If you’ve decided that this is the year to take the plunge and become a full time freelancer, you’re in good company. Some 36 percent of the U.S. workforce took on freelance jobs last year, an increase of 2 million people from the previous year. By 2027, 86.5 million people are expected to be working as freelancers.
Many people who do go freelance find themselves in a better position than they were as employees. Two thirds of people earned the same or more than they did when they worked for someone else, according to a 2018 study by consultancy firm Eden McCallum. That same study discovered that freelancing cuts the gender pay gap from 30% to 3%💃
So there’s lots to be excited about. But whether you’re bringing your design, photography, engineering, strategy, or indeed, any, skills to the freelance marketplace, there are a few things you need to do first to stay on top of your finances all year round.
💳 Set up a separate business bank account
We think this is so important that we’ve dedicated a whole post to it. In summary, it will help you track your work expenses, saving you a lot of headaches when it comes to tax filing time.
🖩 Calculate your expenses
As a freelancer, you might need to pay for equipment, workspace, insurance (more on that below) and more. If you work out how much that will come to, you’ll be able to factor them into the fees you charge your clients.
✔️ Purchase insurance
From health insurance to home insurance to professional insurance, freelancers aren’t covered by anyone’s policies except the ones they purchase. Paying out for insurance might feel like an annoying expense when you’re starting out but we think it’s always better to be safe than sorry.
👵 Plan for your retirement
Equally, no one will be contributing to your pension apart from you! It’s a good idea to set aside some money for your retirement fund each month. Also, don’t forget to stay on top of all the contributions you and your previous employers might have made to your 401K.
🧾 Start preparing your taxes
The IRS requires every self-employed person who earns $400 to file an income tax return that reports all sources of income. Rather than leaving everything to the last minute, keep a record of all your income and expenses, so that you won’t be caught out next April.
Rather than receiving a W-2 form for filing taxes, you will be given multiple 1099-MISC forms from your clients.
As well as income tax, freelancers pay self-employment tax, currently 15.3%, which covers Social Security and Medicare.
Most freelancers are required to pay taxes quarterly, so it’s never too early to start planning!
⏲️ Set your working hours
This won’t directly affect your finances, but might help you maintain them. Decide when you’ll work and hold yourself accountable to those hours. Equally, as a new freelancer, it can be tempting to say yes to everything and make yourself available all the time - but it’s okay to define your boundaries and switch off at the end of your working day!
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