The Importance of Balancing Income and Expenses5 min read
Managing money, for a freelancer, can be messy. When I first started, fresh out of college, living with five roommates in a three-bedroom apartment and paying the rent with a string of freelance journalism assignments, I made a lot of mistakes. It’s probably not surprising: I dove right in with the reckless abandon that comes with being young.
Fortunately, if you’re reading this, you’re already thinking about finances, and you should continue to do so—consult with an accountant, read about personal finance, and read as much as you can about how freelancers should manage their income and expenses.
In my first year of freelancing, I was making just enough to pay my bills, my student loans, and to feed myself. Could I have been more frugal? Absolutely, but my lifestyle was far from lavish. Still, the end result was that, when I filed taxes for the first time as a freelancer, I was hit with a tax bill I could barely manage. I never made that mistake again.
First, Do Your Research
Note: The author of this article is not a tax professional. For tax advise, consult with an accountant.
There are plenty of great resources, many of them from the Freelancers Union, that will assist you with learning about how a freelancer should approach paying taxes. If you are coming from more traditional employment and switching to full-time freelancing (or if you’re freelancing enough part-time that it will have an effect on the way you pay taxes), you should spend some time doing research.
There’s a lot to learn, and there are a lot of decisions to make. Should you remain a sole proprietor? Form an LLC or S Corp? These questions all depend on the type of business you run, your level of income, and what makes sense for your particular situation. That’s why you need to get as much information as you can and solicit professional advise when needed.
In your former life, where you held just one job, you could simply take your w-2 every year and file taxes in a few hours. Now, where you have a dozen clients, some of them that had you fill out 1099s, others that simply hired you for a quick gig and paid you through PayPal, and others that paid you cash, it’s up to you to keep everything organized so that paying taxes isn’t a bigger burden than it needs to be.
Tracking Freelance Income and Expenses
First, keep in mind that as a freelancer you will likely be paying taxes quarterly. For each quarter, you will need to have clear records about how much money you made and how much you spent for legitimate business purposes. Again, here you will need to do research into what you are allowed to deduct for your business and what you are not. AND CO can help with this, too—you can simply text a question about whether something is deductible and get a response.
The way you track your income and expenses depends on what works for you. Some people construct elaborate spreadsheets on their computers, and other people prefer a paper filing system—it doesn’t matter what methods you choose as long as they work for you.
The key is tracking everything that is related to your freelance business—for me, I have a spreadsheet where I enter the day I was paid, the company or person who paid me, the amount I was paid, and any other notes that are relevant to the payment. For assignments that require me to travel, I note my mileage beside the payment. For projects that required me to purchase something, I note the amounts and I keep the receipts on file.
The way you keep track of income and expenses will depend largely on the type of freelance business you run. For me, I do freelance writing and music. For the writing, most assignments come in via email from a few companies I work frequently with—I do the assignments, get paid via direct deposit, and that’s it. Some of the companies had me fill out a 1099, and others did not. I track it all, just to be safe. For the music assignments, things are a bit messier—I drive a lot to perform, I don’t know whether I’ll be paid in cash or by check, I also sometimes sell CDs, but then I also spend money on advertisements, to buy merch, and to fix and replace equipment. This requires tracking all travel, all expenses, and all income—from the pack of last-minute guitar strings I need to pick up, to the major repair of an instrument. Expenses can vary greatly—one week I’m paying someone to make a music video, the next week I receive two checks from gigs, and the week after I need to fix a busted guitar. If I don’t enter these things in my spreadsheet immediately, as they happen, they become easy to forget—so I always enter them immediately.
Managing Your Freelance Finances
Besides paying taxes, it’s also important to track your income and expenses to get an honest assessment of how much money you are making—is it enough to cover all of your expenses? To save for retirement? To save for your kid to go to college? Or for that trip you’ve always wanted to take? By seeing the inflow and outflow of money, you can push yourself harder to reach your financial goals. If you’re flying blind—you won’t have as much of an idea of where you’re at, and if you don’t know where you’re at, it’s harder to plan where you’ll go.
Freelancing can be a fun, exciting, and creative way to make or supplement your income—but if you don’t manage your money correctly, you’re only going to make things more difficult for yourself. A little bit of work, organization, and planning now saves a lot of headache and effort in the future.
I wish someone had told that to me when I first started—I probably would have figured out a way to supplement my income even more, so that I could better survive that first tax hit as a freelancer, but I guess I had to learn the hard way—you don’t have to do the same.