While working for yourself comes with countless benefits, it also means you must bear the burden of added financial responsibility. No more work-provided health insurance, retirement plans, or W2s. It’s a learning curve, but with the right knowledge by your side and the help of an accountant to guide you through your first year, you just might be able to figure it out.
There are five essential pieces of advice to keep in mind as you embark on the journey of managing your finances as a freelancer.
- Buy health insurance
As a freelancer, you’ll be responsible for finding and providing your own health insurance from the marketplace. This can be quite expensive, so you can opt for more affordable options, like HMOs. Known when the open enrollment period starts and ends, and use sites like Healthcare.gov to filter through what’s out there.
Keep in mind that insurance plans with affordable premiums could have astronomical deductions and co-pays, so read the fine print and seek the help of an insurance broker if you’re new to the process.
- Save for taxes
You’ll have to deduct your own taxes from your checks in freelance work. Just because you work for yourself now, doesn’t make you exempt. You have the option to pay once a year or quarterly. If you make quite a bit, you might want to pay quarterly to help break up the payment.
The best way to combat this is to set aside a small percentage of each check you receive for taxes. That magic percentage may vary based on your income and circumstances, but it usually doesn’t need to exceed 30 percent.
You don’t want to get to tax season and not be able to afford your taxes. Consider this ahead of time to avoid this problem.
- Save for retirement now
Retirement may be a long way away. However, as most will tell you, it comes a lot quicker than you would imagine. Do what you can to save for retirement now. You can do it independently, but this requires a lot of financial self-control. Instead, it’s best to set up a retirement account. Now, there are a number of different personal retirement accounts available.
Roth IRA accounts are a popular option, as they invest your money for you. While the dollars you put into this account are taxed, withdrawals are tax-free, making it comfortable and easy to access these funds whenever you are ready to retire.
Traditional IRA accounts are also attractive to some freelancers, but come with further limitations. With a traditional IRA account, you’re not taxed on the money you put in, but you are penalized if you withdraw it before you hit 59 ½ years of age.
- Save for when work is slow
You’re going to hit slow periods, and you can’t just wait them out. When things get slow at a nine to five, your job security remains. When you’re freelancing, this isn’t the case. Budget carefully for slow periods, and make sure to maintain an emergency fund at all times.
Slow periods can happen at any point. It’s important to be prepared for that setback by knowing your living expenses, and having two months’ worth of living expenses saved at any given time.
- Organize finances
Keep track of your expenses year-round so you you’re prepared when tax season comes. Your office space (even if you work from home), office supplies, and mileage could all be tax-deductible. Consult with a tax advisor your first year as a freelancer so you can know exactly what expenses may qualify.
Be sure to make clear spreadsheets and save receipts. Without evidence of your expenses, the IRS will not reimburse.
There are a number of advantages of being a freelancer. You work your own hours and get to pick the work you want to do. However, you must cover the cost of personal expenses. Follow these tips to help keep you financially stable now and in the future, when you’re ready to retire.