Freelance work and the gig economy have taken the nation by storm. A study commissioned by the Freelancers Union and freelance platform Upwork revealed that the gig economy’s work force reached an eye-popping 57 million Americans in 2019, with increasing numbers likely to join in the future. You can choose freelancing as your sole source of income or you can do it in your spare time for extra money, but whatever path you choose, you need to pay attention to how you’re managing your money — otherwise you’re liable to end up facing costly consequences. Here are seven personal finance tips that can benefit every person working as part of the freelance economy.
1. Always start with a budget
Being your own boss is a common dream, but it isn’t easy. When you go out on your own as a freelancer or gig worker, you need to be able to gauge how much income you need in order to make it both worthwhile and feasible. To make that determination, you start with how much money you actually need, and that’s where reading some good budgeting tips can help. That’s where a budget comes in. Knowing how much you pay out in bills and other expenses each month, as well as how much you need to save for the future, tells you how much you need to earn.
2. Create your own withholding schedule.
When you’re a W-2 employee, your employer withholds the appropriate amount of federal and state taxes on your behalf and sends them in so that you don’t have to. It’s done with every paycheck. As a freelancer, you are responsible for paying your own taxes, and if you don’t set aside part of your income on a regular basis, you’ll be in for a rude awakening come tax time.
3. Send the taxes you’ve withheld every quarter
People who are self-employed are required to send in quarterly estimated taxes to the federal government, their state, and in some cases to their city or county. Failing to do so can lead to penalties, so make sure that you read up on the rules and due dates for each. These taxes can usually be submitted online or via snail mail, and if you choose the latter there are specific payment forms that should accompany your tax submissions.
4. Record what you’re spending and earning
It doesn’t matter whether you use a software package or just keep track using a spread sheet or ledger, but whatever you do, record every dollar that comes in and that you spend for the business. Not only will this help you know exactly what your tax liability is, but you will have an easy-access record when it’s time to list all of your business deductions. It will also help you to see clearly whether your business is profitable.
5. Last word on taxes – hire a pro
If you’ve decided to be a freelancer, you’ve already taken on responsibilities that go far beyond what most workers carry. Don’t take the risk that you’re underestimating how much you should withhold or what is or isn’t an eligible deduction. Work with a tax professional like us to find out what you can and can’t do. Not only will you feel more secure as you move forward, but we can also give you some help with minimizing your tax liability.
6. Save for a rainy day
Saving is always a good idea, but when you’re working as a freelancer or a gig worker, you’re not getting regular paychecks the way that you do when you work for an employer. There may be times when you’re so busy you can hardly keep up, but you can also have slow periods, or times when your clients aren’t paying quickly. Building an emergency fund will help you smooth out your ability to pay bills during slow patches.
7. Be disciplined about saving for retirement
One of the most valuable benefits that comes with many W-2 jobs is a dedicated retirement plan like a 401(k) or pension. If you’ve fully embraced freelancing and left company benefits behind, you’ll need to set up your own retirement savings plan for when you no longer want to work. Most experts advise treating long-term savings as if they’re a utility bill – something that needs to be paid every month. Setting up automatic contributions to a Roth IRA, SEP IRA, IRA, Solo 401(k) is easy and ensures that your nest egg is building.
Ask any successful gig worker or freelancer about their jobs and you’re likely to hear that they love it. But dig a little deeper and you’ll also find out that they count their management of finances, taxes and savings as an important part of their responsibilities. By following these tips and including them in your daily or weekly tasks, you can avoid headaches and set yourself on a path to success.