Whether you are a freelancer, a 1099 contractor or you run your own business the finances of the self-employed can be complex. It is important to follow sound practices and to stay on top of things to prevent the paperwork from getting out of control. When it comes to finances, it is best to take a proactive approach.
Here are some smart moves to make to strengthen the finances for self-employed individuals.
Writing out a budget each and every month or completing a timely income statement is always a smart move. With good records, you can find out where your money is going. Perhaps you are spending a large chunk of your revenue on products that are not selling, or maybe you are not spending enough on popular items. The knowledge you gain from a budget, an income statement or a balance sheet can strengthen your business.
2. Get the right bank account
In many cases, it is okay to use a personal bank account for business purposes. This is true if you are an independent 1099 contractor, a freelancer, and in a few other situations. However, for convenience and at times for legal and tax purposes, it may be necessary to have a separate business account.
There are few if any disadvantages to opening a second account. However, there are several benefits of a business account, such as:
- Better records
- Clearer tax receipts
- Reduced legal liability
- Improved budgeting
- Better tracking of profits and expenses
- More efficient use of time.
In some cases, it is required by law to have a separate account for business purposes. This is always true if your company is a separate legal entity or is under a different name.
3. Receive professional advice
Even the simplest of businesses get complex quickly. At some point in your professional development, it is good to check in with a professional for self-employed financial planning. Here are some good sources to consult for financial planning for you or your business:
- Banking institutions
- Tax accountants
- Financial advisors
- Self-employed business owners.
Seek out solid advice to learn how to manage your financial life. Do this every few years, or when you have questions about your specific situation.
4. Manage your taxes
Failure to handle your income taxes properly could result in one of two scenarios. You could get a big refund, which means you gave an interest-free loan to the government. Or you could have to pay a giant tax bill at the end of the year, as well as tax penalties. You might have to file for a tax extension if you do not have money on hand.
Situations vary, but a good rule of thumb is to expect to pay between 25 to 30 percent of your income in taxes. You will have to pay your taxes quarterly, by using IRS 1040-ES. There are also corresponding tax forms for state and local taxes, if applicable. Proper payment of your taxes means no late fees and no bad surprises.
5. Manage your taxes, part II
The second part of the tax equation is to make sure you take all of your allowed tax deductions. This can reduce the taxes you pay by a significant amount. The most common deductions for the finances of the self-employed include the following items:
- Home office deduction
- Transportation related to your job
- Qualified retirement contributions
- Phone bills
- Computer expenses
It is important to keep clear records, as you may have to show these in an audit. You can also deduct 50 percent of meal and travel expenses in the case of job-related travel.
6. Use credit wisely
As a way to manage your cash flow, using credit cards is often a poor choice. If you are not paying off your credit card balance each month, you are probably paying a high interest rate. Simply put, there are better options. A line of credit from a bank, if available, often has more attractive interest rates. Small business loans can also be a smart alternative to the use of credit cards.
7. Get the best savings account
After all of your expenses and financial planning for a self-employed lifestyle is taken care of, then try to save the rest. Look for the best options to put your extra money. Some bank accounts pay a higher rate of interest than others. CDs may be good deals, but your money may be tied up for a year or longer. If you need to withdraw it sooner, there may be penalties.
Financial planning for the self-employed is a critical skill to learn. It will help you get through the lean times, and enable you to enjoy the boom times.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.