Freelance money mistakes you’re probably making…and how to fix them

I say “probably making,” because these are all mistakes that I’ve made along the freelance path–hopefully this post will save you from repeating them! Of course, everyone is at a different stage of freelance financial management; if you answer no, no, and no to these…great. That means you can focus on doing what you actually do for work, not worrying about money. But if you do need some help, read on!

Mistake 1: Not separating your business and personal finances
If you make one change to your freelance finances after reading this post, I literally beg you to choose this one. Where do I start…commingled finances are a rat’s nest of problems…a rat’s nest that you’ll be stuck untangling if/when you are audited by the IRS. Was that ream of paper for business or personal use? How about the lunch? The postage? Things get really messy when you only have one set of accounts. I’ve talked to freelancers who don’t even have a clear record of what they earned, because they look at their bank statement and don’t know if that $75 deposit was from a client, or from a personal friend who owed them money for something. Stop the insanity and (completely) separate your business and personal finances.

Do this: Open a separate set of accounts for your business. Even if you are a sole proprietor, just get a separate checking and savings account in your own name. This also frees you from saving receipts (say goodbye to your shoebox of barely-readable thermoprinted receipts) unless you pay cash for a business expense. Simply use the debit card associated with your business account to pay for all business expenses, and you have them in one place. Which brings us to…

Mistake 2: Not having a business savings account
In my experience, very few freelancers have a business savings account; they just deposit everything into one big bucket–their business checking account. I did this too, for about the first 10 years of my freelance career. Problems here: Most critically, you can end up without enough money to pay your taxes, especially if you unexpectedly earn more than you expected to.

A business savings account also allows you to create a paid vacation fund by depositing a set amount of money every week/month/quarter, then using that to pay yourself when you’re not working. You can also use a business savings account as a rainy day fund, in the event that your computer dies–which also happened to me–or you get sick and can’t work for a few weeks, and so on.

Do this: Best option, open a separate account. Second best, create a partition or earmark in your business checking account. Then, designate a certain percentage (I do one-third) of each client payment and put it in that account. Most importantly, do not touch it except for its designated purpose. The designated purpose can be, “Break glass in case of emergency.” I did that this year, when I planned to work for part of the month that my family spent in British Columbia, then decided that life’s too short and I didn’t want to work. Instead, I drew money out of my business savings account to pay myself. At the very least, do not get caught short at tax time: sock that money away in a business savings account.

Mistake 3: Underestimating how much you need to earn
This is a big one for many freelancers–in fact, I wrote a whole post about it. Lots of freelancers calculate their target income like this: “My last salaried job paid $72,000 a year. So if I work 40 hours a week, 50 weeks a year, that’s 2,000 billable hours, so to make $72,000, I need to make $37.50 an hour. That doesn’t sound hard at all!” I’m exaggerating here, but only a little. Don’t forget that as a freelancer, you:

  • Won’t, and perhaps shouldn’t even try to bill 40 hours a week. You have accounting, marketing, issuing quotes to potential clients, keeping up to date in your specializations, learning new software, attending conferences and webinars, and so on. Trying to bill 40 hours a week as a translator is a recipe for burnout. Let alone the fact that many beginning translators have periods when they would like to be working but have no work.
  • Have many expenses that a salaried person does not have. US self-employment tax is a pretty big hit at 15%; translators in Europe probably pay even more. Then there’s health insurance, which can be a very big hit if you live in the US. Then there’s paid vacation, retirement, computer equipment, continuing education, work-related travel, professional association dues, and so on. All of that is on you.
  • Are much more at risk than a salaried person if you get sick or injured and can’t work. Some translators carry disability or loss-of-income insurance, but most–in my experience–do not. Even something as benign as a sprained wrist, and certainly something critical like cancer, or a heart attack, or a very sick child who needs full-time care, can put you in a serious financial pinch.

Do this: Be honest with yourself about how much you need to earn in order to achieve a similar level of financial security to someone with a traditional job. Or, in 2018, maybe we should say someone with a traditional job at a place that treats its employees well. Not only do you deserve that, you need to put those safeguards in place if you want freelancing to be your “forever” job.

Mistake 4: Not incorporating when it would make sense to incorporate
Here I’ll talk about the US system, but I think many European countries operate in a similar way. Incorporating involves some paperwork, some hassle, and potentially some money in the form of filing fees and/or payroll and end-of-year tax returns. This varies by state; check your state’s Secretary of State website for information.

At a certain income level, incorporating can save you a bunch of money by allowing you to (legally) avoid paying self-employment tax on a portion of your income. Even one-person corporations to legally draw some money out of the company as “wages” (which are subject to self-employment tax) and some as “corporate profit” (which is not subject to self-employment tax. In my case, I pay my accountant to do my S Corp’s quarterly payroll taxes and end-of year tax return. That costs me about $1,000 a year, but I would estimate that even with that expense, I still save over $4,000 in self-employment tax because of the S Corp. The question is when it’s worth it to incorporate: I’ve heard $40,000 gross income, $50,000 gross income…it kind of depends. Talk to an accountant.

Do this: Talk to a knowledgeable accountant about whether you should incorporate, and if so, as what type of entity. A couple of pieces of advice here: if you use an accountant to prepare your business taxes, use someone who is an IRS Enrolled Agent (EA). This means that they can interact with the IRS on your behalf, and you should rarely, if ever, have to personally deal with the IRS. Also, note that the method I described above (wages versus corporate profit) can have some broader repercussions. First, your wages are a lot lower than your gross revenue, which makes you look as if you earn less money than you actually do–perhaps not the greatest option if you want to apply for a mortgage or other type of loan. Second, this may affect your level of Social Security benefits; if you are close to retirement or if you see Social Security as a major source of your retirement income, make sure you understand what you’re doing here.

Readers, over to you!! What’s a financial mistake you’d like to help other freelancers avoid??

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10 Responses to “Freelance money mistakes you’re probably making…and how to fix them”
  1. Juan August 21, 2018
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  2. palomnik August 22, 2018
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  3. Alison Penfold August 22, 2018
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  4. Ruth Krawczyk August 23, 2018
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