Updated for tax year 2023.
Freelancing is incredibly rewarding, but it does come with its own set of financial challenges. Unlike a typical 9-5 job, you as a freelancer are responsible for billing and tracking all of your own income. And that tends to be rather irregular. You are also in charge of setting your own rates, finding your own work, tracking your expenses, and reaching your business income goals as one person.
While the financial side of freelancing can be overwhelming, anyone can be a successful freelancer if they take the time to map out an income plan.
Whether you are a new freelancer or have been freelancing for years, these income tips can help you better organize your finances, and in return, provide the potential to earn even more money.
Plan your services
The first step in creating an income plan is to figure out the money-earning services you will offer. To do this, you need to decide what your niche is within your profession.
For instance, freelance photographers need to determine what type of photography they would like to offer. Writers need to decide the type of writing they want to focus on and what clients they are interested in working for.
Make a list of all of the services you plan to offer. Add notes to each service to describe the process, such as how much time you estimate it will take, any potential expenses that may occur, and how you plan to market yourself.
Determine your annual income goal
Setting an income goal is the key to financial success for freelancers. With a goal, you can then work to price your services accordingly.
First, decide what you would like your annual income to be. Then divide that number by 12 to calculate your monthly income goal. Keep in mind that your income will fluctuate as a freelancer, so even if you fall short on your income goal some months, you have the opportunity to make it up in other months.
When goal setting, it is good to push yourself. Set high but realistic goals. Write all of them down, and keep them in a visible place to motivate yourself.
Calculate your pricing and workload
After deciding your annual income goal, you need to calculate your pricing and workload.
Take this for example:
Say you want to earn $60,000 annually from freelancing. That means you need to earn around $5,000 every month.
If you are a freelance writer and only charge $50 per 1,000 words, you have to write 100 articles every month to earn your goal of $5,000. That is 25 articles a week, which is not very attainable or desirable.
You could offer the same writing services for $250 each. Then you only have to write 20 posts a month or around five a week to meet your goal.
Pricing and workload go hand in hand. You do not want to shortchange yourself as a freelancer and end up making less than minimum wage when you calculate your hourly rate.
Further, do not forget to factor overhead expenses into your prices. As a business owner, you will spend some time performing tasks that are necessary for your business but don’t make you any money. That’s why it is important to charge clients fairly for the time you spend on overhead costs, such as accounting, responding to emails, and marketing.
Open a separate business account
The easiest way to keep your freelance finances organized is to open a separate business account. It is nearly impossible to cleanly sort out your business expenses and income when combined with your personal income and expenses.
By opening a separate business savings and checking account, you can ensure your accounting practices are neat, organized, and efficient.
Pick an accounting system
Having a proper accounting system will not only save you time, but it will keep your finances organized too. Organized finances help to assure you aren’t missing any payments, do not have unpaid invoices, or aren’t paying too little in taxes.
You might consider an accounting system such as Freshbooks. Freshbooks also allows you to send and receive invoices, so you can handle all of your business finances in one place.
Keep track of business expenses
Many business expenses can be used as a business write-off, so you should track them diligently.
Of course, you should also track your business expenses to ensure you aren’t spending too much while earning too little.
Don’t forget to save for taxes
Since freelancers do not have taxes taken out of their paychecks automatically, they are required to pay the IRS quarterly estimated taxes.
Don’t put yourself at risk and save too little for quarterly taxes. Avoid a financial nightmare by making sure to save 20-30% of your earnings to cover your tax liability. If you want to be conservative, you can always save more.
Create an emergency fund
Everyone should have an emergency fund for personal peace of mind. An emergency fund is especially vital for freelancers. As a freelancer, your income is neither steady nor guaranteed. It is likely to fluctuate.
Though you are sure to earn a higher income some months, there are certainly bound to be months when your income takes a notable dip. Be prepared for the worst by setting up a business emergency fund.
By setting up a business emergency fund, you can protect your business in the event that your income drops significantly, all while safeguarding your personal finances.
Income plans are all the rage
Creating an income plan takes some time, but it keeps you on the right track with your business. An income plan ensures you make enough money for the amount of time you spend on your business, allowing you to be as successful as possible.
Filing taxes as a freelancer
TaxAct makes it easy for freelancers to file your self-employed taxes. Start today by signing into your TaxAct account.