The Most Common Money Mistakes Freelancers Make
Most people don’t start their career with the dream of becoming a freelancer. While many of us harbor visions of being our own boss, setting a flexible schedule, and deciding which companies we want to work with and which jobs we want to take, the prospect of freelancing is not what most of us are thinking of.
And yet, just because you’re going solo with your business rather than starting a company and hiring employees doesn’t mean you can’t develop an extremely lucrative operation; at least not if you manage your money effectively and avoid the many common mistakes that freelancers make where their finances are concerned.
Whether you’re new to the freelance game or you’re returning after an extensive stint in regular employment, here are a few common money mistakes you’ll certainly want to be aware of.
1. Charging Too Little
Many freelancers, when they first start out, think that they have to charge an amount that is comparable to what an employer might pay. But you’ll find that this is unwise for a couple of reasons. For one thing, companies expect you to charge more than the average employee for the same work since you have to pay for all of your taxes, social security, health insurance, and other expenses that an employer would normally pay.
So, when you charge too little, you not only miss out on the money you should be making, but you might also scare off companies that wonder if you’re charging so little because your work is somehow lacking.
2. Charging Too Much
Charging too much for your work can be just as damaging as charging too little. You certainly want to earn what you feel you’re worth, but if you don’t offer competitive pricing, your clients are bound to look elsewhere. Unless you’re some kind of whiz kid or prodigy that has the reputation and skill to back up an outrageous price, you need to ask for wages that are similar to what other freelancers in your field are demanding.
3. Failing to Save for Taxes
When you work for an employer, taxes are automatically removed from your check and sent to the IRS, state and local taxing authorities, making the amount you owe come tax time relatively small (usually nothing in most cases).
But when you freelance, a portion of the money you earn must be set aside in preparation for tax payments, whether you opt to file annually or you prefer to send in estimated quarterly taxes. Either way, you’re on the hook for payment, so you need to ensure that you have the money saved when it comes time to pay the piper.
4. Failing to Track Deductions
One of the saving graces of freelance work is that you have so many options for deductions. Literally anything you spend in pursuit of business is deductible, from office supplies, equipment, and the cost of your home office, to travel, food, and events that help you to gain and entertain clients.
And the more write-offs you can claim, the less you’ll pay in taxes. Just make sure to document everything and save receipts for proof in case you get audited.
5. Poor Bookkeeping
When you run a freelance operation, you are responsible for tracking all of your income and expenditures, including the money you earn from clients, stock sales, and even annuity settlements, as well as whatever you spend on behalf of your business. Failing to engage in detailed bookkeeping not only puts you at risk for losing money, but it can also result in audits and fees from the IRS and local taxing agencies. In short, poor bookkeeping practices are a major monetary mistake for a freelancer.
Any Other Money Mistakes?
Can you think of other money mistakes that entrepreneurs can make? I’m sure there are many others, so let us know by leaving a comment.
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