One of the ways that many people achieve financial freedom today is to start freelancing, as being self employed provides a degree of freedom while still allowing you to make money.
However, when you transition to freelancing from working a “real” job, there are a few things you are likely to take for granted. Here are three mistakes that many freelancers make with their money when starting out:
1. Failure to Report Your Income (and Pay Taxes)
When you work a traditional job, your employer withholds your taxes. In fact, your employer also pays half your payroll tax. As a freelancer, you are responsible for reporting your full income and making sure that you pay taxes. You are also responsible for your entire payroll tax amount.
The IRS expects you to make quarterly tax payments, so it’s important to remember to make those regular payments. Plan ahead with your finances, setting aside money each month so that it’s more manageable to make your quarterly payments when they are due.
2. Lack of Insurance Coverage
One of the most important things you can do for your finances is to make sure to have the proper insurance coverage. Getting health coverage is one of the most important things you can do. An illness or injury could devastate your finances. With a traditional job, you often have access to benefits (like health care coverage) at a cost subsidized by your employer. While there are some options available under that ACA, the reality is that you are still responsible for your health insurance. This can be a surprise for freelancers who aren’t used to the cost of the monthly premiums.
You might also need to make sure that you have other insurance coverage. In some cases, it makes sense to get errors and omissions insurance, or another type of professional insurance for protection, depending on the type of freelance work you do. Be careful about the protection you get though. Make sure you have the right coverage in order to reduce the chances that your finances will be impacted by a lawsuit.
3. No Retirement Account
Many freelancers don’t set up retirement accounts. Once again, this is one of the items that many employers often help with. A number of employers offer retirement plans and might even match a portion of your contributions. As a freelancer, you need to make sure you set up a retirement account to save for the future.
Even though you might be reluctant to set aside money for retirement when you may be just getting started with your freelancing, it’s a good idea to at least set aside some small amount each week to get into the habit of saving. There are a few different types of IRA you can open, and it’s also possible to open a solo 401(k).
Look at your options to figure out what makes the most sense for your situation and begin saving. Tax-advantaged dollars are more efficient, and you’ll be in a better situation later.
Freelancing offers a lot of freedom, but you also have to be prepared to manage your finances without the help of your employer’s benefits.
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The big one is #3. Unless you have a mentor, it’s not anywhere on our radar