Practice Pointers - Making Tax Time for Freelancers Less "Taxing"

Transitioning from getting a regular paycheck to getting paid as a freelancer can result in tax shock if you have failed to properly plan for your tax liability. With some simple planning, it can be much less traumatic.

CAVEAT – The following constitutes general suggestions of the author who has been self-employed for 13 years. It does not constitute legal or tax advice for any particular reader and by no means is a substitute for advice of a tax professional.

Regular paychecks have taxes withheld in an amount that at least approximates your tax liability at year’s end. This, of course, does not happen with self-employment income. Not only are there no withholdings, but you will probably be subject to self-employment tax in addition to your regular tax rate. Failure to pay estimated tax payments (as many freelancers do), you could result in a hefty tax bill on April 15th and possibly even additional penalties.

There are ways to avoid or minimize this unpleasantness.

First, and most importantly, talk to a CPA. It is impossible to overestimate the value of a competent CPA to your business. They can review your personal financial situation and make appropriate recommendations for recordkeeping and tax planning that fit your own situation.

Second, separate your business and personal finances. Whatever the structure of your business, take practical steps that will allow you to record and track income and expenses that are related to your business. It is complicated and inefficient to go through your personal checkbook to pull out business-related expenses for your tax returns, or other purposes. A simple solution can be to have a separate checking account into which you deposit all fees earned, and out of which you pay all business expenses. This will help you work with your CPA to maximize available deductions and ensure that your tax returns are correct.

Third, set aside money for taxes where you won’t be tempted to spend it. Armed with the information from your CPA, allocate a certain percentage of each paycheck to estimated taxes. It can be helpful to set this aside in a separate savings account to have handy for estimated tax payments or year end tax liability. Remember, your employer took this money out of your paycheck before, now you are your own employer.

Practice Pointers - Time Management for Freelancers

One of the most difficult transitions between a salaried job and freelance work can be learning how to manage your time. There is no employer telling you when and where you have to be, and no one looking over your shoulder if you take a long lunch. As most freelancers will confess, there can be exhilaration initially with that freedom, sort of like playing hooky from school. However, as with everything else in life, moderation is key. Some simple guidelines to time management will help keep you on track.

• Keep regular hours. You may have changed bosses, but you still have a responsibility to your “boss” to maintain a reasonably predictable schedule. This ensures that you put in enough hours to perform your contract work and manage the business side of your operation, and also lets you know when you are off work and can relax. This is especially important when you have a home office.
  
• Schedule time for non-billable tasks, such as billing, marketing, etc. It is too easy to get engrossed in the current project you are working on and forget the ongoing business aspect of being a freelancer. Set specific times in your week for reviewing and handling your finances, and for regular direct and network marketing.
  
• Keep a timesheet. Staying busy is not the same as making money. Keeping track of your time, even if you aren’t billing clients on an hourly basis, allows you to monitor how effectively you are spending your time. Record time spent on necessary, but non-billable work also so you can factor that into your pricing.
  
• Schedule down time. As an employee, you got certain allocations for sick days, vacation, and holidays. As a freelancer, you should have the same benefits, but you have to give them to yourself. Set aside a certain amount of income each month to cover for times when you are not working.