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Although the number of freelance workers was rising in the U.S. before the pandemic, the nation has seen a significant uptick in independent workers since 2020. And, due in part to what is called the Great Resignation, the numbers are continuing to rise.
According to research by the online work platform Upwork, the number of non-temporary freelance workers increased from 33.8 percent in 2020 to 36 percent in 2021. These 59 million Americans contributed $1.3 trillion in annual earnings to the nation's economy, $100 million more than the previous year.
The advantages of freelancing include the ability to set your own hours, work from home or wherever you happen to be, and, in many cases, do what you love. However, many independent workers worry about managing their money.
This article will offer five steps for managing your expenses as a freelancer, including working with a business consulting agreement and setting up a budget.
1. Create Separate Personal and Business Bank Accounts
As a freelancer, you are a small business owner. That means you should open up a bank account that is strictly for your business.
This step not only helps you manage your money better, but it makes things simpler at tax time. You'll be able to see your income and expenses clearly, and you'll be able to take any business deductions for which you are eligible.
Look for bank accounts that require no minimum deposit or balance and no-fee transfers and deposits. You'll also want free mobile deposits and the ability to link outside payment tools like PayPal, Venmo, or Apple Pay.
2. Set Up a Business Budget
Many freelancers have a variable income, but that is no reason not to have a budget. In fact, you need one more when your income is inconsistent because most of your bills are consistent. Here are some steps to follow in creating a business budget:
- List all your bills in an effort to predict your monthly, quarterly, and yearly expenses, including money you'd like to put in savings.
- Separate your business expenses from personal spending.
- Next, figure out the minimum amount of income you'll need to handle all those bills. This number is your target and shows you how much you need to make.
- Adjust your expenses, the hours you work, and the fees you charge to fit this budget.
- Check to see how your cash flow is going once a week to make sure you are not spending more money than you are earning. You may need to step up your efforts to collect payments from late-paying clients.
3. Set Aside Money for Taxes
As a freelancer, your taxes are not automatically withdrawn from your paychecks. You have to plan for quarterly tax payments or be prepared to pay a hefty chunk of your income at tax time.
Tax experts suggest setting aside 15 percent to 30 percent of your income for federal and state taxes. That business bank account you set up will help you be aware of any business deductions that you are eligible for. Check out the IRS website for details on tax rules for independent contractors.
4. Don't Forget Savings
It's understandable to want to celebrate when you land a big-paying assignment, but freelancers need to think ahead. After paying your bills and setting money aside for taxes, it's a wise practice to put aside any extra as savings.
You can use this money for unexpected expenses, times you cannot work, or other periods of low income. Focus on building up enough savings to cover at least three months of your living expenses. You also might want to consult with a financial advisor about the best ways to save for retirement.
5. Sign Business Agreements
To protect your rights and income, consider using a contract with each client. Contracts help define the scope of the agreement between you and your clients and reduce the chance of any misunderstanding.
Having a written business agreement can help ensure that you are not asked to do more work than you agreed to do and that you get paid in full and on time. The typical written agreements for freelancers include:
- Formal contract. This document details all expectations for both parties for the duration of the contract.
- Informal contract. Also called a letter of agreement, this document is an email or printed letter that outlines the scope of work, both parties' obligations, and payment terms. It is not as legally binding as a formal contract.
- Statement of work. This agreement states what work needs to be done, when it needs to be done, and for how much money. It is the least formal of the first three options.
- Non-disclosure agreement (NDA). Clients may ask independent workers to sign NDAs as a way to protect their confidential or sensitive information.
Balancing your income as a freelancer is more challenging than if you are an employee with a steady paycheck. However, if the freedom and flexibility of freelancing appeal to you, you don't need to be a whiz at finance to make it work. By filling the steps we've outlined above, you can be on your way to a satisfying career.
Sources
https://mint.intuit.com/blog/personal-finance/financial-management-for-freelancers/
https://www.businessinsider.com/personal-finance/budgeting-tips-for-freelancers
https://www.moneygeek.com/financial-planning/freelancer-guide-to-personal-finance/
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