So, you’ve invested your time prudently, signed your first freelance contract, and you’ve just received your very first payment! It’s an exciting time in your freelance career, but now that you have earnings to speak of, it’s important to address a topic that sends shivers up many a freelance writer’s spine: accounting and taxes.
I’ll admit it, I’m far from the most organized person on the planet. I’ve been known to shuffle papers and stick them in the back of my desk drawer, with financial statements and tax forms scattered among take out menus, junk mail, and old business cards. This approach works in the short term, but come springtime, you’ll find yourself in a mad panic trying to get everything ready for the April 15th deadline.
Disclaimer: Hey, I’m no lawyer or finance guru. The information contained in this post is based largely on personal experience, and should not be used in place of a professional’s guidance. I will not be held liable for any misinformation published below.
Where Is Your Money Going?
Income from an employer normally follows the following trajectory: earnings -> personal bank account -> expenses. Of course, as an independent contractor, you don’t receive income from a single source. Instead, you might be juggling payments from a handful of different clients. Furthermore, you incur business expenses that you would never face as a traditional employee. From marketing costs to new computers, business services, and so much more, your expenses have nothing to do with your personal life and everything to do with your professional endeavors. While personal expenses aren’t tax-deductible, you can deduct many business costs from your annual tax return. Without a clear idea of what expenses came from where, however, how are you going to accurately document this information?
Understanding Your Legal Obligations
Believe it or not, you don’t have any legal responsibility to open a business account, whether you’re operating as a sole proprietor, LLC, or corporation. Instead, the IRS simply requires that you keep accurate records. Of course, how tricky is going to be to keep accurate, straightforward records when you can’t differentiate between the $50 you spent on printer ink and the $50 you spent on pizza for your Superbowl party? If you’re not keeping fastidious records, you could easily miss deductions that would save you big money on your return. Even worse, poor records could leave you with one awful migraine if the tax man comes knocking for an audit.
Consider An Alternative: PayPal
I’m a huge proponent of PayPal, for a number of different reasons. PayPal offers a huge assortment of solutions for businesses, including payment processing tools, an intuitive invoicing system, and a business debit card for easy access to your earnings. (The debit card also offers 1% cash back on all of your purchases—nice extra perk!) If you’re only working with a few clients (or using one of the many freelance platforms that supports PayPal), PayPal could be an affordable tool for keeping your finances in check.
Want more information? Pat Flynn has an awesome blog post exploring the ins and outs of business checking, along with a detailed explanation of the differences between self proprietorship and an LLC that I recommend whole-heartedly!
How do you keep your business income and expenses separate from your personal account? What’s the best tool you’ve found for managing your freelance earnings?