Tax season is here, and freelancers everywhere are wondering how to pinch pennies and make sure that they have saved correctly throughout the year. Here are some tips on how to keep your freelance finances in check.
If you’re like most freelancers, tax season is probably prompting some whiplash-inducing double-think about your chosen career path. The good news is that you’re not alone. Surveys show that nearly all freelancers are happy that they chose to be their own bosses — with all the freedom that implies — but more than half experience regular stress about the unpredictability of their financial situations.
The bad news is that worries about freelancer finances can’t be wished away, and if you’re delaying seriously thinking about your money troubles until tax time, you’re probably unnecessarily increasing your stress. To make life easier year-round, take these steps to proactively manage your finances.
Freelancing can be all about feast and famine, but instead of splurging during the highs and sobbing into your pillow during the lows, be responsible and start operating on a yearly budget. Begin by making note of your yearly income for the last several years and determining what the average is. Be honest with yourself about whether a flukily awesome year is skewing the curve, and adjust your average accordingly.
Divide this average by twelve, and voila, you have your monthly budget! Deduct fixed expenses such as rent and utility bills, then use your best judgment to sort out variable costs like groceries and other shopping.
The key to this system is that you agree to keep your spending within that budget every month — even the awesome months featuring a gig that reminds you what a $100 bill looks like.
Any income exceeding your predetermined budget should be stashed away into a savings account to cover the inevitable slow month awaiting you. If you still have cash left in that account at the end of the year, it will be a nice present to yourself, and you can adjust your budget for the next year if necessary.
Taxes can get pretty complicated if you’ve taken the step to start your own officially registered business. However, even if you keep your freelancing on a purely personal level, you still need to keep Uncle Sam in mind.
The IRS generally requires independent contractors to make estimated tax payments every quarter. If you’re not familiar with these requirements, head over to the IRS’ Self-Employed Tax Center to learn more.
IRS Form 1040-ES can help you estimate your tax obligations each quarter, and you should factor that amount into your monthly budgeting. You should also consider stashing an appropriate amount from every paycheck into a savings account to cover those payments.
Once you’ve taken an honest accounting of your yearly income and what you’ll owe to landlords, governments and Starbucks, chances are you’ll spend a lot less time fretting about your finances!
Scripted and its writers do not provide tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
Have any finance tips for freelancers? Include them in the comments below!