Intro:
According to the United States Internal Revenue Service, freelancers are small business owners. Even if you drive for a rideshare service, those few hours you work a week qualify you as a small business owner.
Since the IRS treats independent contractors as such, individuals must also see themselves that way. Some employees don’t branch out into independent work since they know it means paying taxes, benefits, and retirement without an employer’s help.
Thus, entrepreneurs must analyze their earnings and set aside several portions for taxes, insurance, and savings. You’ll still visit your primary physician annually and your dentist every six months. Insurance helps defray those costs.
In addition, entrepreneurs must set aside money for business investments, such as business tool upgrades.
The following are seven things freelancers should aside money for.
1. Taxes
Industry insiders believe that freelancers pay 30% of their income to the IRS as taxes and benefits. For example, solopreneurs must pay their share of disability and worker’s compensation.
Thus, every time you receive payment for a completed project, set aside 30% of it. Opening a separate bank account for expenses, such as taxes, helps you avoid commingling funds. It also lets you avoid spending out of your daily business expense account.
Setting aside 30% of income might feel like a big chunk of change. Therefore, consider opening a second business bank account with money market features. It will help you earn some interest if you maintain a designated balance.
2. Insurance
Some freelancers only work a few hours per week and turn it into a side hustle instead of a career path. Thus, setting aside money for insurance costs might feel like a significant expense.
However, all rideshare providers require that their drivers carry commercial auto insurance. To help their drivers, they’ll offer insurance policies that cover the essential features at affordable costs.
Freelancers also must save for personal insurance, such as health and dental.
Taking care of yourself means also taking care of your teeth. You can see a dentist twice yearly by setting aside money for self-employed dental insurance. You’ll keep your teeth healthy and out of pain.
3. License Renewals
Most independent contractors, such as landscapers, electricians, and accountants, must obtain professional licenses. In addition, you must renew them annually or every two years.
You’ll lose the right to work legally in your field if your license lapses. Plus, the city or town will assess a late fee and penalty that drive up your costs.
Therefore, ensure that you set aside funds to renew your professional licenses.
4. Business Tools
Most freelancers can start working on gigs with minimal investment and equipment. Even graphic designers can start working on a refurbished laptop or desktop computer and the free version of graphic design software.
Ideally, you’ll increase your client roster. Then, you’ll have enough to start investing in your trade’s business tools.
Electricians and construction workers also need a full belt of tools. However, you can start with the ones in your garages. Then, as the income rolls in, set aside a portion to invest in more efficient tools.
5. Retirement
The United States population is living into their 70s on average, while the retirement age remains between ages 62 to 65. If you freelance into your 60s and 70s, you might feel like you don’t need a retirement fund.
However, things can change suddenly, especially the economy. For example, one-fourth of the American population lives with a disability. The disabled population thrived from 2020 through 2022 thanks to remote working, but all freelance opportunities aren’t conducive to working from home.
Thus, save for your retirement, just in case. Then, plan your estate with time to spare if you will leave behind assets or care for a household.
6. Savings
Freelancers, like employees, should set aside 10% of their income in savings accounts. You can use the funds during downtimes; you can also use them to treat yourself to a deserved vacation.
Although savings accounts don’t earn as much interest as in the past, they are still a great safety net.
7. Legal Counsel
Entrepreneurs who work in litigious fields must set aside money for legal counsel. Rideshare and delivery drivers should know the names of legal offices that work with freelancers.
In 2022, you can find lawyers who deal with rideshare vehicle collision and personal injury cases.
Conclusion
The benefits of delving into freelancing remain well-documented. Several responsibilities come with completing this type of work. To protect yourself and your business, set aside money to purchase insurance, renew your licenses, and have a rainy day fund.
