Successful freelancing requires more business expertise than you might think. Especially financial smarts. In observance of Financial Wellness Month, I asked my great friend--who's also my former CPA--Lisa Drake to provide some financial tips for freelancers and independent contractors. (This advice also is useful for entrepreneurs) She knows her stuff!
5 financial tips for freelancers
Most freelancers and independent contractors I know are great at what they do: consulting, writing, editing, decorating. But when it comes to taking care of their financial needs they tend to ignore them until they get to a critical state. Here are my top five financial tips for freelancers so they can take care of their financial business and get back to doing what they do best.
1. Keep 'em separated.
For 2013, establish a separate bank account for your business. Dedicating a credit card to only business transactions is a great idea as well. There's nothing worse than having to separate out transactions at the end of the year to figure out whether you've made money or not. It's cleaner this way (trust me).
2. Paper, not plastic.
Resolve not to use credit cards to fund your business (or your life while your business is slow). I have seen smart, capable freelancers who didn't have adequate reserves and lived on credit cards for six months or more. What then happens is that they amass a huge debt that they have trouble paying off while business ramps up. Interest on the debt keeps accruing and it's a vicious cycle. Better to not get into the trouble in the first place.
3. Get professional help.
Now's the time to find a CPA (Certified Public Accountant) or EA (Enrolled Agent) you can trust. Even if you think you have the chops to prepare your own financial statements or file your own tax return, it doesn't hurt to have another set of eyes to look at your financial information. After all, finances and taxes are their areas of expertise. These pros can help you maximize deductions and avoid troubles with the IRS.
4. Create a stash.
Begin to set aside money for times when business is slow or clients are slow to pay. Even the best of freelancers have down times. You have to have a war chest stocked with at least 4-6 months of operating capital. More is better. [Tips for dealing with slow-paying clients]
5. Pay the man.
While you're at it, sock away money to pay income tax and estimated tax payments. Just because you get a big old fat check doesn't mean you get to keep all of it. The feds and probably the state want their fair share. And those guys get testy when you don't ante up. Stay ahead of it with estimated tax payments. If you don't know how much to estimate, your CPA or EA can help you with this. It's the best way to avoid a nasty surprise come April 15th.
Lisa Drake used to be a CPA with the heart of a teacher. She has over 25 years of accounting experience most of it specializing in small business. Always interested in education, she began teaching accounting part-time in 2007, and became a full-time instructor at Foothill College three years later. Now she is a teacher with the heart of a CPA (and yes, CPAs do have hearts).