Money management is one of those super important things freelancers would rather forget. Taxes and bookkeeping and spreadsheets—oh my!
But it doesn’t have to be that bad. Getting your finances under control can free you up to focus on what you love while also saving you money. Now is the time to get serious about your finances. Do right by your business and take accounting seriously.
We talked with veteran accountant Joanie Gable and peppered her with questions about freelance finances. You can watch the full webinar, and we’ve pulled out some insights below.
1. Get an Accountant
First and foremost, get yourself an accountant. That’s right—you don’t have to do it yourself. You should always hire people to do what you’re not good at. You encourage your clients to hire a website expert instead of doing it themselves, so take your own advice and hire a financial pro.
For most freelance businesses, it’s not going to be that expensive to have someone look over your books and file your taxes. In most cases, you can do your bookkeeping yourself and bring in the account for the big issues—setup, questions, and tax season.
2. Find the Right Accountant
So how do you find a good accountant? Look for someone eager to work with small businesses. You also want someone who’s going to help you improve your systems and think long term. In other words, you want a strategist, not just a bookkeeper.
Plenty of accountants will be happy to go through a box of receipts or compile your numbers into a tax return. While that’s helpful, it doesn’t help you maximize your deductions or make the most of your money. You want an accountant who’s going to tell you how to do things differently to save more money.
3. Ask Questions
Whenever your accountant says something or gives advice, you should understand it. If you don’t understand, ask questions. Finances for a freelance business aren’t so complicated that you can’t comprehend it. Your accountant should be willing to take the time to explain things to you—that’s their job. You don’t have to love accounting, but you should understand what you’re doing and why.
4. Corporate Setup
Even if you’re a solo freelancer working at home, you should have a corporate setup. A corporate structure is a smart way to separate your business and personal life. If something terrible happened and someone sued your business, a corporate setup would mean they could only go after your business assets and not your personal assets (like your house).
Your corporate setup can have various advantages and an accountant can help you weigh the pros and cons. Setting up an S-corp can avoid some payroll taxes, while a single-member LLC is super simple and cheap to set up.
5. Keep ‘em Separated
That corporate structure is just the beginning of keeping things separate. You also need to keep your personal and business accounts separate. Create a separate business banking account where you pay for expenses and deposit income.
You need to be careful about moving money back and forth between personal and business accounts. Whenever you do that you should have a reason—you’re paying yourself a salary or reimbursing an expense or giving your business a loan. Be sure to document it clearly. Otherwise you risk “piercing the corporate veil,” which is legalese for trouble. In short, you separate personal and business to protect yourself, but if you blur those lines you endanger that protection.
6. Home Office
The home office is a big deduction and an accountant can help you sort through all the details. In short, a proportion of any expenses that go to maintaining the house can be deducted. You need to do the math based on square footage, but if your office is one-tenth of your house, you can deduct 10% of all expenses—power, water, trash, internet, etc. If you see clients or contractors in your home, this can also apply to expenses like yard care or a maid service.
But if you do see clients in your home, that also opens you up to liability. You should have an umbrella insurance policy or a business ownership policy. Talk to your insurance agent.
7. Vehicle Deduction
A vehicle can be another big deduction, though there are specific rules you need to pay attention to. One approach is to track business mileage on a vehicle and then take the per mile deduction. But if you do a lot of driving it might make more sense for your business to purchase the vehicle and make the entire thing (and its maintenance) an expense. In order to do this you have to use the vehicle at least 50% of the time for business, and there’s also a way to pay proportionally for any personal use.
8. End of the Year Purchases
The end of the year can be a good time to make big purchases, especially if you had a good year and have cash on hand (and will therefore also have a big tax bill). You can take a Section 179 expense deduction, which basically claims the entire amount in that year as opposed to spreading it over multiple years by capitalizing and depreciating it.
9. Nonprofit Deductions
A frequent question is if you can deduct work you do for a nonprofit. Unfortunately, the answer is no. Charitable donations are deductible, but volunteer work is not.
10. Dealing With the IRS
Sometimes we treat the IRS like the boogieman, but don’t be afraid of the IRS. Especially at this level, audits are mostly random and not based on specific behavior. So a home office deduction is not going to make you more likely to be audited.
If you do get a letter from the IRS, talk to your accountant before paying anything. The IRS does make mistakes and it’s easier to let your accountant sort it out first.
11. Employees vs. Contractors
Another common question is the difference between employees and contractors. It’s an important question because there are much stricter rules for how you compensate employees. It’s also important to know the difference because it’s strictly enforced.
There’s a detailed checklist that determines the difference, though much of it comes down to control. If someone is free to choose when and where they work, they’re likely a contractor. If you set hours and mandate a location, they’re likely an employee.
12. Accounting System
Finally, you need to set up a system to keep track of your finances. Your accountant can help you set it up, but in most cases it needs to be something that you maintain. So find something that works for you, and use it.
It can help to set aside specific time each month to go through your accounts. This is a good way to avoid putting off your bookkeeping and having to catch up come tax time.
Speaking of tax time, another helpful strategy is to create separate bank accounts for things like salary, overhead, and taxes. You can allocate your income as it comes in and keep your money set aside for specific purposes.
More Accounting Help
Managing money has always been a big challenge for freelancers. But don’t be intimidated—it’s all about what you do: Money management is 5% knowledge, 95% behavior.
- Understand the basics of freelance finances.
- Remember to prepare for tax time.
- Get schooled by Budget School founder Phylecia Jones in our webinar, “How Freelancers Can Stop Sucking at Budgeting.”
- For more details on tips and questions, watch our “Ask the Accountant” webinar with veteran accountant Joanie Gable.
The key is to get started now.