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Before we wrap up our discussion on freelancing, let’s not forget a very important topic - taxes! In this final video let’s look at why always thinking about taxes is really important, and how accounting can help you achieve your goals.
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When you run a business, you should always keep an eye on your financial health.
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Not doing so can lead to the end of your freelance career.
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The topic of accounting is vast,
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but there are only a few things you need to know
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to make sure your company is healthy and on the right track.
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You need to know how much you're spending,
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and where you're spending it,
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and you need to know if you're making enough money to cover your expenses.
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An easy way to keep an eye on how much you're spending
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is to look at your expense reports.
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Expense reports are a fancy document
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that just keeps track of all the money you spend
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to make sure what you're spending is accounted for.
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That is, you're not spending more money than you make.
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Earlier we used FreshBooks to create and send invoices.
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The software also helps you keep an eye on your money.
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Freelance designers use a host of services to keep their businesses running.
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They pay for web hosting, storage services like Dropbox,
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Adobe Creative Cloud accounts, and many, many more.
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Keeping track of these expenses serves multiple useful purposes.
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Let's go ahead and add a few to our FreshBooks account.
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You add the amount, date of transaction,
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vendor,
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the category, and any notes you want to associate with the expense.
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It's important to categorize your expenses,
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and any good accounting software should provide you
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with some categories to start.
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We're going to add a hosting expense from the past month.
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Your expenses won't always fit
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into the provided categories, and that's fine.
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You can always create your own categories
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to help you understand your expenses better.
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We're going to add a hosting category under Professional Services
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to help us keep track of this expense.
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FreshBooks also helps you add in all the little nuances.
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You can specify how much of your total was tax,
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whether the expense is a recurring one,
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and you can attach a receipt if you have one.
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All accounting software should let you do this.
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In our example, our web hosting could be a service that we provide for our clients,
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so we have to bill them for it.
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FreshBooks allows you to associate an expense with a client.
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Let's go ahead and do this as well,
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and since our expense is recurring, we'll check that box too.
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Okay, so now that we have recorded this expense,
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FreshBooks allows us to convert it to an invoice
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with the click of a button.
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See how simple that is?
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No more trying to remember whether you charged them for hosting
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and whether they followed up on it.
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FreshBooks also attaches a status to the expense item,
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indicating whether it has been invoiced and whether the invoice has been paid off.
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If you go back to our home page,
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FreshBooks also gives us a comprehensive summary of our invoices and expenses.
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Hovering over each month, we can get a quick summary
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of any outstanding invoices and any unbilled expenses.
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This is really helpful and can help us keep track
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of how much money we're owed.
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Apart from the very useful function of keeping track
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of how our money is being spent,
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why bother tracking every single expense?
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The main reason is for taxes.
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Come tax time, having our expenses categorized and documented
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means we can obtain certain deductions.
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If you pay for your own health insurance,
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then it can be deducted from your tax returns.
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If you work out of your home, you can claim certain expenses for the home office.
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And even if your business ends up not making money,
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you can deduct that from your taxes.
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But to be able to do any of this,
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you have to track your expenses meticulously as proof.
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As with anything tax-related, regulations vary across states and countries.
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So be sure to check with a tax professional
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for the deductions that are available to you.
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Which brings me to the always wonderful topic of taxes.
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As a freelancer, it's your duty
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to keep track of all your income earned
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so that you can send a bit of it away to the government as taxes.
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That's fun, right?
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When you work for someone, your income taxes
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are already taken out of your paycheck,
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so you don't have to think about it.
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As a freelancer, however, that's something you have to take care of.
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Keep detailed track of all your income receipts
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so that you won't be accused of doing anything wrong come tax time.
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Aside from keeping track of your income,
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you'll also have to pay your income taxes at the end of the year.
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This is another area that, if you forget, can essentially ruin your business.
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Make it a point to keep an estimate of the amount of taxes you owe,
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and then put that money aside so that you are prepared
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to pay your taxes and not scrambling to get money together.
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This is really important.
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Because people are so used to having taxes taken out of their paycheck,
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when they're self-employed they forget all about income taxes.
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Not being prepared and having to pay such a large amount at the end of the year
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can really put your company behind in terms of cash flow.
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Rather than paying all at once,
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you can pay estimated tax payments quarterly towards your taxes.
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These smaller amounts can make it easier to stay on top of your payments.
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Aside from your income tax, you will also have to pay self-employment taxes
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such as Social Security or healthcare.
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These rates change from time to time,
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and the amount you pay depends on all sorts of things,
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including your company's structure.
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You could try and do it all on your own,
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but making a mistake when it comes to taxes
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is the worst kind of mistake you can make.
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It's definitely not easy to solve.
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I recommend finding a tax professional who can help you with all these issues.
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When looking for an accountant who can guide you on these matters
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and do your taxes for you, take your time.
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The best way to go about it is to be as picky
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as you would be when deciding whether you want to work for a client or not.
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Take your time and talk to a bunch of people.
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Treat it like an interview process.
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You are the client in this situation, and you want to find someone
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who can do the best job for you.
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When selecting an accountant, they should have the following traits.
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First, a good reputation.
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Talk to other freelancers about an accountant or an accounting firm.
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Bad news spreads quickly, and if there's anything negative
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you will hear about it immediately.
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Your accountant should also be a great communicator.
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Just like a good client, a good accountant should be well-rounded in communication.
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They should get back on time with any questions you have,
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and they should be able to explain any actions they are taking.
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They should also be an educator.
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You want an accountant who's going to help you run your business
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and not just be a number cruncher.
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Find someone who is willing to take the time to explain things to you
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and guide you through the murky areas.
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When you're interviewing accountants,
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make sure they have experience dealing with your industry
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and have worked with some of your peers.
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The last thing you want is an accountant who is
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as unfamiliar about the business aspect of your industry as you are.
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Finally, you want them to be available.
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You should be able to reach them in your time of need.
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Just as you set rules with your clients,
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you shouldn't expect your accountant to be available on the weekends.
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But they shouldn't be more than a phone call or e-mail away.
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Remember, at the end of the day,
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accounting will help you watch over your money
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but it won't make you any money.
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Learn the essentials you need to run your business,
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but don't spend a lot of time managing your books.
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Invoice effectively, track your expenses,
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and log your income, and let your accountant do the rest.
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