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How to Manage Finances as a Freelancer

April 29, 2024
Learn more about how to manage finances as a freelancer

Money Management for Freelancers: Tips, Tricks, and Taxes

The freelance market is growing every year. It makes sense. Freelancers want to keep their options open, to work a flexible schedule and be their own boss. Freelancing platforms and access to gigs around the world throughout the internet make moving to the self-employed sector more possible than ever.

The move to freelancing from traditional employment is not always an easy one. Understanding the financial aspect can be one of the most intimidating parts of going into self-employment. The last thing you want is to get to the end of the year, having spent your money only to realize that you owe taxes on the money you’ve earned.

The complications of freelance money management shouldn’t be what holds you back from going out on your own. Reading through this article, you’ll learn the tactics that savvy freelancers use to organize their finances as well as tax and budgeting tips.

1. Setting Up Your Financial Foundation

Here are a few tried and tested ways of setting up a strong foundation that will encourage healthy growth for your freelancing career.

  • Keep your business account separate from your personal account: This will help you keep track of the money you’re earning from freelancing. It’s simpler than you might think to set up a business account. Many financial institutions such as DCU offer free business checking with no minimum balance, so opening an account is easy for those who are just starting out.
  • Understand the tax implications for gig workers and freelancers: Once you’ve earned more than $400 from any single employer, you’ll need to file taxes as a business owner. While your tax implications are more complicated than one stagnant percentage, financial advisors suggest putting aside 30% of your freelance income.
  • Tracking income and expenses: You’ll want to know how much income is coming in and how much your business is costing. Tracking your expenses is especially important as they can be used as write-offs once tax season arrives. There are many software options and downloadable spreadsheets to help you keep your books balanced.

2. Budgeting for Stability and Growth

While you can typically rely on an employer to give you the same check every two weeks, the income of a freelancer can vary greatly from month to month. While there may be times when the cash is raining in, it’s important to plan for days when paid gigs slow down to a trickle. Developing a realistic monthly budget is critical when it comes to surviving these ups and downs.

When creating a budget as a business owner, you’re not only tracking your household expenses — you have to take business expenses into account as well. Allocate funds for taxes, savings such as an emergency fund and investments such as a 401K account. Budgeting can help you keep your business afloat when times are slow and help you know what to do with extra funds when business is good.

3. Embracing Smart Invoicing and Payment Practices

When you’re considering how to manage finances as a freelancer, the payment process and invoice creation can often be overlooked. Here are some components to consider when crafting your invoice:

  • Make your layout neat and clear: Your layout should be easy to read, represent your level of professionalism and reflect your brand
  • Include all relevant information: This includes your vital contact information, the customer’s information, the invoice number, and the date of delivery. Add on the due date and a description of what your client is paying for, including the quantity and the unit price. Don’t forget to include the most important factors: how much is due, payment methods accepted, and any late payment fees if applicable (we’ll discuss payment practices in detail later). Finally, the invoice should be completed with a space for the client to sign.
  • Consider itemization: It’s nice for everyone, including yourself, to know where the money is going. Itemization can also be a way of making sure no mistakes are made in the billing process.
  • Keep your invoice numbers unique: This makes it easy for both you and your client to track invoices.

The cold hard truth? Sometimes, people won’t pay before the due date. Have payment practices to encourage prompt invoice response. Incentivize early payment such as 2% off for paying within seven days, or establish a late fee if the payment is still missing after the due date.

It’s wise to clearly state these payment practices on the invoice.

If you still are struggling with late payments from a client, consider follow-up strategies such as a pre-written email that you automatically send a week past payment or a scripted phone call to clients who are in the red.

Don’t be afraid to ask for your money. You provide a valuable service and deserve payment for it. Consider making it easy for your clients to pay by using online payment platforms. That way your clients can simply click on a link attached to the invoice, making it more likely that they will pay as soon as your invoice arrives.

4. Navigating Taxes and Legal Obligations

When you work for a company, you can be sure they are keeping track of their expenses, including your paycheck and expenses. Your business should be run the same way. Tracking your expenses can help you gain tax credits, lowering your liability.

Freelancers need to pay quarterly taxes. Here are the six basic steps you’ll need to follow to file your taxes:

  1. Determine your total expected income.
  2. Calculate your adjusted gross income (AGI) by implementing your tax deductions.
  3. Find the estimated income tax owed by multiplying your AGI with your relevant tax bracket.
  4. Use your total expected income to estimate the self-employment taxes owed.
  5. By adding together your estimated self-employment and estimated income taxes, you’ll get your estimated taxes for the year.
  6. Now that you have your estimated taxes for the year, you can divide that number by four to get your quarterly tax amount.

We know this is a lot of tax talk — and while we’re sure you can handle it, we highly recommend turning to an accountant or tax advisor for help in confidently navigating this space. Consider seeking guidance at a non-profit financial institution such as DCU. Here, you will find basic advice and financial education to help keep your business running smoothly. 

5. Building a Safety Net and Planning for the Future

Emergency funds are an important part of financial planning for everyone but are even more important for people with fluctuating incomes such as freelancers. Work a high-interest savings account into your freelance money management tactics and you’ll have money building enough interest to make up for inflation as well as a safety net to fall back on when business is slow.

When you’re working for a company, they’re obligated to provide you with a retirement plan. When you’re your own boss, planning for retirement is in your hands. Even if you’re doing what you love, you’ll want to plan for the future.

There are 401K plans specifically designed for the self-employed aptly called a Solo 401K. However, since you’re not participating in an employer matching program, you may also want to set aside more money in a separate retirement account. Check out DCU’s many IRA options to get an idea of what is available to you outside of a typical employer 401K.

Money Management For Freelancers: The Power Is Yours

When you pictured yourself freelancing, paying quarterly taxes and balancing your budget probably wasn’t part of the vision. Freelance money management is an important part of the reality, however. Strong management will provide you with a foundation on which to grow your business.

You might choose to seek help from an accountant or you might dive into keeping your business’s finances organized on your own. No matter what your business might be or how you choose to run it, you can master your money management.

As your business grows, don’t hesitate to keep learning more about your business’s finances. DCU offers an education center and eagerly helps members better their financial health. Learn more about becoming a member and gaining support from DCU for your freelancing future.

*The national average annual percentage yield ("APY") for savings accounts is updated monthly, please refer to the Federal Deposit Insurance Corporation.

Please note, membership is required to open a DCU checking or savings account. Visit our membership eligibility page for more information.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.