A friend is setting up as a freelancer and mentioned he’s unsure about the money and tax side of things. Over the years I’ve received some great freelancer money tips on how to manage the personal and tax sides of freelance finances.
Note: I’m from the UK so there are some UK relevant tax tips here – it may differ in your country so please check the government taxation website for your area.
Separate your bank accounts
I’m a sole trader, but still separate my bank accounts. By doing this and separating ‘business’ money from ‘my’ money I can pay myself weekly and manage my personal budgeting more easily.
As well as splitting personal and business money, I’ve got business accounts at two banks and each has two or more sub-accounts. This means I can split up my money for my wages, tech purchases and tax liabilities. I am always going to need to keep up to date with tech so I can test websites out on the current devices and web browsers, so putting money aside for these large purchases is vital.
The tax money isn’t yours
I put 30% of my income straight into the tax account as it’s not mine. I got confused about how much I actually had to spend when it was all in one account, so it now goes straight into a separate account and isn’t touched. This removes the stress of scrabbling around for funds twice a year when we pay our tax in the UK.
The tax burden is more than I initially though too as it’s not just income tax but two types of National Insurance (just another stealth UK tax) and my student loan repayments. This caught me out at first!
Tax: Paying it is a long time from when you earn it
You will be taxed way in the future from going freelance and this can lead to you thinking you’re better off that you are, and then getting an unexpectedly large tax bill. Not only do you need to pay your tax on that money from a year ago, but in the UK we have to pay half of next year’s estimated tax on top of that!
Simple forecasting with a spreadsheet
A top tip from a business owner contact is a simple spreadsheet helps me forecast my income for the next couple of months. This helps me see where any quiet times might be and relax knowing that I have money coming in at certain times in the future. It only takes half an hour to set up and 5 minutes to update weekly to keep track of where I’m at. If I am considering a large purchase like new IT equipment I can plan to buy when funds are highest so I’m not stretched.
Freelancer money tips summary
Setting up as a freelancer is exciting and the money side of things can be hard to see properly. By separating money into different accounts for business and personal use as well as separate ‘pots’ this can help you keep track of your available money. Keeping tax money separate is vital as is doing some simple forecasting to see what your cashflow will be like for the coming months.