5 financial tips every freelance designer should follow
When you’re a freelancer, you’re the President and CEO of You, Inc.
You make all the decisions, set the strategies, put systems in place, accept clients, do the marketing, and more.
You’re also the bean-counter. That puts you in charge of keeping track of income and expenses, setting financial goals, and getting the business on solid financial footing. It also means part of your responsibility is keeping things straight with the IRS (and, I’m assuming, your state’s department of revenue).
Many freelancers go into business without much, if any accounting experience. And while there’s certainly some overlap for those of us who are into our personal finances (*ahem* we do exist), doing the books for your business is a new animal.
So what do you need to know about maintaining “the books” for your freelance web design business? We’ll look at the big-ticket stuff here, but first I need to let you know a few things. I’m not an accountant, nor do I plan to become one ever. That said, I’ve been freelancing since 2010 and I’ve learned a few general financial tips for freelancers in that time. That’s what this advice comes from — general accounting rules. If you need or want specific advice, the best thing you can do is find a real accountant.
On to the tips!
1. A PNL is your best friend
PNL. P&L. Profit & Loss Statement. They’re all the same thing: a monthly tally of your income and expenses. And these puppies are incredibly useful for keeping up with your business accounts.
I didn’t always keep a PNL — for years I just tracked my monthly income and stayed vaguely aware of my monthly expenses. But when my business started growing, my expenses became more complex, and I was ready to reduce my mental load, I started doing a PNL.
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When you think about doing a profit and loss statement, your head might spin and your eyes might glaze over. Numbers, ugh — right? Well…yes and no. These are numbers, yes, but they aren’t all that complicated. And don’t lose sight of the fact that these are numbers you add up just once a month.
Having a PNL sounds fancy. And it can be! There are all kinds of software programs and even apps you can get that can put together a fancy PNL for you. The bigger the business, the more complex your PNL might be.
But when you’re freelancing, here’s the thing: It doesn’t have to be fancy.
My PNL is done in an excel sheet. It has columns for the month, total income for that month and total expenses for that month. That’s basically what a PNL is — income and expenses. You can break them down by category if you want (which can be helpful) but it’s not necessary.
I’ve augmented my PNL with additional columns that automatically calculate a 25% tax rate and the net after taxes. But more on that in a bit!
2. You have to keep track of all your income
Every penny that comes into your business needs to go on record someplace. (Preferably the same someplace!)
I’ve heard some people say that you only have to report income that totals $600 or more from a single client (so if you make $200 from one and $300 from another over the course of the year, you wouldn’t have to report those). This is not accurate.
The $600 thing comes into play with IRS Form 1099, which you should receive from any client who pays you $600 or more in a given year. But the idea that you don’t have to report income that falls under the $600 threshold is false.
You have to report everything that comes in, even if it’s not on a 1099.
3. Income isn’t the only thing that matters
Like I mentioned in the PNL section, expenses need to be tracked. This is important for figuring out your net income (which is going to be lower than your gross income). Net income is important because it tells you how much money is actually going into your pocket.
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That’s a really important number to know.
A lot of people will look at their income and revel in the money coming in. But is the money actually staying in? You need to know what’s going out so you can know what’s actually landing in your pocket.
Track your expenses monthly. You can break them out by category or just lump all expenses together on your PNL. Compare your expenses to your income, and the difference is your net income! The bigger you can get that gap, the better off you’ll be…but you’ll only know if you’re growing or retracting if you actually measure it.
Net income is also a big part of calculating your income taxes.
Some people will bump up their business expenses when they think they’re going to have a high tax bill. This isn’t a strategy I know very much about, but if you think you’re going to get a whopper of a tax bill because your business expenses are pretty low compared to your income, it’s definitely worth a conversation with a tax pro to see what you can do to maximize your business growth while reducing your tax bill.
4. Make quarterly income tax payments, or get penalized
This is something I only learned after making the mistake of not doing it. If you don’t make quarterly income tax payments — and if you don’t make them every quarter (not just the profitable quarters), you’ll get penalized.
Now…the penalties aren’t enormous, but that’s money coming out of your pocket that does absolutely nothing good for you or your business.
My personal approach to quarterly payments is to tally up my net income for the quarter and then send in 25-35% of it. Another approach is to project your net income for the whole year, take 25-30% of that number, and then break that chunk into four payments.
Right now, quarterly payments are due March 15 for Quarter 1, June 15 for Q2, September 15 for Q3, and January 15 for Q4. Then, of course, you reconcile everything on your income taxes, which are typically due April 15. Check IRS.gov and your state’s department of revenue to get the skinny on this year’s due dates and tax brackets, though.
5. Keep your business accounts separate from your personal accounts
This is something I see tons of new freelancers skipping, and that’s a bad idea. You need to keep separate accounts for your business stuff. They don’t necessarily need to be official “business accounts” but they do need to be not-your-personal-accounts. This means your business gets its own checking and savings accounts, credit card, and even PayPal account.
There are two main reasons for this:
1. It keeps your business finances firewalled against your personal life.
If all your client checks are coming into the same account where you’re paying rent and buying groceries, it’s really hard to keep track of. If your personal information gets stolen, your business income is safe. And you won’t just “check your balance” and then spend a bunch of money that’s already earmarked for things like your Adobe renewal and a course payment. No double-dipping means fewer headaches.
2. It makes record-keeping a breeze.
When you look at an account’s transaction history, you don’t have to try to remember whether that Amazon purchase was for office supplies or Doritos. If it shows up on the business card, it was a business purchase. This means you can blitz through your PNL, get to the bottom line quickly, and move on to other things. (It also makes it easy to outsource that kind of thing to a virtual assistant!)
Plus, if you ever have the “excitement” of being audited by the IRS, having these accounts standing independently of personal spending will make your life tremendously easier.
So how do you move money from the business account to your personal account then? Simple: you start paying yourself. Whether you pay yourself a conservative monthly “salary” or you simply transfer out your net income for the previous month (after doing your PNL and knowing that number, of course) is up to you.
Another sub-tip: Use the business checking for income and expenses, and use a separate savings account to store your tax money (until it’s time to pay) as well as any savings you’re trying to build up.
Separate accounts is, bottom line, one of the absolute smartest things you can do for your business.
There’s more, too
Financial tips for freelancers is a subject that goes deeper and wider than any one blog post can cover, but in my experience, these five tips are the critical ones.
If you’ve got each one of these systems and approaches in place, you’re going to be equipped with critical business knowledge that will help you take things to the next level!
What are your best financial tips? Share any accounting advice you’ve learned in the comments below!
Looking for more articles from Ashley? Read through these:
- How to find new leads with higher budgets
- How to hire your first design assistant (and know when you’re ready)
- 7 ways to market your business (and why you need to)
All tips are very useful thanks for posting a great post