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The nature of employment has changed drastically in the past several years. The gig economy is on the rise. According to the World Economic Forum’s “Future of Jobs” report, over half the global workforce will engage in some form of freelancing by 2025.
Higher levels of unemployment are prevalent in low- and lower-middle-income countries, while the labor market is tight in high-income countries. Simultaneously, the cost-of-living crisis is causing real wages to decline. Freelance and gig work is seen as a solution to the unemployment problem. More people are also driven to take on extra gigs due to the insufficiency of their incomes.
On the positive side, the freelancing trend is driven by increased access to connectivity, the boom in apps and digital platforms, evolving work relationships between employers and employees, and the growing desire for fulfillment, flexibility, and independence.
Whether driven by necessity or a desire for better working conditions, freelancers are here to stay. Here, evaluate the unique financial planning for freelancers and how they can approach their money management strategically.
With the right approach, freelancers can seamlessly tackle budgeting, tax planning, investing, banking, and retirement planning. Using the right financial products, freelancers can reach their financial goals—improve their savings rate and income and secure their futures—while living on their own terms.
Top Financial Planning Strategies for Freelancers
Freelancers enjoy flexibility in their careers. However, they experience challenges such as unpredictability and insufficiency of income.
They must also deal with self-employment taxes, client payment delays, and collections issues. Other challenges that freelancers face include:
- Inconsistent workload
- Difficulty with retirement planning
- Lack of insurance and emergency funds
- Client acquisition costs
- Business expenses
- Problems in financial planning
Adopting the right approach to managing finances will ease many of these challenges and make freelance careers more fulfilling.
The following financial strategies are ideal for gig workers and freelancers:
Create a Detailed Budget
As a freelancer, you can’t afford to wing it when it comes to expenses. You need to create a detailed budget to manage income and expenses accurately.
However, because of variable pay, it could be challenging to start.
The best way to begin is to estimate average monthly income by reviewing income reports. With at least two years’ worth of income to analyze, you can start identifying your least and most profitable months. Determine your absolute minimum monthly income.
Next, know that there are three types of expenses: fixed expenses, debt expenses, and variable expenses. Identify fixed expenses like utilities, car payments, and rent or mortgage. Allocate a part of your income to variable costs like transportation, entertainment, and groceries. Debt expenses include credit card payments.
Incorporate an emergency fund to ensure unforeseen expenses are covered. Income gaps must also be considered a financial emergency. To provide an ideal financial cushion for lean periods, you must save approximately three to six months’ worth of living costs in a high-yield savings or checking account.
Manage Cash Flow
To manage cash flow properly, you must understand your financial state in-depth. After looking at broader data, look deeply at your weekly balance, costs, dues, and invoicing schedule. You can manage expenses and income using invoicing software automatically setting up recurring bills. Digital platforms can help track dues and client invoice dates to ensure optimal and uninterrupted cash flow.
Use Smart Banking Solutions
Innovative banking solutions can work wonders for the self-employed, providing the tools to help run the business efficiently and assist you as you grow your career. As a freelancer, you must look for a bank account with low fees and minimum balance requirements.
Search for an online high-yield savings account with competitive interest rates to maximize savings. Digital banks often have low to no account fees and a high APY, allowing freelancers to earn more on idle cash while having convenient and flexible access to funds whenever needed.
SoFi’s high-yield savings account can earn up to 4.6 percent APY and offers bonuses based on your direct deposit amount.
In addition, freelancers can look for additional features like integrations with other financial services and solutions like payroll, invoicing, and loans.
Manage Risk and Diversify
Income diversification is a valuable strategy that can help people of all professions, especially freelancers. Projects are typically spread out unevenly throughout the year. Moreover, the economic climate may affect clients’ businesses, resulting in dry spells in the freelancer’s cash flow.
Diversifying income streams helps mitigate the impact of unpredictable circumstances. It prevents you from relying too heavily on a single account.
Freelancers must constantly explore opportunities to learn new skills or upskill, expand their client base, network, and pursue multiple projects simultaneously. Such efforts help to increase earning potential and cushion against economic downturns.
Remember that income does not only come from professional labor. Consider investing in financial instruments like stocks and bonds and alternative investments like real estate. These investments can grow your money as you do your regular work. Be sure to understand the risks and requirements of each investment.
Also, note that your investment strategy must match your risk tolerance and financial goals.
Understand Taxes and Compliance
Freelancers are bringing in significant earnings, so financial planning for freelancers is a must. Globally, approximately 1.57 billion people are freelancers. The popularity of freelance platforms is rising; today, they are estimated to be worth $3.39 billion.
In Canada, 28 percent of adults work in the gig economy, primarily part-time. Moreover, nearly half of these workers say they do not declare their entire gig work income. This situation could pose problems in the future.
Freelance income is taxed. Whether a side gig or a full-time freelance account, it impacts how you file your taxes. Neglecting the nuances of compliance could result in an enormous tax bill.
For as long as you sell a product or service with an expectation of profit, the law in Canada considers you self-employed. Beyond completing your standard personal tax forms, you are also legally required to complete your self-employment income and expenses report to the Canada Revenue Agency (CRA).
If you fall under US jurisdiction, there are generally two types of taxes for freelancers: self-employment tax and income tax. You are responsible for paying the self-employment tax on your earnings.
However, you must also report the same earnings on your tax return. You’ll have to pay income tax for that year’s freelance income.
It is reasonable to set aside about 25 to 30 percent of every freelance check received in a separate savings account to cover self-employment and income taxes sufficiently.
Take advantage of the tax-saving opportunities available for freelancers. As a freelancer, you can claim several tax deductions to lower your taxable income, thus reducing your tax bill.
Freelancers in Canada can claim business expenses to lower tax bills. Claim all eligible costs to maximize tax deductions. Document all expenses, as the CRA may require you to provide proof.
Similarly, in the US, they can claim deductions on “ordinary and necessary” expenses—those you need to operate your business. These include advertising and marketing expenses, computer equipment, software costs, travel, business meals, office supplies, home office setup, and utilities.
Save your original invoices and receipts. Detailed bookkeeping and documentation go a long way in proving these business expenses, saving you money in tax season.
To make it easier to track expenses, open a separate checking account for freelance work. By keeping personal and business expenses separate, you can track business costs more efficiently and reflect them on your income taxes.
If you are still trying to figure out how to navigate your tax situation, which can happen when handling multiple income streams, consult a qualified tax professional.
Plan for Retirement
Retirement is an area freelancers may neglect. Eighty-five percent of Canadians who freelance are concerned about their retirement status. Without access to employer-sponsored retirement plans, it’s easy to overlook or de-prioritize retirement plans.
In Canada, freelancers are required to pay for their Canada Pension Plan (CPP) contributions. Everyone aged 18 to 70 with a $3500 income and up must contribute. Self-employed individuals are on the hook for the employer and employee portions of the CPP.
Canadian employment insurance (EI) contributions are optional, however. EI is helpful if you prefer to receive benefits for emergencies like sick leaves or situations like parental leave.
In the US, freelancers can save for retirement through solo 401(k)s and individual retirement accounts (IRAs). You can contribute regularly to such accounts to ensure that you take advantage of tax-deferred growth on your savings to build a comfortable nest egg.
To develop discipline on your contributions, consider automating them by setting up regular monthly transfers from your online bank account to your retirement accounts.
Get Insured
Many freelancers acknowledge a lack of health insurance and benefits. This is another significant disadvantage of gig work and self-employment. A lack of health insurance means you may have to pay hefty amounts when you get sick. This emergency cost can be devastating for freelancers. To prevent this from happening, freelancers must consider purchasing health insurance and public liability.
Canadians can avail of several types of freelancer insurance coverage, including the following:
Professional Liability Insurance Plus Errors and Omissions Insurance
This type of coverage is relevant to freelancers, no matter their field. Freelancers provide third parties with professional services for fee-based compensation. Accusations of negligence, substandard work, or breach of contract could lead to legal action.
PR professionals, marketing specialists, strategists, IT professionals, web designers, and consultants depend on delivering work at a specified standard. Failure to provide satisfactory work sometimes results in lawsuits. Part of financial planning for freelancers is considering professional liability insurance which ensures sufficient funds for defense costs, judgments, or settlements against the freelancer.
Cyber Liability Insurance
Cyber liability insurance offers protection of digital assets against malicious attacks and data breaches. Those who depend on the internet to send and receive data with personal information or consumers’ financial information will need to consider this type of insurance coverage.
Commercial Property Insurance
Freelancers who rely on physical locations like small leased offices or property for their businesses will need coverage. This type of financial planning for freelancers applies to floods, fires, theft, and vandalism and protects physical property and related assets.
Health Insurance
In Canada, many companies offer health insurance for the self-employed. Each plan has varied features, so select the best plan that applies to you and your budget.
There are several ways to get health insurance coverage in the US as a self-employed professional or freelancer. Those without employer-sponsored insurance (ESI) or access to a parent’s or employed spouse’s plan can consider health insurance marketplaces, Medicare, Medicaid, military benefits, catastrophic health insurance, and limited benefit plans.
Accessing Health Insurance Marketplaces
The US federal government’s health insurance marketplace was created as a central hub of comprehensive insurance options for small businesses and those without employer plans.
The broader program facilitates private health insurance shopping end enrollment via call centers, in-person assistance, and a website. Qualified health plans (QHPs) refer to all marketplace plans that cover essential medical services. They cannot place annual or lifetime caps on their insurance coverage.
Most US states use the federal site, healthcare.gov. Washington DC, California, and several others operate their platforms, accessible via the main site.
Master the Gig Economy: Be Proactive With Financial Planning
Being self-employed in the gig economy offers numerous benefits. However, freelancers are on their own regarding financial planning, paying taxes, saving for emergencies, and preparing for retirement.
With the right tools, like high-yield bank accounts and budgeting apps, freelancers can take charge of their income and manage their cash flow properly to make room for personal expenses, debt payments, investments, insurance coverage, and emergency funds.
Take advantage of provisions that reduce your tax bill. In a career characterized by variable income, you must avail of every opportunity to save money to compensate for slow months.
Your independence goes hand in hand with more significant financial responsibility as a freelancer. Consider automating many of your payments, digitizing your documentation, and using technology for data analysis to maximize many other functions and streamline your financial management process.
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