Joining The Gig Economy? 10 Finance Pros Share Tips For New Freelancers

More and more people are turning to freelance work to either supplement their income or as their full-time career. But while joining the gig economy can boost your bank account and let you pursue a variety of interesting projects, it also comes with some extra responsibilities. Not only must freelancers track down their own clients, but they must also take on some of the accounting tasks an employer would usually handle. 

Still, freelancing can be a rewarding option in more ways than one—just make sure you’re prepared to take care of the financial details. To help, 10 experts from Forbes Finance Council share some important information and smart advice to help ensure your freelance career is on solid financial ground.

1. Plan your spending conservatively.

Whether you find your own “gigs” or subcontract through others, gig work by its very nature is fluid and uncertain. Therefore, be conservative in your planning since on average you may only be at 60% capacity annually. If you spend with the assumption that you’ll be at a lower than full capacity, you’ll have the savings and financial buffer for leaner times. – Aaron Spool, Eventus Advisory Group, LLC

2. Maintain careful and clean records.

Keeping clean records helps immensely once tax season rolls around and it’s time to gather data. Opening a separate bank account for freelance transactions keeps records clean for taxes and aids in easily identifying profitability. Utilize a single-member LLC for further separation—if it’s set up as a disregarded entity, taxes flow through to an individual return while providing liability protection. – Megan Lezar, QuadCap Wealth Management

3. Consider incorporating.

I believe it’s important to decide whether or not to incorporate and if so, what type of corporation to create. Side gigs can generate a lot of income, which can lead to a lot of taxes. Side gigs can also introduce financial risks that most employees have never encountered. Proper insurance coverage can protect the personal wealth of side-hustle entrepreneurs. – Todd Sixt, Strait & Sound Wealth Management LLC

4. Separate personal and business expenses.

Separating your personal and business expenses will help immensely come tax season, especially as you grow your freelance business. Your future self will thank you if you take the time to open a separate bank account for your business, get a small-business credit card and establish a simple way to track your monthly finances. – Jenn Flynn, Small Business Bank at Capital One

5. Consult your tax advisor before beginning.

Freelancing is a great way to earn income, but remember it’s still income, which means that you have to track it and report it or you will end up with a big tax liability. Ask your tax advisor ahead of time if there are expenses you can deduct from your freelance income, and make sure you track these ahead of time rather than at the last minute. – George Souri, LQD Business Finance

6. Be ready for the self-employment tax.

Those participating in the gig economy need to know that the IRS considers them self-employed. This means they’re responsible for the self-employment tax, which is 15.3% of earnings: 12.4% for social security and 2.9% for Medicare. When you work for an employer, both you and your employer are responsible for half of each—6.2% for Social Security and 1.45% for Medicare. – David Haass, Elite Insurance Partners, LLC

7. Always set aside money for taxes.

No matter how many jobs you take, always set aside enough money for tax time. When freelance gigs start coming in, it may be tempting to spend everything you earn. However, this could hurt when it comes to tax time. Keep a thorough record of your invoices, contracts and payments. Be sure to take a percentage from each payment you receive and set it aside so you aren’t blindsided come April. – Greg Herlean, Horizon Trust

8. Run multiple scenario analyses.

When you are starting your freelance gigs, make sure that you set two financial target numbers: one for the best-case scenario and one for the worst-case scenario. It will help you manage your expectations and budget better. As a freelancer, it is hard to predict total market demand and timing, so it is important to run multiple scenario analyses in advance. – Kristy Kim, TomoCredit

9. Focus on keeping your debt down.

Make sure that whatever is being put on a credit card can be paid when the bill comes in. You don’t have to pay the bill in full, but making only the minimum payment can cause more debt to pile up and hurt your overall credit score. It’s important to keep debt down to avoid bigger problems down the road. – Jose Rodriguez, Got Credit?

10. Plan for retirement.

There are many retirement plans available to people generating self-employment income. These allow you to save and invest for the years ahead in a tax-favored manner. Some plans must be established before the end of the year, so start looking at alternatives this summer. – Sandi Bragar, Aspiriant

Original Article: https://www.forbes.com/sites/forbesfinancecouncil/2021/04/09/joining-the-gig-economy-10-finance-pros-share-tips-for-new-freelancers/?sh=4a1b473079a1