once your client has agreed on a price, it’s a good idea to put a contract in place. At a minimum, get the following in writing:
- What you’re going to be doing
- How much you’ll be paid
- When it will be done by
- Payment terms
When negotiating price and contract terms, consider requesting partial payment upfront. If you’re new to freelancing, it might feel weird to ask for payment before you actually do the work. But push past that feeling. Deposits are a freelancer’s best friend! Clients are less likely to ghost you if they’ve paid part of the invoice upfront. And since you’ve already collected some of the money, there’s no way you can get stiffed after putting in all the work.
2. Send an Invoice for Freelance Services
I still remember the first time I had to send an invoice to a client as a freelancer. I did all the work and then realized I had to send an invoice to get paid. A quick google search for “invoice templates” yielded several ugly Excel options. I chose the least offensive one and typed in the details. I’m not even sure I included proper payment terms. I felt (and looked) like such an amateur. Luckily, I learned pretty quickly. By the time I had my second client, I was invoicing like a pro. You’ll look like a pro from the start – because you have the tips below to guide you.
Most bookkeeping tools let you easily create and send professional-looking invoices. You can even collect payment directly through the tool. But you still need to know what to put on an invoice. Here’s what you need to include:
- Your Business Name. Or your name if you don’t have a different name for your business. If you use a bookkeeping tool to generate your invoices, it should add your business name automatically.
- Describe the Work That Was Done. Or the work that will be done, if you’re requesting a deposit before you start. You don’t need to go into too much detail, but it should be clear what services were provided. If you worked on several distinct projects, consider itemizing them on the invoice. If you bill by the hour, the invoice should clearly show the total hours worked and the rate per hour.
- Amount Due. This is pretty self-explanatory. Make sure the amount due is clearly displayed on the invoice.
- How to Pay. These days, there are many ways to accept payment. Check, Paypal, Zelle, Electronic Transfer, & Credit Card are some of the most common payment types. You don’t have to accept them all, but it doesn’t hurt to provide your clients with a couple options. For some payment types, you may need to give your client more information:
- For Checks, they need to know who to make the check out to, and where to send it.
- For Electronic Transfer (also called ACH), you’ll have to give them the account number and routing info.
- For Zelle, they’ll need the email address or phone number attached to your bank account.
- Invoice Date and Date Due. The invoice date is the date the invoice is being sent. You’ll also want to include a due date. If the invoice is due right away, you can say “due upon receipt” instead of a due date.
- Payment Terms. How long the client has to pay. Payment terms are usually indicated by “Net [Number of Days They Have To Pay].” So “Net 15” means that the invoice is due 15 days from the date received. If you’re planning to charge a fee for late payments, that should be indicated here too. Double-check that your payment terms and your due date match up before sending the invoice.
- How to Contact You If There Are Questions. Include a phone number or email address on the invoice. The person making the payment may not be the same as your normal point of contact. This is especially true if you work for larger companies. If whoever is processing the invoice knows how to contact you, you can quickly clear up any questions. Which means you get paid faster.
- PO Number – If Requested by the Client. When you work with larger clients, they might ask you to include a PO number on your invoices. PO stands for “Purchase Order,” and the client will need to provide you with this number. If you’re asked to include a PO number, make sure you do so.
Templates and standardization save time. Most bookkeeping tools will save most of this information after you create your first invoice. If you keep your terms the same for all of your clients, you’ll be able to quickly generate invoices going forward.
3. Collect Payment for Freelance Services
After you send the invoice, the client has until the due date to pay it. Set reasonable payment terms – generally at least Net 15 – and expect the invoice to be paid when it’s due, not before.
Many clients will pay sooner, especially if you accept payments electronically. But this won’t always be the case. Resist the urge to reach out about payment before the due date, especially with new clients. This can be difficult when the end of the month is approaching and you have bills to pay. But resist anyway. Pestering your clients about current invoices will frustrate them. And make you look unprofessional.
What do you do with clients that pay late? If you have a client that has paid late in the past, it’s reasonable to send them a reminder or two before the due date. You also have the option to charge them late fees. Late fees are commonly somewhere around 1.5% interest per month. However, the maximum late fee you can charge varies by state. Make sure you know your state’s rules before you set your late fee.
What to Consider Before Paying Yourself – Like Taxes on Freelance Income
You’re your own boss. You own your own business. It’s easy to think that 100% of the fees you charge are yours. But before you can spend the earnings from your business, there are a couple of things to consider. The biggest one is taxes.
Paying Taxes as a Freelancer (In the United States)
When you were an employee, taxes were taken out of your paychecks automatically. As a freelancer, you’re responsible for paying taxes on your freelance income. That means setting money aside for taxes before you pay yourself. For most freelancers, setting aside 30% of your net income for taxes is plenty. But your situation could vary, so I suggest consulting an accountant.
If you can, it’s a great idea to transfer those tax funds to either a separate checking account or a savings account. That way, you never have to worry about accidentally spending it. It’s right there in the tax account when you need to make a tax payment. Bonus points if you use a savings account – you’ll earn interest on your money until it’s time to pay the IRS. The interest might only be a few dollars a year, but it adds up over time.
You set that money aside for taxes, but what now? For starters, you’ll need to make quarterly estimated tax payments:
- The first quarterly payment covers January through March and is due on April 15
- The second quarterly payment covers April through June and is due on July 15
- The third quarterly payment covers July through September and is due on October 15
- The fourth quarterly payment covers October through December and is due on January 15
There are also additional forms to file on an annual basis. If you’re operating as a sole proprietor or single-member LLC, you’ll need to file Schedule C with your Individual Tax Return. If your business is taxed as a partnership or S-Corporation, you’ll need to file a separate tax return for your company. State tax requirements vary by state. Keep in mind that when there’s a federal tax requirement, there’s often a state requirement as well.
Tax time does become more complex when you have freelance income. But as long as you keep your books organized and up to date, it’s nothing to be afraid of.
Hiring an accountant to help with your taxes can reduce your tax-time stress even more. I’ve never met a freelancer who regrets hiring an accountant. But I’ve met plenty who say they wish they would have hired one sooner. Don’t be afraid to talk to a few accountants before hiring one. If you can, choose someone who works with other freelancers. You should hire someone you feel comfortable reaching out to when tax questions arise.
Planning for Upcoming Expenses
Once taxes are set aside, you’re almost ready to pay yourself. But first, you should take a look at your budget and see what business expenses are coming up. Make sure you’re leaving enough in your bank account to cover them. You don’t want to get stuck transferring money back and forth all the time – or worse, wind up overdrawn.
It’s important to plan for expenses. But remember that paying yourself is important, too.
If you’ve ever watched ABC’s Shark Tank, you’ve seen entrepreneurs pitch their business to “the Sharks.” The goal is to secure funding and support from a multi-millionaire or billionaire. Sometimes there’s a point where the Sharks ask the entrepreneur whether they’ve paid themselves a salary. You watch the person squirm a little. They mumble an excuse about why they didn’t pay themselves. And you know they’re not getting a deal.
Successful business owners pay themselves. Why? If you don’t pay yourself, you’re working for free. Your time is valuable. You’d never keep going to work for someone else if you didn’t get a paycheck. So why would you keep working your own freelance business without taking home some money? The truth is, doing so isn’t sustainable. You’ll burn out. Your personal funds will dwindle. And if all you’re doing is working to cover business expenses, you’re not gaining anything by being in business. So make paying yourself a priority!
Plan Ahead for Rainy Days and Retirement
Financial experts recommend having an emergency fund that covers between 3 and 6 months of expenses.
As a freelancer, you may want to stash away a little more. That’s because you’re generally not eligible for things like unemployment, vacation pay, or sick leave. So it’s wise to save up some money for a rainy day. Or a sunny one, if you’re planning to take some time off.
How to Manage Uneven Freelance Income
Most freelancers don’t have equal income month-to-month. So it’s important that when you have a good month, you stock away some of those excess funds. That way you’re prepared for the less-good months.
There are a couple ways you can manage this. Some people prefer to place a certain percentage of their monthly earnings into a savings account. That way, on good months, they’re automatically putting more money into savings. Another option is to “pay” yourself a consistent amount each month. Anything you make over and above that automatically goes into a savings account. Either way, in months when you don’t earn as much, you can reach into the savings account for your salary. Because that’s what your rainy day fund is for.
By planning ahead, you can afford to lighten your workload when you go on vacation. You don’t need to panic if you need to take some unexpected time off. And having some savings to fall back on also means you won’t be scrambling when you lose a client.
Don’t be discouraged if you don’t have very much saved right now. Instead, choose a saving strategy and start putting a little away each month. You’ll be surprised how much a little savings here and there adds up over time.
Saving for Retirement as a Freelancer
Now that you’re a freelancer, you don’t have a 401(k) match or a company-sponsored pension. But you can still set yourself up to retire well. A great way to do this is to set up a tax-deferred retirement account.
There are 5 types of plans available to self-employed individuals. They are: Simplified Employee Pension (SEP), Solo 401(k), SIMPLE IRA, Traditional IRA, and Defined Benefit Plans. Each one has its pros and cons. For freelancers who don’t plan on hiring any employees, Traditional IRAs and Solo 401(k)s tend to be popular options.
- A Traditional IRA is a great option for when you’re starting out. You can only contribute a limited amount ($6,000 in 2020, or $7,000 if you’re over 50). But the contributions are generally tax-deductible. And a Traditional IRA is relatively easy to set up.
- A Solo 401(k) is a great way to put more away for retirement. Contribution limitations are the same as a regular 401(k). But since you can contribute as both employee and employer, you can save quite a bit each year – up to $57,000 for 2020. You can only use a Solo 401(k) if you don’t have any employees. And once your solo 401(k) reaches $250,000, you’ll be required to file a special tax form annually.
Does creating your own retirement plan have you feeling overwhelmed? If so, talk to your accountant and consider hiring a financial advisor.
The worst thing you can do is let overwhelm stop you from saving.
The earlier you start contributing to your retirement account, the more time compound interest has to work. When money is first invested, you earn interest on the amount you put in. But the following year, you’ll earn interest on the amount you put in plus the interest you earned in the first year. In the next year, you earn interest on that interest. The sooner you start saving, the more opportunity your interest has to multiply.
Start Managing Your Money Better
Learning to manage your money as a freelancer is a process. You won’t be able to implement everything at once. But you have to start somewhere.
So, tackle invoicing today…
And next week, think about taxes…
Then, schedule time next month to think about retirement.
Pick one thing to implement now, and go from there. Bookmark this freelance finance guide, and come back to it as often as you need to. Before long, you’ll manage money from freelancing like a pro.