A new year means we’re all “jonesing” to be better versions of ourselves – for at least a few weeks anyway! And, naturally, many times that desire to do better spills over into our careers.
As a freelancer hustling through life, capitalize on that feeling. Before your New Year’s resolution fervor begins to wane, start implementing these strategies to manage your taxes and finances like the true boss that you are in 2018.
Evaluate how you spent your money in 2017
Reinvesting in your business is a key part of growth, but it’s easy to haphazardly throw money around just to see what actually converts. Reflect back on how you spent your money in 2017. Comb through your expenses and see if you need to make any adjustments.
Are you paying for a newsletter service even though you rarely send out a newsletter? Did your virtual assistant recently raise her rates? Should you put more money towards targeted ads on social media because those performed well? Trim down or cut out expenses that don’t convert and reinvest those dollars in what matters most to advance your business.
Set financial goals for 2018
A new year means getting out a fresh notebook and writing down your goals for 2018! (Or don’t be so old school and keep them stored someplace on your computer).
Come up with short, medium, and long-term goals for 2018. Then focus in on what you can do in the short-term to help you achieve those goals. For instance, do you need to do a better job of setting some money aside specifically for quarterly estimated tax payments? That’s a great “medium” goal for the year. Commit to meeting it by making weekly or monthly deposits to a bank account you’ve designated for tax payments.
Should you start building an emergency fund? Everyone should have a nice chunk of cash saved for emergencies, but it’s especially crucial for freelancers in case you have a particularly lean month when it comes to your income.
Next, set reminders on your calendar to touch base with yourself at least once a quarter to track your progress. Regular check-ins are the only way you can be sure you’re moving in the right direction.
Another great business practice is to join a mastermind group so you have like-minded people around to share your goals. Staying on track is easier when you have accountability buddies.
Keep personal and business expenses separate
A rookie mistake for many freelancers is mixing business and personal spending. From the get-go, you need to be diligent about keeping your money separate. This is especially critical in the off-chance you ever get audited by the Internal Revenue Service (IRS).
To make it easy, open two different bank accounts; one for your business and the second for your personal, every-day expenses. You should also get a credit card that you solely use for business expenses. Keeping your charges separate makes deciphering what portion of your purchases were business-related versus personal much less complicated.
That way, should you ever be subject to a tax audit, you’ll have clean, organized records to back up the information listed on your return.
Tweak your tracking system
There is a myriad of ways to track your income and expenses. You could turn to software options or just go the excel spreadsheet route. Reflect back on your 2017 system and determine if it makes sense to level-up your approach in 2018.
Were you diligent in capturing all your business expenses? That includes down to the mileage you drove and each little client gift you purchased. If you haven’t realized it yet, many expenses related to operating your business are tax deductible. And in order to minimize your tax liability and maximize your net revenue, you want to take every deduction possible.
An expense tracking worksheet can help ensure you’re getting the most out of potential deductions from expenses. Each time you make a business purchase, immediately make a record of it so you don’t forget about it when it comes time to file your tax return.
Save for Uncle Sam
Prioritizing financial goals, especially savings goals, can feel tricky when dealing with a variable income. The general financial advice to automate savings isn’t as easily applied. However, you must be diligent about saving at least 30 percent of each paycheck for your taxes. That should be the first move you make when you deposit a paycheck. Failure to save adequately for your taxes could leave you in the vulnerable position of not having enough to cover what you owe to the IRS.
As a freelancer, you’ll be in charge of paying self-employment taxes in addition to your income taxes.
Considering you’ll likely owe thousands of dollars to both the federal government and your state, it’s always best to have a cash reserve for your taxes. Personally, I have a savings account just for my taxes, which I’ve affectionately nicknamed “Uncle Sam’s Money”.
Pay those quarterly-estimated taxes
Instead of making a once per year payment, like the traditionally employed, freelancers need to make four estimated tax payments throughout the year. The IRS requires estimated tax to be paid on any income that does not have income tax withheld, which is probably most – if not all – of your freelance paychecks.
The quarterly payment deadlines are typically April 15, June 15, Sept. 15 and Jan. 15. That means the filing date for your quarter four 2017 taxes is right around the corner on January 15, 2018.
Along with making your quarterly payment, you’ll also need to file an annual return by April 17, 2018. If you your quarterly payments didn’t cover your entire tax bill, you’ll need to pay the remaining balance by April 17 as well.
Put money aside for retirement
It’s so easy to put off thinking about retirement when you’re a freelancer building a business. No one is there to match your contributions, and you don’t have a friendly human resource rep to encourage you to sign up for the company 401(k). It’s all up to you!
But putting money aside for retirement isn’t just great for your future self. It also helps you reduce your tax liability now. So, don’t forget to designate some of your hard earned dollars to retirement.
One easy strategy is to increase the amount you take from each paycheck and put into your “Uncle Sam” savings account. I save 40 percent of each paycheck to ensure I’ll have money left after paying quarterly-estimated taxes to put into a SEP-IRA. Putting a system like this in place helps you form a habit instead of just sporadically trying to save when you have a high-income month.