Freelancers: The Top 5 Personal Finance Traps to Avoid
Almost one in three working Americans is what the Freelancers Union calls an “independent worker.” That’s about 42 million people working as freelancers, temps or contractors, and they have to find their own insurance, set up their own retirement plans and manage their own taxes. With so many responsibilities tasked to these individuals, mistakes and oversights are all too common. If you’re a freelancer, avoid these common pitfalls associated with managing your own finances:
There are a wide range of tax deductions you can use to lower your annual tax obligation. These deductions can include computer equipment, travel obligations and your work space. Tax professionals are well aware of these deductions, but many freelancers are not. If you’re unfamiliar with these options, talk to a tax professional who specializes in self-employment.
Mixing Personal & Business Expenses
Don’t make the mistake of putting business expenses on your personal credit or debit cards. Although that often seems the easiest solution in the moment, it creates long-term problems when it comes time to do your taxes. It also prevents self-employed people from establishing a business credit profile that may come in handy down the road. The easiest way to resolve this situation is by setting up a business account and securing a business credit card to handle all your work-related expenses.
Working Without an Emergency Fund
Full-time employees in corporate America typically benefit from unemployment coverage. In the event they lose their job, they can file for unemployment and receive assistance for a period of time following their loss of income. Freelancers don’t have that luxury, unfortunately, and even their month-to-month income can fluctuate. For this reason, it’s important freelancers set up an emergency fund to cover unexpected financial instability.
An emergency fund can come in several different forms. Basic savings accounts or money market accounts both earn interest over time and are the the obvious go-to options. And if you have other long-term assets such as real estate or an annuity, but you don’t have an emergency fund, it may be time to convert those assets into cash value. While you lose the long-term payout of those assets, you gain the financial stability and flexibility a freelancer needs. Ultimately, you’re looking to create a savings option where you have three to six months’ worth of expenses on hand.
Avoiding Quarterly Tax Payments
Freelancers don’t have taxes taken out of their paychecks. That can hurt when April 15 hits and you have to write a check for a full year of taxes. In addition, the IRS charges a penalty to freelance workers who choose to pay in a lump annual sum.
Get set up to make quarterly tax payments. This breaks your annual tax obligations into four payments throughout the fiscal year, making the payments more manageable and, in many cases, even lowering the actual amount of taxes owed.
Failing to Send and Track invoices
Freelancers often work with a wide range of clients at once. Because there are so many accounts active at a single time, tracking invoices (including payments owed and upcoming payments due) can be time-consuming and seemingly inefficient. FreshBooks is a simple software solution that can help you put together bills and track invoices, and it’s accommodating to those who aren’t financially savvy. With such a solution in place, you can spend less time worrying about where your money’s coming from and possibly increase the reliability of these payments.
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