The way we work is changing and freelancing is one of the factors leading this revolution. As an article from CNBC.com notes, almost one-third of Americans now do freelance work—a trend that was only further accelerated by the current pandemic.
If you’re self-employed, however, you’re also responsible for tracking and reporting your cash inflow and outflow. As Nashville CPA Evan Hutcheson notes, both longtime and neophyte freelancers should avoid these money mistakes.
Not setting up a corporation
As a freelancer, the line between what’s business and what’s personal is very slim. However, it is in your best interest to set up a separate corporate entity to represent your freelance operations. This way, if you get sued or have outstanding financial obligations, only your business’ assets will be on the line and not your personal assets (such as your home). It’s an additional step that requires quite some paperwork, but you’ll thank yourself in the long run.
Not keeping business and personal expenses separate
In a similar vein, freelancers usually struggle to determine whether a purchase is personal or business related. This isn’t surprising, though: if you work at home using your personal laptop to do freelance work, is your device considered a business expense? Failing to keep the two separate, however, means you’ll have a harder time preparing taxes and may even be subjected to an audit if the IRS finds anomalies. Luckily, the easiest way to avoid this is to get a business credit card and charge all freelance-related purchases there.
Not keeping good records
The IRS won’t take your tax filings at face value; if you claim to have earned or spent a certain amount of money, it’s going to require documentary proof of it. That’s why it’s crucial to have records of all your dealings, whether that’s an invoice to your client, a payment to a vendor, or a store receipt for printer ink. The above-mentioned documents are especially important if you plan to claim exemptions to keep your taxes low.
Not knowing the difference between invoiced and paid
Landing a huge contract is surely something to celebrate. However, you shouldn’t count this project as part of your earnings quite yet. Remember that many clients renege on their contracts and payments, leaving freelancers high and dry. Not counting your chickens before the eggs hatch applies to freelancing as well, so only input an invoice as an earning once it’s actually been paid.
Not reconciling your financials each month
What you think you earn and what’s actually in your bank account are not always the same thing. To get an accurate number, you need to reconcile your income and expenditures monthly. Getting an accurate picture of your freelance business’ profitability helps you craft a financial strategy, whether that involves doing more work, charging current clients a higher price, or cutting down on certain expenses. The longer you put off this task, the harder it is to catch discrepancies or money sinks that could harm your operations.
If you need help sorting out your freelance business’ financials, get in touch with Evan Hutchison today. With his assistance, you can focus more on doing great work and less time worrying about your bookkeeping.
Money Mistakes For First-Time Freelancers, TheSelfEmployed.com
The 7 bookkeeping mistakes small businesses and the self-employed should avoid, SimplyBusiness.co.uk