For some, the idea of striking out on their own is absolutely unappealing. But for more than 76 million of us, freelancing is the dream. It’s how we make our living while doing what we love. That said, there are pitfalls all freelancers should avoid, including these four banking missteps.
1. Mixing personal and business finances
When you start freelancing, it’s easy to forget that any job you’re paid for is considered a business, and taxes will be due. After all, most freelancers take on jobs they enjoy, and it’s natural to associate enjoyment with a hobby.
One of the first things all business owners should do is set up an account separate from their personal checking account. A checking account dedicated solely to business makes it easier to track income and expenses. While it should not be your only bookkeeping method, a separate business account is useful when paying taxes and seeking business-related tax deductions.
Failing to set up separate accounts increases the odds that you’ll pull money from your business income to cover personal expenses. While it’s fine to transfer money earned to a personal account, it should only be done after taxes and other withholdings are deducted. Otherwise, you may find yourself short on cash when taxes come due.
Tip: While you’re setting up a bank account for your freelance business, take time to decide how you’re going to track income and expenses. Your method can be as simple as filing a copy of paid invoices in one file and receipts for the bills you’ve paid in another. Or you could take advantage of one of the many excellent small business accounting software programs. Accounting software makes it easy to find the information you need when you need it.
2. Forgetting about taxes
Approximately 300 words in, and we’ve already mentioned taxes twice. That’s because taxes are one of the primary concerns many freelancers have. What you want to avoid is receiving a tax bill because you failed to pay taxes on your income or you underpaid the taxes owed. The easiest way to avoid that pain is to stay on top of taxes throughout the year.
If you collect money through a payment platform like Venmo or sell on a marketplace such as PayPal, eBay, or Etsy, your income is now reported to the IRS. In other words, if you earn it, the IRS will know.
According to the IRS, anyone earning over $400 in net self-employment income must file an annual tax return. Self-employed taxpayers (like you) must also make estimated quarterly tax payments. Fortunately, it’s not hard to do. Here’s how:
- Go through your invoices or check your accounting software to see how much you earned that quarter. Quarters are as follows: January to March, April to June, July to September, and October to December.
- Use one of the many self-employment tax calculators available online to determine how much you owe in relation to how much you earned that quarter. Don’t forget to figure out how much you owe in estimated taxes to your state. You can find estimated state tax calculators online, as well.
- The IRS offers several ways to pay your estimated federal taxes. Choose the method that works best for you. Check the Department of Revenue website for your state to learn how to pay those quarterly taxes. Each state has its own portal and method of payment.
While paying taxes is not fun, it is an essential part of living the freelancer’s life.
3. Treating the business as a hobby
One of the biggest roadblocks freelancers face is forgetting they’re business owners. That may mean they never create a business plan that can help determine if their business is financially sustainable. As a business owner, you must also set financial goals, create a budget, and come up with a marketing strategy.
It may sound intimidating, but you don’t have to do everything at once, and you’re sure to learn on the job.
As a business owner, you must also plan for the “what ifs.” For example, do you have money put away in savings to cover emergency situations? Does your business require customers to come into your home? If so, do you have the appropriate level of homeowners insurance to cover any injuries they may suffer while there?
4. Believing one bank is as good as another
You may be short-changing yourself if you don’t shop around to find the best bank or credit union for your small business. That’s because all banks are not created equal.
Some offer a higher rate on products like certificates of deposit (CDs) and money market accounts (MMAs). Some charge ridiculous fees that chip away at your profits. Some may be banks you’ve never heard of, like some of the online banks currently offering the highest interest rates on accounts. The point is, you owe it to yourself to find a bank that doesn’t nickel and dime you or your business.
There’s no denying that freelancing for the first time involves a learning curve. However, once you’ve got it down, there’s no stopping you or your business.
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