10 [Actually Helpful] Business Accounting Tips for Freelancers and Microconsultants
Welcome to our [Actually Helpful] series of blog posts that are geared towards people who are new to freelancing or microconsulting. We'll go over several different aspects of flying solo in the business world with as many practical tips as possible, without going off the deep end in detail. Feel free to use these tips as springboards for further research, or to fuel your questions to our various business advisors on Pruuf, who range from marketers to accountants and more.
Topic 1: Business Accounting for Freelancers and Microconsultants
Unless you’re an accountant, we’re betting tax season has always been a little bit of a foreign territory. Since this discomfort typically comes along just once a year for salaried employees, it’s pretty easy for them to suck it up and muscle through Turbotax or fork over some cash to have an accountant do it. However, freelancers (including microconsultants) can’t afford the same luxury of only thinking about taxes once a year.
If you’re a freelancer or microconsultant, there are many things to keep in mind regarding your finances. Being smart about them will minimize the amount of taxes you’ll pay, help you avoid getting penalized by the IRS, and will also avoid numerous headaches and confusion.
Fortunately, since Pruuf is a platform that strives to connect people to the best advice they need, we wanted to do the same for our own network of freelancers, mentors, microconsultants, and overall gig workers. Read on, because we’ve come up with a list of tips and simple habits that should help make your financial life much easier!
1. Separate your business and personal accounts
This tip is extremely basic but extremely important: if you haven’t done so already, it’s a good idea to keep your business and personal finances separate. Why? It’s so much easier to track the profitability of your freelance work when it’s separate from your other income or savings. You’ll be much more aware of how much money you put into, or earn from, your freelance work, which will make it much easier to know when to quit your day job.
You can do this by simply opening up a second “personal” checking account, or else opening up a business account with low/no fees. Be sure to look into the terms, like how many transactions are allowed monthly or if you need to keep a minimum balance.
2. Do your homework on taxes
Do you know what a 1099 form is or that you can expense part of your living costs if you work from home? It’s important to educate yourself about taxes since you’ll need to do them quarterly when you are working for yourself, instead of annually (bonus points to those who were already thinking that the system is not exactly quarterly). In fact, if you wait to pay your taxes until the end of the year, you may be subjected to a penalty. This is because the IRS wants to receive your taxes throughout the year, just like they receive from the paychecks of salaried employees.
Additionally, taxes are much more complex when you are your own boss - for example, you’ll pay 100% of Social Security and Medicare taxes instead of the 50% that your employer pays. While it sucks that you’ll be paying more into Social Security and Medicare, you’ll also be able to deduct more expenses than if you only worked at a W2, salaried job. Be sure to familiarize yourself with the types of things you can deduct before tax season rolls around. This will help you keep track of those expenses as they come in, instead of having last minute scrambles every quarter.
In short, make sure you know at least the most practical ins and outs of tax law so you aren’t blindsided when it’s time to report them!
3. Have a system for invoices
Invoices aren’t just for your client’s information - they are also records for your own benefit. When you’re numbering your invoices, don’t just number them arbitrarily (please don’t start out with “invoice #1”, “invoice #2”, “invoice #3”, etc.). Instead, think about how you are dividing your work and create a numbering system that follows that logic. This will make them easier to find later if you want to track down a specific one. For example, if you’re invoicing multiple times for a specific project, you may want to create a numbering system that includes a project number before the invoice number, or that incorporates the date.
4. Technology is your friend - use it!
Since “necessity is the mother of all invention”, there’s no surprise that many apps and web-based software have been developed to help you keep track of your finances. Think of your weak spots and then look around for an app that can help. From aggregating different financial accounts to budgeting, products like Mint can keep you on track. If you need a more comprehensive solution that tracks income and expenses, records receipts, generates invoices, and can even do payroll, look to a product like Quickbooks, with plans starting at $10/mo. There are also invoicing apps you can upload on to your smartphone if you need to do invoicing on the go. These programs will not only help you keep things organized, but also usually offer analytics so you can see your business performance at a glance.
5. Create a paperless filing system, even if you’re saving receipts
While we’re on the topic of technology, it’s also handy to have a digital system for entering your expenses, or even just to take a picture of receipts. Even if you’re hanging on to the paper copy, you can create a naming convention for the digital versions that will help you track them down if you need to. The government does require that you save original copies of bigger-ticket purchases you’re expensing, so make sure you do have a place for those as well.
While there are many apps and products out there designed specifically for this, a simple alternative is simply creating a folder in your Google Drive or Dropbox account for each tax year, and then dropping photos of your receipts in there as you go. Just be mindful that modern-day camera phones take fairly high resolution photos, which means each photo will add up to several megabytes each and can clog up your storage space if you track lots of receipts that way. However, much of a freelancer’s or microconsultant’s work is now done remotely, so we’re going to go ahead and guess that most of your receipts will be sent digitally via email.
6. Keep at least generally up to date with new tax law
Homework isn’t typically described as fun; ongoing homework is probably less so. Nevertheless, it’s worth doing if it’ll save you money and reduce headaches down the road. Keeping "generally up to date" means you'll quickly hear if there's a new tax law passed that's worth spending more time researching.
For example, if you aren’t already aware of the Tax Cuts and Jobs Act, it’s a law that was passed in December that increases tax cuts for small businesses, including freelancers. 2018 tax law now stipulates that there is a 20% deduction for “pass-through” income to a sole proprietor, LLC, or s-corporation. However, you won’t be eligible if you’re doing your freelance or microconsulting work through an outsourcing agency - so beware of what you claim if you’re in the gig economy! Pruuf is legally considered a “venue”, which means it’s a platform by which you can sell your services, just like Google provides a platform for accessing people’s websites. Bottom line: take that 20% deduction on the taxed income you receive from Pruuf!
Although this law is set until 2025, it’s a good idea to keep yourself knowledgeable about developments in tax law, since they change all the time!
7. Keep money in your business account for expenses
You’ve probably heard common advice that you should put any money you make back into your business - and it’s true for more than one reason! Aside from investing profits back into your business to make it stronger in the future, you’ll also need to keep some money in your business account to cover expenses until you start earning enough to make a permanent withdrawal. That way, you won’t have to constantly transfer money back and forth all the time between your business and personal account whenever funds run tight, and it’s much easier to keep track of.
8. Decide on a monthly investment or withdrawal
If you’re just starting out, you may need to move money from your personal account to your business account to keep your new career afloat. This is okay. But If you’re already making a profit, of course you’ll want to take money out from time to time and enjoy the fruits of your labor!
Either way, once you’ve been keeping track of your business finances for a few months, a good way to keep things simple is to decide on a monthly sum that you can afford to either invest into your business account or take out of it as a paycheck. That way, you don’t have to keep track of multiple deposits or withdrawals when it’s time to prepare a financial statement.
9. Dividends, salaries, and draws - oh my!
A paycheck is not a paycheck is not a paycheck. There are actually different ways to pay yourself, whether it’s through paying yourself a dividend, a salary, or an owner’s draw. These methods are all taxed differently, and also further depend on how your business entity is structured (sole proprietorship, LLC, S-corp, etc.). You can even get fancy and combine different kinds of payouts, like “guaranteed payments” along with dividends. With several options and combinations of payouts available depending on your specific business needs, you can go from very simple to very complicated. Just be sure to do the work in the beginning to figure out the best method for your particular situation.
10. Consult with a professional if you’re unsure
This last one is obviously close to our hearts, but it’s a good one! Everyone needs a little help from time to time, and if you’re finding yourself in over your head, consulting with a professional can help you avoid making expensive mistakes, or accumulating tax-related fines. Just be sure to engage with a certified financial professional. Bonus tip: “enrolled agents” are a special class of financial professional that is able to practice throughout the whole country and represent people before the IRS if they get audited. These two reasons are pretty compelling for several reasons - if you live in a city or state with a higher-than-average hourly rate for CPAs, you can look for an enrolled agent that can help you remotely from another state. Additionally, since enrolled agents must consistently further their education in the field and spend lots of time representing people being audited by the IRS, you know their advice will be sound.
Keeping your finances in top shape may sound like a real chore, but once you set yourself up right and then fall into a few good habits, the payoff will be well worth it! Business finances are like cleaning the house: if you do it often, you’ll barely notice the effort - but let it slide and suddenly you’ll have a disaster on your hands.
And finally, if you’re interested in becoming a microconsultant with Pruuf so you can sell your insights and advice, all on your own terms, please apply on our website or within our iOS app! Otherwise, you can find general information about what we do on our microconsulting 101 page and more insight on how our microconsultants operate on our advisors page.