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7 Common Financial Mistakes New Freelancers Make (and How to Avoid Them)

Caroline Goldstein

Staff Writer at Fundera
Caroline is a small business and finance writer at Fundera. Before coming to Fundera, she received an MFA in Fiction from New York University. She loves finding creative ways to help entrepreneurs grow.
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In some ways, freelancing is the dream: You get to choose clients and projects that excite you, create your own schedule, and get paid for doing exactly what you love. But without the safety net of an employer-sponsored salary, you’ll also need to be responsible for your own financial obligations—both personal and professional. Unless you’re a freelance financial pro, too, then, you’re likely to make one of these common financial mistakes as a new freelancer.

Most often, those financial mistakes fall into two camps: personal finance mistakes and tax-related mistakes.

As a freelancer, your business may seem necessarily personal—after all, you’re both your own employer and employee. But without a clear separation between personal and business finances, you’re vulnerable to making a few missteps, like failing to budget properly or forgetting to save for retirement.

Plus, when tax season rolls around, you’ll have a tougher time disentangling your business income and expenses from your own. That adds an unnecessary headache to the tax-paying process, which is already a bit more complicated for self-employed individuals than it is for regular wage earners. And there’s another big danger, too, that we’ll tell you about. (Spoiler: Potential legal bad news.)

But none of this is meant to scare you off from becoming your own boss! We’ll walk you through seven of the most common financial mistakes that new freelancers make, and how to avoid them. Then, with just a bit of planning—and some excellent business accounting software—you might become just as savvy with the numbers as you are about your actual profession.    

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Common Personal Freelance Financial Mistakes

Staying on top of personal expenses is more than enough for most people. But when personal and business are sort of one in the same, things only become more difficult. It’s certainly not just you.

You know that when you’re your own boss it’s insanely important that you watch all of your spending—both your business and personal. It’s so much easier said than done, of course. But when you’re caught up in the hustle of hitting your deadlines and finding your next client, logging every transaction exactly might not be top of mind.

Here’s exactly what to look for. Lots of new freelancers make these mistakes with their own money. The good news is that there are easy ways to fix them all.   

1. Not Budgeting Your Personal Expenses

Budgeting is tough, or at least unpleasant, for most employed folks. And for freelancers who don’t rely on a fixed, steady paycheck, parsing out the cash you do earn can seem truly terrifying. But if you don’t budget, you might inadvertently blow your earnings on incidentals during a prosperous month, then have to scrimp if business is slow the following month.

The Fix

Experts say that you should stick to the 50/20/30 budgeting rule for your after-tax dollars:

  • 50% on needs
  • 30% on wants
  • 20% on savings

Needs include non-negotiable expenses like groceries, rent, utilities, and car payments. Wants are the extras that make you happy but which aren’t crucial to your survival, like dining out, clothes, vacations, and gadgets. And savings includes retirement plans, emergency funds, savings accounts, and any investments you make.     

Use a budgeting app like YNAB (You Need a Budget) to track all your expenses, which The Wirecutter picked as the Best Budgeting App. That way, you can see exactly where each factor of that 50/20/30 budget is going, and adjust accordingly.

2. Mixing Your Personal and Business Finances

We get it: Entirely separating your business’s finances from your personal finances probably seems like an unnecessary addition to your miles-long to-do list. As a freelancer, you are your business. Why complicate matters with a separate business credit card and a business bank account?

Actually, in the long run, not separating your business and personal finances is what complicates matters. The best way to simplify your finances—and, by extension, your life—is to sign up for a dedicated business credit card and a business bank account.

Beyond what we mentioned before regarding minimizing headaches come tax season, there are potential legal implications for not separating out your books. First, if the IRS ever comes knocking, you’ll want to make sure your books are squeaky clean, which means it’s easy to see what’s business and what’s personal. If the IRS needs information on your taxes, you need to be able to easily provide it. They’re certainly not going to disentangle any info for you.

More pressingly, though: If you’ve set up a freelance LLC to help manage your new freelance business (and we highly suggest you should) to protect yourself from legal exposure, this is essential. You won’t get the benefit of that “limited liability” without separation, because there’s no way to distinguish you from your business entity.

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The Fix

Get those business accounts that you need.

Get a Business Credit Card for Freelancers

Having distinct credit cards for personal you and professional you makes tracking your business expenses a whole lot easier. Come tax season, sorting through your credit card bills and trying to remember which charges were personal and which were professional eats up hours of the day you’d want to spend by actually doing your job. (Or relaxing, because you deserve it.)

Plus, lots of business credit cards are loaded with rewards (and even hidden perks) that can help you grow your business. The American Express SimplyCash Plus Business Credit Card, for instance, is ideal for freelancers looking for an extra cash cushion. With this card, you’ll earn 5%, 3%, or 1% cash back, depending on where you spend your money. Eligible spending categories include office supply stores, wireless phone services, advertising, restaurants, and gas—aka essential, everyday purchases.

Plus, there’s also a 15-month 0% intro APR period, so if you’re just figuring out your cash flow situation, you don’t have to worry about carrying a balance for the majority of the year. After your 15 interest-free months are up, a variable APR sets in at a rate depending on your creditworthiness. This rate will also vary with the market, so check Amex’s terms and conditions for the latest APR information.

There’s also no annual fee if you decide you like this business credit card.

    

If you’re not ready to jump headfirst into a business credit card as a new freelancer, that’s entirely understandable. You’ll still want to keep your finances separate, though, and a great way to do that is with a prepaid business credit card.

Bento for Business is a prepaid Mastercard that’ll let you preload funds onto your card and use it wherever Mastercard is accepted for any of your business purchases. Although this card doesn’t build credit, it’s a really smart way to begin tracking your business expenses and disciplining yourself to keep your freelance spending off of your personal card.

Plus, once you see your spending patterns (aka figuring out whether you’re using your card for supplies, coffee shops, or whatever), you can then get a business credit card that’ll maximize your business spending when you’re ready to jump.

In the long run, using a business credit card saves you time and money—two of your most valuable resources as a freelancer.

Set Up a Business Bank Account as a New Freelancer

Establishing a business bank account gives you certain protections as a small business owner. First of all, with a business bank account, you can make sure that you’re not personally spending the money you’ve set aside for yourself to run your business. You want to protect that personal money for long-term funds like retirement and health care, and for monthly necessities like rent, utilities, and car payments.

Also, once you’ve done the paperwork to establish yourself as a freelance LLC like we mentioned above, you’ll be thrilled to have that business bank account. That’s because, in case you’re hit with a business lawsuit down the line, your personal assets should be protected from potentially traumatic repercussions.

When looking at business bank accounts, you’ll want to figure out whether to open a business checking account or a business savings account (or both). In short, your business checking account is the hub for your business’s working capital, which you can pull down from whenever you want. Your business savings account, on the other hand, is your business’s financial storage solution. It’s the safest place to save your cash, and you’ll potentially earn interest on your funds at the same time.

If you don’t have anything, and you’re a brand-new freelancer starting out, we recommend getting a basic checking account to get yourself set up. Chase’s Total Business Checking is great for freelancers, with only a $25 minimum first deposit, and the opportunity to waive a monthly fee with a low minimum balance requirement.

Plus, they’re offering a limited-time promotion of a $200 sign-up bonus if you can deposit $1,000 of new money within 20 days of opening your account and keep a balance of $1,000 for 60 days, and make five qualifying transactions in that timeframe, too. That’s definitely doable for most self-employed people for whom freelancing is their main source of income.

3. Not Saving for Retirement

We’re sure you know why it’s so important to start saving for your retirement. For one thing, you’ll probably want to spend your golden years enjoying your life, not worrying about whether you’ll have enough money to take a week’s vacation. But retirement planning for entrepreneurs may seem difficult, especially because you don’t have handy access to an employer-sponsored 401(k).

The Fix

Those traditional 401(k)s are far from the only retirement fund option. Consider opening another tax-advantaged account, like a SEP-IRA or a One-Participant 401(k), both of which are ideal for (or geared specifically toward) self-employed individuals.

You can choose how much of your salary you’d like to contribute to each of these funds, so you can chip in a larger percentage of your earnings during financially strong years, or less when business ebbs.   

4. Not Having an Emergency Fund

As a freelancer, you’re closely acquainted with the concept of volatility. Some months you’re flush with cash; others, you’re budgeting every last cent you’ve earned. (At least you know to budget now, eh?)

So, it shouldn’t come as a surprise to you when life throws you curveballs—specifically, curveballs that require money to amend, like a burst pipe, an injury that your health care doesn’t cover, a spouse or partner losing a job… and we’re sure you can think of a few more.

The best way to handle those unwelcome surprises? Arm yourself with a fund of emergency cash.

Keep in mind, though, that your emergency fund should be separate from your personal savings account. And you shouldn’t tap into it until a true emergency hits, so upgrading your plane ticket to first class probably doesn’t count. (The miles you earned on your travel business credit card might be able to do that for you, anyway.)   

The Fix

If the thought of manually transferring your hard-earned cash into an untouchable fund is, well, painful, then set up an automatic transfer from your checking account to your savings account. Most banks allow you to do this online. Just choose how much you want to transfer, and how often, and you can easily adjust those metrics to suit the speed (or stagnation) of your current cash flow.

→Too Long; Didn’t Read (TL;DR): Separating your personal finances from your business finances makes both your business and personal capital easier to track, budget, and save. Plus, you can make sure that you’re saving enough of your own money to contribute to your retirement account and emergency fund.

Common Tax Mistakes That New Freelancers Make

Ah, taxes: Yet another financial obligation that’s made even tougher on freelancers.

If you worked for a larger company before setting out on your own, you’ll remember that your W-2 and W-4 were the only tax forms you had to worry about. Back then, your employer reported your wages and automatically withheld your income, Social Security, Medicare, and other taxes for you.

As a newly self-employed individual, however, you’ll need to do all that legwork yourself. And you don’t necessarily need to be raking in a huge salary for the IRS to deem you “self-employed.” If you’ve grossed at least $400 as a freelancer and are not paid on a W-2, you must file a tax return.

Tax obligations for self-employed individuals are generally trickier for freelancers, because you’ll have to keep track of a few moving parts. In addition to reporting your income and withholding your taxes yourself, you’ll also need to pay self-employment tax. And unlike company-employed individuals, your income isn’t aggregated on that single, W-2 form. Rather, your clients are responsible for sending you 1099 forms.

That’s a lot of paperwork, and a lot of numbers, to keep organized. And if there’s any income missing on your tax return, the IRS might audit you.

There’s a lot of opportunity for freelancers to make mistakes on their taxes. Of course, hiring a tax professional is the surest way to correctly file your taxes, and to avoid the IRS’s penalties for misreporting tax information.

But whether you’re outsourcing the tax-paying process or going it alone, it’s smart to keep these common tax pitfalls in mind, and know how to avoid them.    

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5. Not Tracking Your Freelance Income and Expenses

As a freelancer, you probably want to sign up for as many projects as possible. But when the projects pile up, so, too, do the numbers. And if the financial details of all your jobs aren’t in order, you’re going to have a tough time accurately reporting your income when your taxes are due.

It’s vital to keep meticulous track of every job you perform, every hour it takes for you to perform it, and every dollar you’re owed. Tracking your income helps you stay on top of your freelance tax forms, aka your 1099s, which your client owes you every tax season if your services cost them at least $600.

If your services cost less than $600, your client isn’t required to fill out a 1099. But you’ll still have to report those earnings to the IRS. So you really can’t rely only on those 1099s to cover all the information you owe the government. Anyway, it’s smart to corroborate what your client reported on their 1099s with your own records, in case they made any errors.

You’ll also need to record all the expenses required to do your job. That’s especially important if you’re claiming deductions on your tax returns, because the IRS might need to see hard evidence of how those expenses are directly related to running your business.

The Fix

The easiest way to stay on top of your bookkeeping is to use business accounting software. With these powerful systems, like QuickBooks, Sage, and Xero, you can easily track your freelance income and business expenses.

And here’s something else cool: If you’re interested in Bento for Business, the prepaid business Mastercard we mentioned above, you can integrate your spending data right into your accounting platform. It’s all the more reason to not only be diligent about your bookkeeping and become a better record keeper, but also get a Bento card.

6. Missing Your Quarterly Payment Deadline

As a freelancer, you’ll file an annual tax return just like the full-timers. But if you expect to owe more than $1,000 in taxes, you’re required to make estimated tax payments on a quarterly basis, too.

Failure to make your estimated quarterly payment is a common financial mistake that new freelancers make. If you ever worked for a corporation, your company automatically withheld tax money from your paychecks. But, as a freelancer, you are that employer. So, now, you have to do all that yourself.

When you make your estimated quarterly payment, you’ll have to account for both your income tax and your self-employed tax. Self-employed tax consists of the Social Security and Medicare taxes that employers automatically deduct from their employees’ salaries. So, once you’ve estimated your total taxable income, you’ll divide that number by four and submit that amount four times per year. Come April, you’ll pay off whatever amount you still owe.

And, as you can probably guess, you’ll be penalized if you botch your quarterly tax payments: If you’re late on your quarterly tax payment or if you file an insufficient amount, the IRS will fine you. Incorrect tax reports might also give the IRS ammunition to audit you down the line.

The Fix

Use a business accounting software like Intuit QuickBooks Self-Employed, which automatically calculates quarterly estimated taxes. And if you sign up for the QuickBooks Self-Employed Tax Bundle, you can also pay your quarterly taxes online.

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7. Claiming Tax Deductions Incorrectly

According to the IRS, you can only deduct business expenses that are “ordinary and necessary” to running your business. In this context, “ordinary” is anything that’s widely used in your industry, and “necessary” is anything that’s helpful for running your business.   

So, depending on the type of work you do as a freelancer, you might be able to claim deductions on business expenses like:

  • Required materials to make your products
  • Advertising, including online ads
  • Research materials
  • Office supplies
  • Work-related education
  • Meals with clients

…and more. Keep in mind that the IRS requires material evidence of all of these expenses to prove that they’re all necessary for running your business. A credit card statement isn’t always evidence enough.

The Fix

Be sure to maintain all receipts, travel documents, correspondences, and datebook entries related to the deduction you’re claiming. That’s especially important for trips, meals, and entertainment, which the IRS can easily disprove as personal expenses.

Your business accounting software, or business accounting app, can help you track all your business expenses. For instance, if you take a picture of your saved receipts, Intuit QuickBooks Self-Employed will automatically sort your expenses into their proper tax deduction categories.

And, of course, you should always work with an accountant to make sure everything you’re doing is above board—especially if you’re new to freelancing.

→TL;DR: As a freelancer, you’re responsible for reporting your income to the IRS, paying self-employment tax, and, if necessary, providing evidence for any deductibles you claim for your business. To keep track of all those moving parts, choose a business accounting software with tax-organizing capabilities.

How to Prevent Common Financial Mistakes That New Freelancers Make

If you have what it takes to be self-employed, then you’re totally capable of managing both your personal finances and your professional finances. You just need to know which common freelance financial mistakes to look out for, and establish some organizational measures so you can avoid, or prevent, those pitfalls.

To be sure you’re saving enough of your own money, and using it appropriately, consider these simple solutions to the personal financial mistakes you might make as a freelancer:

  1. Use a budgeting app to keep track of your personal expenses and know exactly where to save.
  2. To separate your personal finances from your business’s finances, sign up for a business credit card and open a business bank account
  3. Open a tax-advantaged retirement fund, like a SEP-IRA or a One-Participant 401(k)
  4. Set up an automatic transfer with your bank to contribute to your emergency fund

Taxes are also a little more complicated for freelancers than they are for wage earners. Unlike full-time employees, freelancers are responsible for:

  1. Tracking and reporting their income
  2. Making estimated tax payments on a quarterly basis, including both income tax and self-employment tax
  3. Claiming the correct deductibles on their business expenses and, sometimes, providing evidence of those expenses for the IRS

To avoid the myriad possible mistakes when filing your freelance taxes, you’ll need to keep meticulous track of your business’s income and expenses all year long. The absolute easiest way to do this? It’s not an Excel spreadsheet (although that’s better than nothing!). It’s using business accounting software.

By putting all these preventative measures in place, you’ll be spending less time worrying about your savings and stressing over taxes, and more time doing (and making money on) the job you love.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Caroline Goldstein

Staff Writer at Fundera
Caroline is a small business and finance writer at Fundera. Before coming to Fundera, she received an MFA in Fiction from New York University. She loves finding creative ways to help entrepreneurs grow.

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