This tax season, I got a wake up call. It was from the IRS. I quickly looked at my income and expenses.
They said, “Please report your income,” or something horrifying like that.
I had multiple sources of income—from my day job, freelancing clients, the stock market. And here’s what I (very naively) didn’t realize: unless you’re employed with a W2, you pay for all your social security and income tax at the end of the tax year.
As a Millennial with no dependents and modest income, I was expecting a refund. But because I was exclusively an independent contractor, I owed thousands of dollars to the IRS for 2015.
Fortunately, I had enough savings to pay it. Hopefully you did too. But if you didn’t or you’re just getting started at freelancing—no matter where in the world you are—this article is for you.
If you’re planning on making any money on the side this year, here’s how to take charge of your finances even when you’re not a math/economics person and never will be:
- Get a grip (and a spreadsheet).
I didn’t properly manage my finances in 2015 for one reason: Anxiety. Ironically, the solution to my anxiety was the thing that used to give me the most anxiety… spreadsheets.
If you don’t have a basic spreadsheet for your income and expenses, make one right now. Detail what you’re making, when and from whom in one tab. In a second tab, make a list of estimated monthly expenses—groceries, rent, entertainment, travel, retirement fund, cell phone bill, haircuts etc..
Update this spreadsheet constantly. Once all those numbers are out of your head and onto paper—once you’re no longer guessing at your livelihood—managing your finances becomes far less stressful.
(Remember that you can easily Google how to create automated formulas so you’re not doing any of the actual math yourself.)
- Figure out and use one payment system.
Having one payment system (such as Due) is important for several reasons:
- It prevents money from getting lost in cyberspace because you can easily track and remember which clients have paid you.
- It helps you remember income you may not be 1099-ed for but nevertheless need to pay taxes on. (If you’re audited, it’s incredibly easy for auditors to figure out what income you didn’t report.)
- It saves you time. Getting to know one system saves administrative time that would otherwise be spent creating new invoices and figuring out how the technology works.
- Clients want consistency. They’re more likely to pay through systems they know and have seen before.
- Track your expenses.
Not keeping track of your office-related expenses is pouring money down the drain. The government allows you to deduct—“write off”—expenses such as website domains, insurance, meals with clients, commuting, internet bills, laptops, home office supplies and rent. Sometimes people deduct these things on their taxes even though they don’t have receipts, but this is lazy and also illegal. If you’re audited, you’ll be fined.
I now use an app called Expensify, which allows you to take pictures of receipts and add notes to them so you don’t have to keep old receipts lying around. Wherever you decide to track work-related expenses, make sure to denote their purposes. Just because it’s from Office Max doesn’t mean you can deduct it (for example, it could have been a TV).
- Add 20-30% to your freelance rates.
If you think $15 an hour sounds okay as an independent contractor, remember that you’ll only have made around $11 an hour after taxes. Adjust your rates accordingly.
One way to remain acutely aware of how much you’re actually making is to pay estimated taxes. In fact, at least in the U.S., if you don’t pay estimated taxes when you’re self-employed you’ll be fined. If you’re a U.S. citizen, fill out this form (or you can get an accountant who will file it for you and then you’ll just send a check to the IRS each quarter). If you over pay, don’t worry; you’ll get a refund at the end of the year.
Freelancing isn’t as easy as accepting money from clients via Due (unfortunately). But freelance finances can be straightforward with the right preparation. Only when we finally implement these little details can we impact the big ones (like, um, profit).
