LATEST

Freelance work, by its nature, ebbs and flows. When it flows, you have to be diligent about saving. When it ebbs, you use what you’ve saved.

Most experienced freelancers will say this simple-sounding narrative is anything but. It takes years of troubleshooting, and many face-palm worthy financial mistakes.

Save yourself the effort—and the money. Learn the tricks of the trade, and start adapting these four financial management best practices for freelancers.

1. File as an LLC and Open a Business Account

As a freelancer, you can qualify as a sole proprietorship, register as an LLC, and then request an IRS tax ID for that business. This will allow you to open up a new business account, which could qualify you for a line of credit down the road.

It also lets you receive substantial tax benefits as a small business owner, and separate your personal expenses from your business expenses. Make sure to obtain the URL associated with your LLC, and set up a basic WordPress site to be the digital storefront for your freelancing business.

2. Track Your Expenses

You don’t need to keep a physical ledger to track your business expenses. Nor do you need to hire a bookkeeper. You can just download a few apps, and automate the whole process.

Shoeboxed helps you track mileage and other business travel costs. Foreceipt helps you capture receipts and stores them in the cloud. Freshbooks helps to handle your accounting and your invoices.

What about miscellaneous spending? Use Hurdlr, which lets you swipe right for a business expense and left for a personal expense. It also sends expense reports to your Dropbox account.

3. Do Your Taxes Quarterly

You’ve filled out what seems like a thousand 1099s. You know the drill. Come April, you’re going to try to write off everything from your mileage to your rent to your internet bill. You still may owe a monstrous amount of taxes from the IRS.

Avoid this heart-stoppingly huge bill, do your taxes every quarter, and pay what you owe immediately.

Don’t think you have the bandwidth for this kind of accounting? Try finishing your taxes in January, and set up a payment plan for your taxes with the IRS.

4. Earmark 10–20% of Every Paycheck for Short-term Savings

Erratic and delayed payments are the inescapable downside to freelancing. It’s not uncommon for clients to drag their feet when it comes to payday. And, unless you’ve included a clause that requires them pay interest for late fees, they aren’t incentivized to pay you in a timely fashion.

The only way to maintain financial stability is to save. Minimally, you should put between 10 percent to 20 percent into an easily accessible fund. You will use this reserve to pay bills and cover critical expenses during slow business periods.

Financial planners would recommend building up this rainy day fund to be able to cover between four and six months of income. Some more aggressive types would recommend saving 50 percent of every paycheck, allocating 25 percent to retirement in a Solo 401(k) or a SEP-IRA, and 25 percent to a rainy day fund.

Don’t get discouraged by the inherent flexibility and seeming instability of the freelance economy. With some strategic planning, you can maintain a predictable cashflow and prevent any missed bills. To get started, follow these freelancer’s best practices for financial management.