7 Money Management Tips for Independent Contractors
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?Independent contractors must be especially mindful of how to manage their finances. From separating personal and business accounts to diversifying income streams, this guide offers advice on becoming an independent contractor with a successful business.
Freelancing can be a fantastic way to earn a full-time income for part-time work. It allows entrepreneurs to set their hours and manage their creative and professional destinies. But even the busiest freelancer knows that sometimes, a business can slow. Client churn happens. Payments may not show up on time.
The best way to stay ahead of money issues is to take proactive steps to avoid them. Spending the time, energy and (sometimes) money to set up effective processes for budgeting and billing goes a long way toward reducing the headaches that come with running a business.
From seasoned entrepreneurs to new contract employees, the following tips can help lighten the load for anyone who wants to learn how to become an independent contractor.
1. Separate Your Business and Personal Accounts
Jumping feet first into work as a freelancer often means taking payments from clients and depositing that money directly into a primary checking account. It also might involve using their credit card to purchase supplies like a new computer or office equipment.
This is a recipe for confusion. At the end of the year, when it is time to itemize receipts and deductions, tracking down all those purchases and payments can be a hassle.
The first thing any entrepreneur should do is to protect their peace of mind and open separate business accounts . The business accounts an independent contractor needs to open include:
Contractors may only use these accounts for the business. Do not make personal purchases with them, even if the rewards are better than a personal credit card. This helps simplify accounting and protects liability (primarily if the business operates as an LLC ).
Opening a business checking account usually requires a few documents, including an employer identification number (EIN) or Social Security number if the business is a sole proprietorship.? Some banks may also require proof of a business license to operate in the state and ownership agreements.?
2. Develop Your Budget
How much money does a business need to be successful? What are the plans for spending business proceeds? How will the company handle billing clients?
Many entrepreneurs do not start with a budget. This is dangerous. Employees of companies without budgets find themselves adrift; owners of companies without a budget find themselves out of business fast.
A great, cost-effective way to keep track of most minimal budget needs is to use a spreadsheet. But most businesses quickly outpace the usefulness and need a little more complexity. In these cases, popular apps like QuickBooks Self-Employed and Wave Financial can help small business owners take their finances to the next level.
Depending on the company a person runs, they may not have any standing expenses or minimal costs like software subscriptions and office space rental. Knowing what kind of hard costs a company — or individual — can expect each month informs how much business a contractor needs to cover them.
3. Set Aside Money for Taxes
Freelancing as an independent contractor offers another wrinkle: taxes. Employers handle the accounting work of taking taxes out of an employee’s paycheck. Freelancers do not have that luxury. They must instead set aside money to pay federal, state and self-employment taxes. Freelancers should request 1099-MISC forms from each client. While the IRS does not require clients who pay less than $600 per year to provide contractors with this paperwork, most companies will choose to do so for accounting purposes.
How much money should a freelancer put aside? The commonsense answer is to save back 30 percent of each payment . Other taxes (like city taxes) may apply depending on where a freelancer lives. Some freelancers pay their taxes annually, while others who pay more than $1,000 in taxes must do so quarterly .
Where should this money live to avoid temptation? A business savings account.
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4. Build Your Business Savings Account
A business savings account allows freelancers to save money for lean times, but it can also be an excellent vehicle for money they do not wish to touch, like the money they need to pay taxes. A good business savings account allows an independent contractor to earn interest on their deposits .
Some business savings accounts require minimum deposits or a cash balance above a specific dollar amount, so a freelancer needs to understand those requirements before they open the account.?
5. Manage Multiple Streams of Income
Another way to avoid lean times? Diverse streams of income . This is something influencers know quite a bit about. One large client can be a great way to start a freelance career, but what happens if that client suffers a downturn in their business and can no longer afford to pay their independent contractors?
The most successful freelancers know that creating several ways of earning income is a fantastic way to stay afloat. What do these income streams look like? They can take several forms, but some of the most common include:
Several simultaneous income streams provide redundancy and can help maximize earning potential, but it can take much work to launch them. Some of them, such as newsletters, may require a built-in audience or learning other marketing skills.
6. Always Pay Bills on Time
Nothing eats into profits more than late fees on bills or missed payments. Building a budget early on in a freelance career can help reduce the risk of missed bills. Automatic payments to vendors and software platforms — made on the company card — can maximize rewards and reduce the risk of a missed payment.?
7. Seek Professional Consulting
New freelancers often benefit from some mentorship. Finding an experienced person who has successfully built their business can go a long way toward helping a nascent independent contractor avoid mistakes and navigate the trickiest parts of running their company.
Networking is one of the most important things a freelancer can do. Not only does it open doors to new business opportunities, but it can put them in contact with potential mentors. Joining professional groups in spaces like LinkedIn is a great way to become more comfortable and familiar with people in their industry.
Bottom Line: Set Your Contracting Career Up for Success
Contracting is an exhilarating way to make a living. But without the proper preparation, it can be a confusing and sometimes frustrating role. Freelancers who take the time to plan and work with a purpose reduce financial friction. They can focus on what matters: growing their business and doing what they love, day in and day out.
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(Reporting by NPD)