Finance 101
Freelancing poses some serious questions related to finances. Among these are Do I need a business bank account? How should I keep track of business finances? Do I have to pay taxes quarterly? How can I invoice my clients? Do I have to spend money to get an LLC?
Each of these are great questions. I’ll attempt to answer some of the ones we asked, but know this is not going to be an exhaustive list. It will simply be what has worked for us.
Do I need a business account?
Since Laura and I are the only ‘employees’ in our business and we only run through about 10-15 projects a year, we do not have a separate bank account. I can see where this could benefit tracking if freelancing is your full-time job, though. The IRS requires you keep tons of records, especially if you have a home office like we do. The way I see it though is I don’t need a whole separate bank account to manage when we already have two IRA accounts, a 403(b), a stock account, a checking, savings, credit card and health credit account. That made me tired just typing it out!
How should I keep track of business finances?
In the past, we have used Quicken entirely to track our finances. And it is simply daunting. There are lots of features, but sometimes these can be overwhelming. This past year we switched all our financials over to Mint.com and haven’t looked back. Mint is simply amazing. In about 15 minutes I set up all my accounts, categorized all my expenses and income and had a clearer picture of my entire financial state. Mint has recently helped us set a budget and stick to it. It sends us weekly email reminders about upcoming bills, lets us know when we are approaching our budget allotment for a certain category, and it also has an iPhone app. Intuit, who owns Quicken, bought Mint out in late 2009 and while I wasn’t too wild about that, they promise to keep Mint the same and so I will continue to highly recommend it.
Do I have to pay taxes quarterly?
Taxes are extremely time consuming, but thanks to Turbo Tax I am still able to do my own taxes. One major piece of advice is track everything. I mean everything. Purchases, purchase dates, mileage, utilities, cell phone, internet, mortgage/rent, etc. The IRS requires you keep hard copies of it all too so you will need to keep good records. Anything I purchase online I also make sure to store receipts in an administrative folder based on the year I purchased it. As for the question, you can if you need discipline and make a lot. Since we don’t make much over $5,000 a year then we usually even out our expenses and earnings (which is what you want). Big profits will move you up in the tax bracket since social security and medicare are not coming out of your checks. Proper management can really alleviate all tax pressures so just be smart.
How can I invoice my clients?
We currently use Freshbooks, an amazing to track project time, estimates and invoices. Freshbooks is a simple, yet amazingly resourceful Web app. And the best part is it links to your Basecamp projects which enables us a more efficient workflow. It’s a breeze to set up and clients’ can even see their own invoices/estimates history. At the end of the year, I use the reporting feature to find out exactly how much I made for tax purposes. For a while we actually had enough client projects to justify paying for Freshbooks. Currently we only have three active clients. Freshbooks allows you to upgrade/downgrade easily which is a huge plus for freelancers.
Do I have to spend money to get an LLC?
This will really depend on your business. I would say it is a very wise idea if you have employees, but since we are a husband/wife team currently our business is filed under our names. Essentially this means your EIN (employer identification number) is your social security number when doing your taxes. You might want to read more on this topic since I’m unfamiliar with it.
I know this isn’t the most exhaustive list and there are probably a million other questions you have. Feel free to leave a comment and let us know your questions or opinions. We are simply excited we can even share about some things that have worked for us.
