After working all day on my business taxes (year-end and fourth quarter…I need a mocha!), my thoughts are firmly stuck in the financial realm. So let’s stick with that topic and talk about some tips for managing your freelance finances. Some of these are US-specific and some apply worldwide, so especially if you’re an overseas reader, feel free to contribute your own tips too!
- Have a business bank account and business debit card. Your business and personal finances should be completely separate, and the debit card statements save you from dealing with a shoebox full of receipts at the end of the year.
- I posted this one on Twitter earlier today. Set up a business savings account. Every time you receive a payment from a client, immediately transfer at least 30% of the payment into the savings account (the exact amount depends on your tax bracket, retirement goals, etc.). Use the saved funds to pay your taxes, fund your retirement account, etc. Over the years, I’ve heard numerous freelancers lamenting “…made more money than I thought this year…owe $6,000 and I don’t know where that’s coming from…” This year-end downer can easily be avoided with the business savings account plan.
- Keep a running total of your receivables. Let’s say that your gross income goal is $6,000 per month. If you only have $4,000 in outstanding invoices, it’s time to get cracking; you can’t afford to be too picky about what you accept and what you decline. If you have $8,000 in outstanding invoices, it’s a good time to raise your rates, be choosier about what you accept, or work on some non-paying projects that interest you. I use an Excel spreadsheet for this task. Whenever I issue an invoice, I enter it into the Excel sheet and it is automatically added to my running total receivables.
- Set up a paid vacation account. Lots of translators insist that they can never take time off because if they don’t work, they don’t get paid. Part of the solution is to raise your rates so that you don’t have to be working all the time. The other part is to give yourself paid vacation. For example if you typically gross $1,500 per week and you want to take 4 weeks a year off, you need $6,000 in savings in order to pay yourself $1,500 per week off. Divided by the 48 weeks a year that you would be working, that’s $125 per week. Stash that amount in your paid vacation account and when your vacation time rolls around, you’re set!
- If you subcontracted more than $600 of work to anyone during the year, make sure to send that person/entity a 1099-MISC by January 31. I use FileTaxes.com to prepare these online and mail them to the recipients. My accountant recommends sending 1099s to both individuals and corporations.
- Within the limits of the law, deduct, deduct, deduct. I’ve been freelancing for 10 years and I’m still finding out about new deductions: this year’s discovery was the potential to deduct my daughter’s summer day camp costs (may apply to private babysitting too) under the Federal child care credit. Some restrictions apply: the child has to be under 13, sleepaway fees are not eligible, and if you are married, your spouse has to be employed. Plus, of course there’s a cap: you can probably claim only $3,000 per child or $6,000 total, and that includes work-related child care during the school year if you use any. Here’s the IRS page about this topic. And as always, ask your accountant!