Self-Accounting: Valuable Tips For Freelancers
The pandemic transformed the way most of us work forever. From increased hybrid and remote working to more people going it alone through startups and freelancing, the working world has arguably changed for the better.
Professional content writer and branding aficionado Annie Button shares some valuable self-accounting tips for freelancers.
A report from Upwork shows that freelance workers contributed $1.3 trillion to the US economy in annual earnings, which were up by $100 million from 2020. Working for yourself brings with it plenty of freedom; you decide when your day begins and when it ends. You can also choose how much or how little you want to work, whatever makes sense for you.
But, while there are plenty of upsides to being a freelancer or self-employed, there are also some things that make life a little trickier. The biggest one is the need to take control of your finances and become an expert in accounting, even if you have no real interest in finance. Fortunately, there are a few simple tips and tricks to make self-accounting easier for freelancers.
Think Of Yourself As A Business
As a freelancer, it can be too easy to not consider yourself as much of a viable business as cafes, florists, or shops nearby, but that’s not the case. Whether you are a creative freelancer or acting as a consultant the principle is the same, you are a business. Experts at Wellden Turnbull, a UK-based chartered accountant firm, agree, “As a freelancer, you are a business owner, and one of the key determinants of your commercial success is how you manage your finances and business accounts”.
Changing your mindset to think of yourself as a business can help you to create effective accounting and financial management strategies.
Business Or Pleasure, Not Both
Taking the plunge to go full-time freelance deserves credit but it’s important that you commit to it from an early stage. Creating a business bank account that is separate from your personal account makes life a lot easier when it comes to totting up taxes and expenses.
Although not always a legal requirement, it just keeps things simple and is an effective way to begin the process of self-accounting. With just one bank account, everything is going in and out of both your business and your personal life.
It will then take a lot of filtering through and tracking, which is time-consuming. Setting up online banking for your business account allows you to easily track your cash flow and figure out where your earning potential lies.
Track Incomings And Outgoings
Besides any legal requirements, for freelance or self-employed people it’s imperative to track how much money is coming in versus what’s going out. This can determine how much you charge for your services and you'll learn pretty quickly how much work you need to be doing. Then, you will have to decide how much income covers your living expenses and how much you need to live the life you want.
Your expenses should be tracked to better understand where your freelance work is costing you but also because much of this is tax-deductible. That’s a win, especially as you can claim expenses for things like lighting and heating in your home if that’s where you work from.
You can even claim for expenses on small things related to the running of your business, for example, stamps for posting letters or the fuel you may use for visiting and working with clients.
In a similar fashion to staying on top of your incomings and outgoings, staying as organised as possible will help you in the long term. Did you know that your financial records need to be kept for at least five years? Using receipt makers can help as how you store that data is important and something as simple as a spreadsheet can cover years of invoices and expenses.
Your invoices need to be numbered correctly for traceability. Most invoices will follow some form of sequential numbering, something as simple as 001, 002, 003, etc., or more specific to clients like A01, A02, B01, etc. Automating your invoices makes this process much easier and provides peace of mind knowing that it’s one less job to do.
Embrace Accounting Software
While it’s possible to manage your finances through spreadsheets, or even pen and paper if you prefer, accounting software is perfect for freelancers. Especially for those who maybe don’t have such an organised mind.
Self-accounting software options like QuickBooks, Xero and FreshBooks are purpose-built to make your life easier. You can manage your accounts in a visually pleasing manner and you’ll only have to set aside a small amount of time.
Keep Taxes In Mind
Unfortunately, the ability to avoid paying taxes applies to few people. Freelancers must keep their taxes in mind throughout the year and the best way to do so is by holding money back from each invoice received.
A good ballpark figure to hold back is 25% of your income, which is typically more than enough to pay your yearly taxes. However, if you are fortunate enough to earn a sizable income as a freelancer, you may have to contribute more. For example, in the UK, earnings above £50,000 are hit with a 40% income tax.
Have A Rainy Day Fund
They say you should ‘make hay while the sun shines’ and that sentiment is certainly true for freelancers. Regular employment will see you consistently earn money but freelancing is less predictable. You may find that your services are more in demand at certain times of the year, or that clients can be harder to come by for various economic reasons.
Whatever the case may be, it’s important to consider your overall finances for the year rather than going month by month. Creating good savings habits is a great way to start but that’s not to say you should simply accept lean times.
Alison Grade, the author of The Freelance Bible, says, “We've all got loads of people in our networks, and they might not be able to give you a job, but they may be able to open their address book and help you meet other people.” It’s on you to find new revenues, be that through contacting former clients or reaching out to new ones.