Tax season is a funny term because the entire time you operate should be tax season. It’s never a good idea to only think about taxes when it’s time to pay a bill. Instead, business owners should always keep taxes in the back of their minds, which means paying close attention to their finances.
A good financial management system will make it easier to pay taxes every year. It may not sound too glamorous or exciting, but managing your business finances is essential to your success as a freelancer and business owner.
Keep reading for 5 money tips to keep your business finances in check.
01. Keep Business Finances Separate
It’s advisable to have a business account that handles all the financial things. This is something that many freelancers or self-employed business owners forget. You use your personal bank account for everything, including getting paid by clients and paying for business expenses. There’s technically nothing wrong with this, but it makes tracking your business finances a little messy.
When it’s time to manage your finances and check expenses/income, you’re searching through thousands of transactions a year. Many of these transactions are completely personal like your monthly energy bills or mortgage payments, which often means the important business transactions slip through the cracks and go unnoticed. This can lead to a whole host of issues come tax season.
We’re lucky in that there are plenty of great business accounts you can open online these days. Some are opened in minutes and they give you a business debit or credit card to use. Make all business purchases from that account and use it to “pay” yourself — aka, sending excess money to your personal bank every month. When you have to check payments, you only need to look through the business account.
02. Understand Your Industry
You might assume that accounting and finance are the same throughout every industry. In some ways, that’s not necessarily untrue. At a very basic level, all businesses in all industries have to manage expenses and purchases, ensuring that the right amount of tax is paid.
However, the things you’re concerned with and even the amount of tax you pay can be influenced by the industry you work in. Accounting for freelance writers is vastly different than accounting for restaurants or accounting for manufacturing companies. Depending on what industry you work in you may need to purchase essential equipment. There could be health and safety regulations you have to adhere to, meaning more money needs to be invested in that side of things.
Also, there could be tax relief schemes for businesses in certain industries. The biggest example of this is the R&D federal tax credit scheme that helps companies involved in research and development projects. You need to understand your industry to be aware of any schemes to take advantage of — and to ensure you know all the main expenses you might face.
03. Record All Business Transactions
No matter how big or small a transaction is, it needs to be recorded. Part of filling in a tax return involves calculating how much money you made in the previous financial year.
To do this you need to see the money coming into your business as well as money leaving it. You subtract the expenses from the income to show if you made a profit. That’s key as you only pay tax on your profits. If you lose money, you’ve technically not made any money to be taxed on.
This can throw up problems for some small businesses, particularly in the first year or so. It’s very common for freelancers to pay taxes they don’t need to pay. Why? Because you tracked your earnings and forgot all the expenses. It gives the illusion that you made money when really you didn’t. Therefore, you could’ve paid no tax or significantly less than what you paid.
That’s why having a business account is so important. It makes it easier to separate your personal and business transactions to see everything coming and going.
One of the best things you can do is use online accounting software like FreshBooks or QuickBooks, which connect to your business accounts to track income and expenses. If you're on a budget, consider using a free platform like WaveApps or track everything manually via a spreadsheet.
However you choose to do it, make sure you're checking in on your business finances weekly. At the end of the week, sit down and review your finances and make any manual adjustments as needed. This will make sure you're not missing anything and helps you keep track of outstanding payments, setting you up for success now and in the future.
By staying on top of and tracking your income and expenses, filing a tax return is way easier and more accurate. You’ll avoid common mistakes, ensuring that you only pay what needs to be paid.
04. Set Money Aside Each Month
You try to save money on the personal side of your finances, but you should also try to do so on the business side. The money saved will help you cover emergencies. It will also help you pay for your tax bill when it’s due.
Unfortunately, there’s not a lot of guidance or advice to give you here. The amount you save will depend on your tax bracket or what type of tax you’re paying. For instance, if you’re paying self-employment tax, the rate is typically around 15.3%. In this scenario, you should save at least 15.3% of your earnings every month, just to be sure there’s enough money to cover your taxes.
Some experts recommend saving 20 to 30% of what you earn for taxes and another 20 to 30% for general savings, but it’s entirely up to you. The best advice is to speak to a financial advisor about this. They’ll look over your finances and tell you how much you can afford to save. Generally, it’s smart to save as much as possible — the money still exists, but it can earn interest in savings accounts and be there in case of emergencies.
05. Understand Cash Flow
Cash flow is a crucial part of every small business that often flies under the radar. It relates to the amount of cash moving through your company during a particular period. A steady cash flow means there’s enough money coming in to cover the money going out. Strangely, it sometimes seems as though your business is in a good financial spot, but your cash flow is drying up and causing concerns.
For example, imagine you complete jobs for multiple clients. You send out invoices and await payment. In your mind, your business has earned money for these jobs. In fact, you’ve earned enough to more than cover your essential monthly expenses. Unfortunately, your clients are slow to pay. It reaches the point when you need to pay for things yet the money from clients still hasn’t arrived.
This is bad cash flow! It could mean you skip or delay payments, generating interest and causing a higher expense bill. You can easily see how this can spiral out of control and leave you in debt.
Understanding cash flow is as simple as noting down unpaid invoices. See how much money is tied up elsewhere and yet to come in. It’s always helpful to keep cash flowing through your company, which is why you should always focus on getting paid quickly. It’s an issue many freelancers face, but there are plenty of solutions to ensure clients pay on time. One simple idea is to ask for the full payment or a down payment before completing jobs. That way, you already have money flowing.
Feel Prepared for Tax Season
Managing your business finances can be daunting, but it’s not as complicated as it may seem. Setting up a business account and using these tips will help you prepare for a low-stress, simplified tax season.
If you want more money tips, consider checking out these 5 Tips for Managing Money as a Freelance Writer and this guide on How to Earn Consistent Income as a Freelance Writer. You may also want to check out the books listed below.
- The Money Book For Freelancers, Part-Timers, and the Self-Employed by Joseph D'Agnese and Denise Kiernan
- Finance for the People by Paco De Leon
- Get Good With Money by Tiffany Aliche
- Invested by Daniel Town and Phil Town