When you're self-employed, the challenges you face in building a successful financial future differ dramatically from those that full-time workers face. Whether you are new to self-employment or have successfully freelanced for years, you might consistently find it difficult to organize your personal and business expenses and maximize your tax deductions.
One financial challenge is that your clients will almost never withhold taxes when they pay you, so you'll have to calculate and pay taxes entirely on your own. When you file your annual tax return, you might thus wind up paying significantly higher taxes than if you were employed full time, so you'll need to do all you can to maximize your tax deductions. As any self-employed worker knows, that's easier said than done.
The challenges of managing finances as a self-employed worker
Self-employed workers face numerous challenges in managing their finances. The below obstacles are just a few.
Variability in payment schedules and amounts
Full-time employees usually receive regular payments of equal amounts, and this predictability often makes budgeting for monthly personal expenses significantly easier. When you're self-employed, not only do your payments arrive at irregular intervals, but the amount you earn every month may vary. This unpredictability can make developing a budget and sticking to it more challenging than it is for many full-time workers.
Separating and organizing personal and business expenses
When you're self-employed, you're essentially a one-person business. That means you need to organize your personal and business expenses. If you were a full-time worker, your company wouldn't include any of your personal spending in its bookkeeping, and you should be similarly discerning in separating your personal and business expenses. That fancy lunch you bought should stay in your personal expenses – unless, that is, your lunch was a business meeting.
Knowing what to categorize as business expenses
On top of organizing your personal and business expenses, you'll need to know what actually counts as a business expense. Traveling to and from a store to pick up office supplies might not count as a business expense, but the money you spend getting to and from a client meeting or work event might be (and certain tools can automatically track your miles traveled if you're driving and paying for gas to get to and from these meetings). No matter what, you should separate your business expenses from your personal expenses and tag or categorize your business expenses so you can more easily maximize your tax deductions.
Maximizing your tax deductions
It takes immense diligence and patience to maximize your tax deductions as a freelancer. If you haven't tagged enough of your appropriate transactions as business-related, then you might not maximize your tax deductions, and in turn, you'll overpay the IRS when you could have saved hundreds or even thousands of dollars. On the other hand, if you lump in too many personal expenses with your business expenses, then your tax deductions could be large enough to raise red flags with the IRS and potentially lead to the dreaded tax audit. And that's all on top of having to calculate and pay quarterly estimated taxes that never cross full-time workers' radars.
Whether you find it most challenging to maximize your tax deductions, separate and organize your personal and business expenses, determine what qualifies as a business expense, or establish a budget given your revenue variability, there are tips you can follow to stay on top of your finances – and tools you can use to help you do so.
Tips for self-employed financial success
1. Maintain separate personal and business bank accounts and credit cards.
You can't get organized if all your financial information is haphazardly clustered together. If you use the same bank account to pay for personal leisure items and your website's domain, you can quickly lose track of which transactions on your account are for business and which aren't. That's why you should maintain separate personal and business bank accounts and credit cards. This not only organizes your personal and business expenses, but also makes expense tracking tools that much easier to use.
Expense tracking tools can be linked to your business accounts so that every transaction you make is logged, dated and timed with a digital receipt. You can categorize your transactions to make tallying your expenses easier come tax time. You'll also eliminate personal expenses from your business logs while making sure no business transactions go missed, so you won't miscalculate – making a financially draining overestimate or a dangerous, potentially audit-triggering underestimate – what you owe to the IRS.
2. Don't do it alone (or manually).
If you're looking to cut costs, you might be tempted to log all your business expenses manually in a spreadsheet. This work is not only tedious, but also prone to human error. Save time by relying on software platforms that empower you with tools built on expert knowledge – think of it as having another person there with you inside your computer, smartphone or tablet.
Expense tracking software can accurately track and organize your business expenses. Budgeting software can take your financial management to the next level by using your spending and earnings to establish a monthly budget that you can easily follow. If you're coming too close to spending outside your budget, your budgeting software will alert you, and you can take action to achieve the proper balance.
If you want both budgeting and expense software, there's an easy solution: An accounting software platform can offer you both at once. Several accounting software platforms combine these features with automated invoicing and follow-ups for overdue clients, and they can use your revenue and expense information to organize your personal and business expenses. They can also maximize your tax deductions, and some platforms go the extra mile – literally and figuratively – and automatically track your miles when you're traveling for business.
The best tool for addressing self-employed challenges and tips
For accounting software that allows you to maximize your tax deductions, organize your personal and business expenses, and automatically track your miles, QuickBooks Self-Employed might be your best option. You can link QuickBooks Self-Employed to your business bank and credit card accounts to automatically organize your personal and business expenses so you can properly calculate your taxes and maximize your tax deductions. With the expense tracking and sorting tools that QuickBooks Self-Employed offers, users have discovered, on average, $4,628 in tax savings per year.
Additionally, if you have to keep track of your travel and gasoline expenses for business purposes, the QuickBooks Self-Employed smartphone app will automatically track your miles and expose you to as much as 45% more in tax deductions than you'd get otherwise. On top of all these automated features, QuickBooks Self-Employed will automatically calculate your quarterly estimated taxes. If you bundle your QuickBooks account with TurboTax, you can quickly pay your quarterly taxes online too, all without printing forms and running them to the post office.
If you've long struggled to maximize your tax deductions and minimize your bookkeeping workload, you can sign up for QuickBooks Self-Employed now for a 50% discount on your first three months.