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The Guide To Organizing Finances For Freelancers

MileIQ, Tax Advisors
Many freelancers have trouble organizing their finances. This article walks you through how to organize finances for freelancers.

How to Organize Finances for Freelancers

The best way to organize your finances as a freelancer is to become more aware of both your business expenses and your personal expenses. This means that every month you should have a month-end budget/financial statement for your business as well as one for your personal life. This will help you understand your cash flow and organize your finances.

In order to create these month-end statements, you’ll need to organize your finances using the following three steps:

  • Separate business and personal expenses
  • Use the right accounting software
  • Understand your self-employment taxes

Failure to do so will result in messy and illegible finances. Let’s now talk about each of these three steps in greater detail.

Separate Business and Personal Expenses

The number one thing that all freelancers should do immediately is separate their business and personal expenses. Unfortunately, it’s common for freelancers to operate with a single bank account and a single credit card for all of their transactions. While this may seem convenient, commingling your business and personal expenses over-complicates your finances.

When organizing your finances, you should get two separate bank accounts as well as two separate credit cards. One bank account and one credit card will be for your business and the other account and card will be used for your personal affairs.

This should better help you keep your business and personal expenses in two distinct categories.

Use the Right Accounting Software

Freelancers rarely use accounting software, if ever. Yet, using the right accounting software goes a long way toward organizing your finances. The right software will also help you track customer or client payments as well as create and send invoices, better organizing your finances.

Choose the right solution for your needs. Look for the ability to:

  • Organize finances by business category
  • Organize by personal expenses
  • Give revenue forcasts
  • Produce budgets and financial reports.

Understand Your Self-Employment Taxes

One of the largest problems with a freelancer’s finances is often taxes. Many freelancers fail to realize that if you work for yourself you’ll have to pay self-employment taxes. If you make over $400 per year in freelancing income, you’ll have to pay somewhere between 15 percent to 16 percent more in taxes than if you were a W2 employee.

You may reduce your taxable income and save money on taxes with the steps above. Make sure you categorize your business expenses correctly. This includes expenses for an office space, new work computer, client entertainment and more.

You can use those correctly categorized business expenses to reduce your taxable income. This effectively reduces the amount of earnings that will be charged the self-employment tax and all other income-related taxes.

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