Freelancing is becoming more and more of a viable career for Americans. According to Upwork’s most recent Freelancing in America report, an estimated 57 million U.S. workers freelance. This is mainly dominated by the younger population, as Generation Z freelanced more than any other generation of workers since the yearly report was created. Freelance work is becoming more of a long-term career choice, the researchers also found. Over 28% of freelancers in the country do it full-time, this is a significant increase from the 17% back in 2014.
The number of freelancers in the U.S. may increase because of the recent pandemic, too. Over 58 million Americans filed for unemployment, according to August data from the Labor Department. More people are out of work. Companies are looking for contractors to keep up with their commitments without having to worry about benefits.
Whether you got into freelancing because of the flexibility or out of necessity, you need a good way to manage your finances. After all, you don’t have a company’s accounting and finance and human resources team to provide you with a bank account and regular pay. Plus, you don’t have medical benefits to fall back on in case of emergencies.
Here are ways to keep your finances in check in the gig economy.
Start Treating it as Your Own Business — Because it Is
When you’re a freelancer, you essentially own a business with yourself as the sole owner and employee. As such, your personal finances should never mix with it. Have separate bank accounts for personal and business use. This way, you don’t have to waste time figuring out which transaction is personal, and which is for your freelance work.
You can always get an account from the same bank as your personal one. However, you should definitely consider a bank that’s known for great online banking. This is because most freelance work for you do will be wired to you online payment gateways like PayPal. You don’t want any problems with transferring cash from your PayPal to your account.
Keep Close Track of Your Cashflow
Track your transactions at least every week. See if your balance reflects your earnings. If there are any expenses, learn which of them are eligible for a tax writeoff. Inspecting your expenses allows you to see if you’re spending more than you should, too. Business meetings don’t always have to be in upscale restaurants.
Use money management applications like Mint.com or Every Dollar. These link up to your business bank account and tracks every transaction you make, from receiving payment to withdrawals. These apps will automatically analyze your transaction data and provide real-time reports of your profits and expenses. This way, you have a visual guide of how much you’re spending compared to how much you’re making.
Create a Budget and Stick to It
It can be difficult to create a solid budget for freelancing because your earnings will fluctuate from month to month. However, it’s still worth the effort to do, as it prepares you for ups and downs in your business. Base your budget off of your average income every month. You can use an online tool like Value Time to calculate this. Once you have a value, you can move on to deciding how much you’ll pay yourself, how much you’ll spend on taxes, and how much you’ll allocate for business expenses. Here’s how to determine some parts of your budget.
- Taxes — You still have to pay taxes as a solopreneur. If you earn $400 or more, the Internal Revenue Service will require you to pay for a 15.3% self-employment tax. Work with a professional accountant to find out the kind of business structure you have, how much tax you’ll pay, and how you’ll pay them.
- Salary — Apart from your taxes, you should prioritize paying yourself as well. Determine how much you should earn based on your experience, education, expertise, and needs. You can do this by figuring out your personal expenses every month, from your mortgage loan rate to leisure spendings. You could also research the average salary of a freelancer of your caliber and try to match them.
- Operating expenses — As a freelancer, you use a variety of resources to get the job done. This can include your subscription for certain software, maintenance for your tools, transportation, and even rent if you use a flexible office space during your workdays. You should also include payment for people you hire, like moderators if the nightbot app isn’t doing enough for your stream. Add up all your bills for a month and estimate how much you spend on them.
When you’re a freelancer, you’re essentially running your own business. This means that you need to keep perfect track of your own finances not only for your salary’s sake but also to stay on the good side of the IRS. Use these tips to keep your earnings organized and accounted for.