self employment

5 Tax Mistakes Freelancers Need to Stop Making

Aja McClanahan — Wed, 07 Feb 2018 09:00:06 +0000

No doubt about it, being a freelancer is hard. From serving clients to staying on top of your money game, there's no shortage of work to do. Sometimes, things may be overlooked or set on the back burner while you tackle pressing business matters. However, there is one major thing that just can't be ignored — taxes.

As your own chief financial officer you'll need to be aware of major tax missteps that could ultimately ruin your business. Ideally, you'll engage the help of an experienced small business accountant who knows the ins and outs of tax strategies for freelance business owners. However, you've got to have your ducks in a row to double and triple check their suggestions and advice, too. (See also: What Freelancers and Side Giggers Need to Know About Income Taxes)

These are the top tax mistakes freelancers really need to stop making.

1. Not paying self-employment tax

As a freelancer, you probably have a number of clients that pay you without deducting any taxes. Because you are a contractor, you are responsible for any and all taxes on your income.

Self-employment tax is a term that covers two main taxes: Social Security and Medicare. As an employee of a company, your employer would cover part of this tax. However, lucky you, since you are your own employer, you get to pick up the tab on the entire tax bill.

On the other side of paying all these taxes, you do get some reprieve by deducting a portion of these payments from your gross income, which can reduce the amount of taxes you owe overall.

Just know that it's very important to pay self-employment taxes on your freelance income. If your client issues you a 1099 form, it's also transmitted to the IRS. The IRS becomes aware of this income and can demand you to make an accounting for that money if they suspect you owe taxes on it.

2. Not having an accounting system

Making a lot of money as a freelancer can also increase your tax liability. If you don't have a good system in place to track all of your income and expenses, you could end up paying more (or less) taxes than you're supposed to.

Charleen Fariselli is a CPA who has worked with small businesses for over 10 years. She says that freelancers who don't accurately track income and expenses are at a disadvantage. "This affects their taxes because they don't have a good accounting system and are often losing deductions so they pay more in tax," she says.

Charleen also adds that a lack of a good accounting system can have an impact on making timely, accurate tax payments: "These freelancers can't calculate what their taxable income is each quarter for making tax payments, so they over or underpay, if they pay at all."

The good news is that there are many accounting software options out there to help you organize your books, including QuickBooks, Xero, Wave, and Freshbooks. You can also use a simple Google Sheets document. (See also: 5 Free Accounting Tools for Freelancers)

3. Mixing business with pleasure

One of the worst things a freelancer can do is allow their business expenses and income to spill over into their personal finances. For example, a business owner may use a business credit or debit card to cover a personal expense like purchasing groceries for their family.

The biggest problem with this behavior is how it affects record keeping for tax filing purposes. Joshua Zimmelman of Westwood Tax & Consulting says that bad record keeping can cause confusion for freelancers at tax time. "Too many freelancers miss out on deductions because their finances are not organized," he says. "Separating your expenses from the start makes filing your tax return so much easier."

If you need help keeping your personal and business finances separate, you can opt for a business checking account or credit card. You could also use both.

If you do have to use money from your business dealings to cover personal expenses or vice versa, make sure you keep a record of such transfers. A small business CPA can help you categorize (loan, owner draw, paycheck, etc.) the transactions so that you don't run into problems with record keeping or tax liabilities. (See also: The 5 Biggest Mistakes Freelancers Make)

4. Neglecting retirement savings

The freelance life can be a roller-coaster ride of feast or famine, but it's still important to keep savings in the equation — especially retirement savings. Saving for retirement is not only critical for your golden years, but can also help you save on taxes.

When you put money away for retirement, it reduces the amount of your income tax withholding. Joanna Zarach is a consultant who helps freelancers plan for retirement. She says, "Solo retirement plans are the most effective way to lower your tax bill now and to build tax-free growth in your investment accounts."

There are different options to save for retirement. Some smart options include:

Individual 401(k): This type of account is ideal for solopreneurs who want higher contribution limits. You can save with pretax dollars while receiving tax deductions for employer contributions (you are the employer) as well.
SEP IRA: Tax-deductible contributions are made by the employer (in this case, you). Growth is tax-deferred until withdrawal.
ROTH IRA: With this type of retirement account, you save after-tax income that grows tax-free forever.

5. Neglecting health care contributions

Paul Jacobs is a CPA, EA, and officer at Palisades Hudson Financial Group. He says he often sees freelancers, "Forgetting to deduct health insurance premiums. A great tax break that is available to the self-employed is the ability to deduct this expense."

As a small-business owner, there are tax benefits when you pay insurance premiums for yourself and family members. Premiums for medical, dental and, in some cases, long-term health insurance qualify.

Reporting these premiums on your taxes can reduce your adjusted gross income (AGI) which can make you eligible for certain tax breaks. The only caveat here is that you may now have to itemize deductions in order to take advantage of this deduction come tax time due to the recent Tax Cuts and Jobs Acts of 2017.

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Questions Retirees Should Ask Before Starting a Small Business

Denise Hill — Wed, 17 Jan 2018 09:30:08 +0000

Retirement is a time to kick back, slow down, and do all of the things you didn't have time to do during your "clock-punching" years. But for an increasing number of retirees, becoming an entrepreneur is the new thing to do after leaving the workforce.

In fact, the Bureau of Labor Statistics reported in 2015 that the self-employment rate among retirement-aged workers (65 and older) was the highest of any age group, at just over 15 percent.

However, before diving headfirst into the pool of startups, here are a few questions you need to ask yourself before starting a small business in retirement.

1. What do you have to lose?

Unfortunately, in business, failure is a very real option. According to the Bureau of Labor Statistics, 50 percent of new businesses don't survive past five years. And if your business fails, you need to be able to survive. You must count the costs before you begin.

Answering the question, "What do I have to lose?" will help you assess and determine your risk tolerance and accurately scale your business. It will help you develop a business model that works for your lifestyle, interests, financial status, and physical health.

If you retired and are looking forward to leaving the world of nine-to-five, it makes no sense to start a business that operates primarily during these hours. If your health is beginning to deteriorate, doing work that is physically demanding with lots of heavy lifting or repetitive motions may not be the way to go. Be sure you keep your needs and limitations in mind before you begin. (See also: 8 Common Myths About Starting a Small Business)

2. How will you finance the business?

The adage, "It takes money to make money" is the truth when it comes to starting a business. You must understand that you may have to shell out — depending on the industry — large sums of money up front. Taking on huge amounts of debt, or any debt for that matter, during retirement is a tremendous risk and should be avoided if possible.

If your business requires a large amount of upfront capital, you need a plan for getting your hands on funds. Dipping into your retirement stash to pay business expenses is not recommended by most financial advisers. You may need to scale back your business plan, take on a partner, or allow others to become investors. You may even need to delay starting the business for a year or two and reduce your living expenses to help set aside funds to get the business going.

Another financial surprise that comes with new ventures is the hidden costs associated with starting a business. Again, these costs are contingent on the business type, size, and the area in which you live. Things like insurance, professional fees, permits, licenses, attorneys — and everyone's worse nightmare, taxes — can derail the business before it gets off the ground, and significantly impact your retirement nest egg. Do your homework to see which fees apply to your business in your area and plan accordingly.

3. How much time and energy will it take?

Nurturing a business in its infancy requires, time, energy, and a ton of diligence. Starting a single proprietorship with no staff, no outside financing, no products, and no facility will take a couple of months. If you factor in hiring staff, securing a bank loan, and purchasing product, the time it takes for your business to be up and running could be six months or more. And while you do have more time now that you are retired, you must understand that time affects your bottom line.

Counting the cost of becoming an entrepreneur doesn't just mean finances, it also includes sweat equity. Retirement is a different season of life and, depending on your particular circumstances and the industry you enter, you could be making a bigger time commitment than you expected.

Be sure you understand the marketplace and all of the "small" jobs that go into running a business — especially if you are doing it alone or with minimal staff. What will you do if your computer crashes or your printer breaks down right before an important meeting? Figure out what can you afford to outsource and what you can you do yourself. And most importantly, be sure you can commit the time and energy it takes to make your business successful.

4. What can you do before you retire?

If starting a business is something you know you want to do before you retire, you should do as much ground work as possible before giving up your income. It's even advisable to launch the business before you retire.

Starting a business while working a full-time job is tough (speaking from experience here), but it does have its advantages. It makes you budget your time and start small. You have to go at a slower pace, which is a good thing. You are able to learn the intricacies of the business, establish relationships, and make mistakes within a controlled environment.

If starting a business while working your regular gig is too much, see if you can shadow, intern, volunteer, or work part-time for a similar business. You can also establish your small business framework — write your business plan, become an LLC, and get any necessary licenses, permits, or certifications — so you are ready to go as soon as you retire. It is also advisable that you save, save, save to help offset startup costs, minimize debt, and to keep from disturbing your retirement funds. (See also: 6 Ways You Can Cut Costs Right Before You Retire)

5. What am I giving up?

Becoming an entrepreneur in retirement is a great way to indulge in your passion, spend your time and energy meaningfully, and earn some extra cash. But being your own boss comes at a cost. The biggest expense that comes with starting a business in your sunset years is opportunity cost.

Opportunity cost is the cost of what you're giving up while choosing to do something else. Things like spending time with the grandkids, taking tropical vacations, or even establishing a college fund for the grands or giving your kids the down payment on their dream home are all things you may have to forgo, at least for a time. (See also: How to Find Your New Identity After Retirement)

Before you make your decision, be sure you thoroughly count all of the costs. Pay a visit to your financial adviser, and discuss your options and sketch out a solid financial plan. Hold yourself accountable, know when to scale back, and know when to walk away.

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This article is from Denise Hill of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Signs It's Time to Quit Freelancing

Paul Michael — Mon, 15 Jan 2018 09:00:07 +0000

Tell someone you're a freelancer, and you'll usually be treated with a mix of envy and admiration. Freelancing brings with it a perception of freedom and flexibility that is a definite plus, but much harder to sustain than many people might realize.

As a freelancer, chances are you put in more hours and are on the go more than regular full-time employees. You don't get subsidized health care, a 401(k) match, or paid vacation. It can be tough — sometimes, too tough. And when the following red flags appear, it may be time to throw in the towel. (See also: Day Job or Freelance: Which Is Right for You?)

1. You don't enjoy it anymore

Let's start with the most obvious reason. If it's just not something you like doing anymore, maybe it's time to start thinking about a different career path. Remember when you first decided to jump into the freelancing pool? The buzz you felt going it alone. Hustling for clients. Being your own boss. It all felt like the world was your oyster. If you now get up every day wishing you'd made a different choice, that's life telling you you're wasting time.

Our job takes up the majority of our waking hours, so to be doing something that makes every one of them painful is just not worth it. What do you daydream about doing instead? What would reinvigorate those passions you once felt for freelancing? Listen to your gut and make a move in that direction. (See also: 8 Signs the 9-to-5 IS Right for You)

2. It's getting harder and harder to find work

When you first dipped your toe into the freelance pool, you had to hustle to get those initial clients. But, after some hard work, you built up a nice client roster and had enough regular work to make freelancing a financial success. However, things change. Markets change. Freelance industries can become flooded with new and cheaper talent. And, of course, there are those sites like Fiverr and Guru that are crammed with people all over the world charging rates that you cannot even begin to compete with.

That mix of more competition, lower freelance rates, and even corporate downsizing can have a serious impact on the time you spend trying to find work. And if you spend more time looking for it than working on it, you could be in real trouble. (See also: How to Land More Freelance Clients)

3. You can no longer afford to pay for your own health care

This is a big reason freelancers are returning to the workforce, and it's a sad sign of the times. Corporations and small businesses have the clout to negotiate excellent rates for their employees. Not only that, but the company pays the majority of the monthly premium, with some companies even offering completely free HMO coverage for an employee and family.

As a freelancer, you don't have that kind of power. According to data gathered by eHealth, the average individual health insurance premium for 2017 was $393 a month. It skyrockets to $1,021 a month for families. That's not taking into account deductibles, which you have to meet before the insurance kicks in. It's a huge burden for a freelancer to take on, and coming back into the fold can be a relief. (See also: 10 Work Perks You Can't Get as a Freelancer)

4. You miss the interaction with other employees

Freelancing can be a lonely business. Many people take daily human interaction for granted. In fact, some people tire of it all, and it becomes a major reason for freelancing and going solo. But over time, you can go days without talking to anyone except the checkout cashier and the dog.

Humans, for the most part, are social creatures; it's only natural to start longing to be around other people again — for those water cooler talks about last night's killer season finale, or the latest and greatest music you've discovered. And while texting and calling people can help with the loneliness, it can become depressing. If it's starting to weigh on you every day, and you are making excuses to leave the house, it's time to think about returning to the workforce. (See also: 11 Ways Freelancers and Telecommuters Can Make Friends and Network)

5. You're bored and you're coasting

Has the freelance life lost its spark because you are simply not being challenged anymore? It's possible that your daily work routine is filled with the same projects, for the same clients, over and over again.

Some freelance writers get stuck penning annual reports and company brochures week in, week out, and it becomes monotonous work. Some freelance photographers get stuck doing weddings and graduations, and although it's special for the people being photographed, it can be tedious taking the same shots every time. Whatever your freelance gig, if you are dreading getting out of bed in the morning because you have "those projects," you have lost your passion. Dive back into something more challenging, for your own mental wellbeing.

6. You can't make ends meet

Freelancing is a constant hustle. It can be exhausting to find work for yourself. What's worse is when the jobs start paying less, or you lose a few clients. Some clients will be tempted by younger freelancers offering lower rates. Others may just be retiring, or going in another direction. And while it's important not to panic if you do lose some regular monthly income, you have to be prudent about how long you ride it out.

Can you find something that will make up for that income loss before it really starts to eat away at your emergency fund? Do you even have an emergency fund? What can you cut out to keep going? Examine the budget carefully, and if things are looking bleak, you may need to cut and run to a regular, full-time salary. (See also: The Smart Way to Budget on a Freelance Income)

7. The work-life balance is no longer acceptable

When you first started freelancing, you knew you'd have to put in extra hours to get the business off the ground. After that, it should have been more like a day job, with regular hours that you work, regular time to relax, and hopefully, a week or two of vacation. However, some freelancers swear by the saying, "Never turn down work — they may never ask again."

That can be a huge problem. You don't want to turn work away and risk an income stream drying up. But you're tired. You've been putting in 60-hour weeks and you need a break. If you have reached that stage where you are living to work, and not working to live, you should consider quitting and finding a full-time job with an employer. (See also: 9 Signs Your Work-Life Balance Is Off)

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 New Year's Goals Every Freelancer Should Make

Kentin Waits — Wed, 20 Dec 2017 09:00:07 +0000

It’s part of the magic of the season — each new year is a chance for a new beginning. For those of us who freelance, this time of year is particularly important. It’s a moment to reflect on what’s going right in our businesses, what needs improvement, and what goals should shape the next 12 months. In short, it’s time to plan for the care and feeding of our self-made careers. With that in mind, here are eight New Year’s goals every freelancer should make.

1. Build your brand

No matter how small the enterprise, branding matters. If you haven’t established a brand for your freelance business, resolve to do it this year. Remember, a brand is more than a logo and tagline; it’s also the experience clients have with you.

If you’ve already established a brand, apply it consistently and flawlessly online, in all printed material, and in person. Remember, the goal is to make sure clients keep your business top-of-mind and recommend your services without hesitation.

2. Update your LinkedIn profile

LinkedIn has established itself as the social networking hub for all things employment-related. Its network connects professionals in nearly every field imaginable — and many of them are in desperate need of freelance help. If your LinkedIn profile is out of date, sloppy, or incomplete, it reflects poorly on you and your business. Update it ASAP. (See also: 7 Things You Should Never Do on LinkedIn)

3. Learn a new skill

Regardless of what field you’re in, markets never stand still. Changing technologies, new tools, and shifting tastes all demand that freelancers adapt or die. Stay competitive by sharpening your current skills; stay engaged by learning new ones. (See also: 10 Things All Successful Freelancers Do)

4. Expand your network

Freelancing can be isolating, especially for those who work from home. A strong network of colleagues will keep you engaged socially and plugged into new professional opportunities. Devote an hour or two each week to expanding your network through social media, blogs, and industry events. (See also: 11 Ways Freelancers and Telecommuters Can Make Friends and Network)

5. Ditch toxic clients

Take a critical look at your project list for the past couple of years. Are there clients who consistently paid late? Had endless demands and unreasonable deadlines? They’re likely costing your more money than they bring in. Free yourself by phasing out chaotic professional relationships. But be diplomatic; bad clients often employ good people and you never know where those folks may land.

6. Bump up your rates

For many freelancers, it’s tempting keep rates low to draw in more business. But over time, this loss-leader strategy can do more harm than good. Not only does it keep you at a financial disadvantage, it implies your services aren’t as professional or in-demand as your competitors’.

Assess what price the market can bear and adjust your rates accordingly. Communicate the increase clearly in writing and give your clients at least 60–90 days notice.

7. Make time for downtime

When you work for yourself, the boundary that separates your personal and professional world can get a little fuzzy. This year, establish (and stick to!) a more formalized schedule — one that allows for real downtime and breaks from client calls, email, and paperwork.

8. Save for retirement

Without access to employee-sponsored retirement programs, freelancers must take the lead on saving for the future. Roth, traditional, and SEP (Simplified Employee Pension) IRAs each have distinct benefits and limitations. Choose the one that works best for you and make regular contributions — starting now. (See also: A Simple Guide to Retirement Plans for the Self-Employed)

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This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Fundamentals of Naming a Small Business

Paul Michael — Wed, 06 Dec 2017 09:30:11 +0000

What's in a name? When it comes to a small business, quite a lot, actually. While it may seem like a fun side project, the name you choose for your business could have a long-lasting impact on the success (or failure) of your startup. However, if you follow these guidelines, you should come up with something that makes a great first impression for your new business venture.

1. Do not name it after yourself

The biggest mistake people make when choosing a business name is to go straight for the ego option: "Well, it's my business, I should use my name." You see it with law firms, handymen, auto garages, and so on. While it may be nice to see your name on a big sign and a business card, it doesn't tell anyone anything about what you do or provide. Therefore, you have to add a second line to spell it out: "The Smith Brothers: Plumbing and Heating Experts." That's not catchy.

2. Be smart, but not too clever

It's tempting to have fun with your business name. However, keep in mind that when people see the name of your company for the first time, they do not have the background that you do. They know nothing about your business, how long you've been dreaming of it, and what kind of thought process you went through.

For example, imagine someone passionate about great hot dogs opens an eatery called The Top Dog. To that person it's a great name, but they know it's a reference to hot dogs. To someone else, it's more likely something to do with actual dogs; perhaps a dog grooming service, products for pooches, or a place to buy a dog. The business is going to have to work harder to identify itself as a restaurant. If instead they'd chose a name like Hot Dog Heaven, or The Tasty Wiener, there wouldn't be any confusion.

3. Keep your sights set on expansion

Small businesses sometimes become big businesses. When that happens, and the company grows to include new locations, your company name might suddenly become very confusing. For instance, if you base the name on your current location (maybe something like Delaware Dinners), you may have people scratching their heads when you move to a different state, or even a different country.

Similarly, think about not just physical expansion, but product line growth. You may start out as a T-shirt company, and call yourself something like Top Shelf Tees. But what happens when you decide to make branded caps, bags, and sneakers? Your original product name limits the expectations of customers, and you may have to rebrand to Top Shelf Apparel. So, think about the future.

4. Cutesy spellings aren't for everyone

The rise of the internet, and the need for a unique dot-com address, has brought about a glut of misspelled words. Carz instead of cars. Kabbage instead of cabbage. Wzrd instead of wizard. All in the name of getting a name that sounds memorable.

But consider the additional steps you will have to take to inform your customers of the odd spelling. For example, if you choose to do radio promotions, you'll have to say something like, "Remember, that's carz with a Z." And when potential customers hear a little buzz, and search for you on the web, will they be searching for the right company? Chances are, they'll use the typical spelling, and it could end up taking them to a major competitor.

5. Completely made-up words make life difficult

There are hundreds of companies out there that have names that either mean nothing, or were based on a real word from any number of languages. You already know some very well, including Verizon, Google (although it was based on Googol), Etsy, Skype, Hulu, Zillow, and eBay.

Now, the reason you know these words so well is because the companies are huge, and spent major branding and advertising dollars to get their name to be recognized. Plus, as word of mouth has spread, the familiarity of these names has grown. Let's be honest, have you ever considered what Google means over the many years you have used the service? Because the brand is so dominant, it hasn't really mattered to most people.

However, you're the owner of a small business right now, not a major corporation. You have limited funds. Unless you think your company will scale to the size of these giants, you are better off avoiding completely nonsensical words.

6. Make sure your name conjures positive imagery

To this day, it baffles many marketing and branding experts that the company The Athlete's Foot was named something so horrendous. Athlete's foot is described as "a contagious fungal infection that causes itching, blisters, cracking, and scaling, especially between the toes." And yet for some reason, a boardroom full of people said "Yeah … we want our footwear store to be associated with that."

Bizarrely, it worked; the store is still going. But you really do not want to take that chance with your own company. If the first thing people conjure up in their heads is negative, you have a tough image mountain to climb. If you are a mobile hairdresser, Curl Up & Dye might sound funny for a second — but what kind of image are you putting in your customers' heads? Keep it positive, unless it really does fit the bill (like Vinyl Resting Place, a store that sells old vinyl records and has a sense of humor about it).

7. Don't pick a name out of a hat

The hat comes in many forms. It can be a dictionary or thesaurus. It can be a random word generator online. Or, it could in fact be a bunch of words you put into an actual hat. These methods are just not going to work out for you. There has to be a logical reason as to why you went with the name you did.

What's the background? How does it tie to your business? Does it accurately describe what you do, or at least invoke some part of it? For example, Pinkberry is not an accidental or random name. While it sounds fun and trendy, it also relates directly to the fresh fruit cut daily for its frozen yogurts and ice creams. If the company had simply pulled a word out of thin air, it would not have been as successful.

8. Think alphabetically

There's a reason there are so many AAA Plumbers, and AAAA Lawyers; they were looking to be first in the phone directory. While that is not always the case anymore when it comes to search engines, alphabetical listings are still a way to organize companies. If your company is called something like Zoomfood or Yogalicious, you're going to be stuck at the back of the line.

Consider a name that will bump you up without compromising the fun and originality of your name. For example, Foodzoom is just as fun, but vaults you way higher up the list. While it may not be the most important consideration, it's worth thinking about.

9. Combining words can produce great results

One of the easiest ways to come up with a good business name is to combine two (or more) words to create a new word that's both eye-catching and memorable. Start by writing down a list of all the traits of your company. Don't worry about coming up with actual names just yet, this is a brain dump. Your company mission statement will include a lot of these words. When you have that list, start making connections.

Which words fit well together? For example, if you're a meal prep company, you may have a list that includes food, easy, preparation, timesaving, meals, dinners, fresh, delicious, organic, diet, delivery, and simple. Now, which of those words can you combine to make something new? It could be as simple as FreshPrep, or EasyMeals. You could also do it another way, like Dinner 'N Delivery, or Meals On Time. These are just quick examples, but it's a great way to brainstorm a name that includes essential aspects of your company.

10. Test out a few names before you commit

When you have a list of business names that you're happy with, it's time to put them to the test. Narrow the list to the top three, and set up a simple survey through a site like Survey Monkey. Ask questions like, "What did the name instantly make you think of?" or, "Does this business sound professional?" You want a good variety of questions and possible answers. Send the survey to people you may already be working with, online forums, a subreddit devoted to your industry, and anyone else that could be of help. However, don't send it to immediate family and friends; they know too much and won't give you an unbiased opinion.

One last note: When you have picked the winning name, think about how you will turn that into a memorable and noticeable logo or brand mark. Work with a freelance designer to get some options, and use the same survey system to help you select the best one. This will be your logo for the foreseeable future, although brands change identities often, so it's not as important as the actual business name. Good luck.

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Moves Every First Year Freelancer Should Make

Emily Guy Birken — Mon, 30 Oct 2017 08:30:14 +0000

When I started my freelance career seven years ago, I honestly had very little idea of what I was doing. I made some seriously painful mistakes that affected everything from my bottom line to my stress level to my relationships with some of my clients. (See also: The 5 Biggest Mistakes Freelancers Make)

But even though self-employment mistakes are common, they're not inevitable. You can make the transition to self-employment much smoother and easier to handle if you commit to doing the following things in your first year as your own boss. Not only will you lay down the good habits and policies you'll need throughout your new career in self-employment, but these moves can also help your career start off with a bang. (See also: Day Job or Freelance: Which Is Right for You?)

1. Set aside 30 to 35 percent of every paycheck for taxes

One of the double-edged swords of working for yourself is the fact that your paychecks will generally not have any taxes withheld. While it feels pretty good to have the full amount of money you earned coming directly to you, it can really mess up your finances if you don't plan ahead for taxes.

Many of the newly self-employed can get themselves into trouble by assuming they'll pay their quarterly estimated tax bills with whatever funds they have received as of the quarterly estimated tax due date. But Uncle Sam doesn't care if you have a slow work spell or are waiting on some payments that are not quickly forthcoming from a client — he wants you to pay the taxes you owe on time. (See also: Avoid IRS Penalties With This Simple Estimated Payment Strategy)

You can bypass the quarterly stress of finding the necessary funds to pay your tax bill by specifically setting aside 30 to 35 percent of every check you receive. This does take a depressingly large bite out of your paychecks, but it gives you the peace of mind to know that you will be able to cover your estimated tax payments. In addition, by putting this money into a savings account, you can earn a little interest — which already puts you financially ahead of folks who have their taxes withheld.

If your diligent savings of 30 to 35 percent of each paycheck means you have more money than you need for taxes in your first year of self-employment, then you can always use the leftover money to reinvest in your business or smooth over any lean months in your second year of self-employment. (See also: 7 Things I Learned About Money After I Went Freelance)

2. Hire an accountant

Speaking of taxes, they are going to get more complex now that you have begun working for yourself. While it is certainly possible for you to complete your taxes all by yourself as you've done in the past, the money you spend on an accountant for your self-employment taxes can both save you time and lower your stress. (See also: 5 Free Accounting Tools for Freelancers)

Asking for referrals from trusted colleagues or small business owners can be the best way to find the right accountant or tax professional for your needs. Don't let this important part of self-employment go on the back burner. Having an accountant throughout your first year of self-employment can help you to accurately pay your quarterly estimated taxes on time, and take advantage of deductions and other tax benefits that you might otherwise miss.

3. Determine your payment floor

During my first year as a freelancer, an educational company contracted me to write lesson plans for English teachers. I had been working as an English teacher before my freelancing career, and I loved that this company was committed to using humor in all of its resources. I thought it was a perfect fit, and I quoted them a price per lesson plan that felt reasonable for my expertise (and comedic chops). They offered me a fifth of what I asked for. Since I was worried that I wouldn't be able to actually make a living as a freelancer, I took the job.

It was a huge mistake.

Here's why: The amount of work that I put into each lesson plan meant I was earning less than minimum wage for my hours of toil. It took me months to get through the initial contract of 10 lesson plans, in part because I knew how little I was making and it was difficult to prioritize this client over those who paid more for less work.

Even though the company loved my work, we parted ways after I finished the first round of lesson plans. They were just as happy to get a quicker and less-funny turnaround from another freelancer who did not have my expertise. I was glad to no longer be working so hard for a company that did not financially value my contributions.

After this experience, I learned to figure out my payment floor — the least amount of money my time was worth. Once I knew my payment floor, it became much easier to recognize which jobs were worth my time, and which jobs would leave me feeling overworked and resentful. Knowing your payment floor may seem premature in your first year of self-employment since you feel like you are hustling just to capture enough clients to keep the lights on. But you are better off holding out for clients who value you, rather than taking any job, no matter how low the pay.

4. Build free time into your schedule

There are a couple of common scheduling traps that can trip up the newly self-employed:

Working all the time. Since you are now completely in control of your schedule and your career, and since you presumably love what you do, it can be very easy to throw yourself into your work 24/7.
The planning fallacy. Even after seven years as a freelancer, I still underestimate how long it will take me to complete a project, because it never occurs to me that my kids might get sick, my internet might go out, my research might uncover more complex issues than I anticipated, or that I might be struck down by an unexpected nap after eating too many carbs for lunch.
Lack of discipline. For some newly self-employed individuals, it can be difficult to stick to self-imposed (or even client-imposed) deadlines if you don't have a boss to keep you honest. It's a lot harder to succeed in self-employment if you have trouble sticking to a work schedule.

All three of these scheduling mistakes can be helped by building free time into your schedule. Forcing yourself to take time off from your otherwise nonstop work will prevent burnout and allow you to be far more productive. Having a free afternoon built into each week has helped me to improve my on-time percentage, because it leaves some slack for when life happens and I'm not able to finish things according to my pie-in-the-sky planning assumptions. And anyone who struggles with self-discipline will generally have an easier time forcing themselves to work if they know that there is free time coming. (See also: Self-Employed? Tips for Taking Time Off Without Trauma)

5. Capture excess income in a savings account

When you are self-employed, there will be some months when several paychecks or client payments come in all at once. This can feel pretty great, especially if you can thank your own hustle for making it rain, but it's important to be disciplined about this kind of excess income and put it in a savings account. That's because you are likely to have a low-income month sooner or later, and that excess income can be the difference between you being able to pay your bills as usual and you having to go grocery shopping with couch cushion change. (See also: The SEP-IRA Is How the Self-Employed Do Retirement Like a BOSS)

During your fat-paycheck months, you should not only set aside the 30 to 35 percent you put away for your taxes, but you should also put whatever additional excess income you can afford into a "rainy day" savings account. This account is where you will go to get the money you need to keep everything running smoothly during any lean months. And like your taxes savings account, if you don't end up needing to dip into this rainy day savings account, that means you will have money already set aside that you can potentially invest back into your business. (See also: How to Budget Consistently Without a Steady Paycheck)

6. Insist on clear contracts

Everyone who has ventured into self-employment has at least one story about being stiffed out of payment from a client. For instance, in my first year of freelancing, I was hired to write for a startup parenting website. I wrote several articles for the site, but I was only paid for one of the half dozen pieces I provided them. (See also: 8 Ways Freelancers Can Make Sure They Get Paid on Time)

The client was in the wrong for not paying me — but I also made a mistake in accepting work from them without a contract. Our arrangement was based on nothing more than email exchanges and a phone call. We did not have a contract that spelled out our legal expectations of each other, which meant it would have been very difficult for me to pursue the client for the money they owed me.

In addition, contracts are also helpful for defining the scope of a project and specifying the details of a termination fee. A contract that outlines the specific timeline and deliverables will protect you from having to revisit the same project over and over again for no extra money if your client insists on more edits or revisions or a larger scope than you expected. Similarly, if your client decides to end your project, having a contract that specifies the termination fee you'll receive under such circumstances will protect you from having wasted your time.

Welcome to self-employment!

You can set yourself up for se lf-employment success in your very first year as your own boss. Planning ahead for everything from taxes to lean months to time management to contractual disputes will help you create a self-employment career that you'll love for years to come. (See also: Freelancing: A Beginner's Guide to Doing It Right)

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Moves You Should Make Now for Your 2018 Taxes

Christa Avampato — Thu, 19 Oct 2017 08:00:07 +0000

Fall is full of wonderful things: pumpkin lattes, crisp autumn air, changing leaves, and tax preparation. OK, tax preparation may not hold the same wonder as fall flavors and vibrant foliage, but this is a critical time to get your financial house in order before the end of the year. In particular, here are six easy tax tasks to take care of before we enter 2018.

1. Re-evaluate your withholding

Did the size of your family change this year? If it did, contact your human resources department to update your withholding so that you aren't overpaying or underpaying your taxes throughout the year.

2. Compare your life situation this year versus last year

Get out your 2016 tax return and consider any changes that have happened in your life since you filed your taxes for that year. Did you move to a new county, city, or state? Did your marital status change, and you'll now be filing jointly? Did you switch jobs or take on some freelance work? All of these changes can impact your tax filing, particularly if you itemize your expenses.

For example, let's say you moved to a new city this year and now work full-time from home. You'll want to have any job search expenses, home office and work-related expenses, and any moving costs detailed and organized before you visit your accountant or start the preparation and filing process yourself. All of these costs are potentially deductible on your taxes if you have well-organized records of them.

If you moved this year, make sure your employer(s) (full-time and freelance) from 2017 have your updated address so that you get your W-2 forms without delay.

3. Max out your retirement contributions

Are you maxing out contributions to your 401(k), 403(b), and/or IRA accounts? If not, could you afford to increase your contributions to meet or get closer to the max for the year? You can contribute up to a maximum of $18,000 (plus an additional $6,000 if over age 50) to your 401(k) or 403(b) for 2017 until December 31. IRAs give you more flexibility with your 2017 contributions — you can contribute right up until you file your 2017 taxes or Tuesday, April 17, 2018, whichever comes first. You can contribute up to $5,500 per year to an IRA (or $6,500 if over age 50).

4. Make your freelance income work for your retirement

Do you do freelance work? You still have time to set up and contribute to a retirement account that will have tax benefits for the 2017 tax year. In particular, look into opening a Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) account. SEP IRA accounts are specialty retirement accounts that were created for the advantage of business owners and their employees. This applies to you if you're a freelancer.

These accounts can be opened and funded independently from any other retirement accounts you have, such as traditional and Roth IRAs as well as 401(k) and 403(b) accounts from employers. Like other IRAs, you have until you file your 2017 taxes or Tuesday, April 17, 2018, whichever comes first, to set up and fund an SEP IRA for 2017. For 2017, contributions to an SEP IRA cannot exceed the lesser of 25 percent of your compensation or $54,000.

5. Prepare your deduction receipts

This is a task I always leave right until the end, but this year I'm trying to get ahead of the game. I itemize my taxes each year and have to keep track of all of my receipts to make sure I itemize properly.

Rather than letting my receipts stack up over the year, I've been tracking them in a spreadsheet each month to make my tax filing quicker and easier. Don't forget about any job-hunting expenses, either: Make sure to take special note of those expenses related to job searching, as they will be itemized in their own category.

6. Consider homeownership changes

Did you buy or sell a home in 2017? This change has huge implications on your taxes. Make sure you have all of your home purchase or sale paperwork organized so that you can account for it appropriately in your filing.

Fall offers us a slight pause before the rush of the holiday season that ushers us into the new year. Take a little time now to get a head start on tax preparations, and your future self will thank you!

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This article is from Christa Avampato of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Budget Consistently Without a Steady Paycheck

Emily Guy Birken — Fri, 11 Aug 2017 08:30:05 +0000

Freelancers, small business owners, contractors, and salespeople working on commission all have one thing in common: irregular income. Anyone who has worked in these professions knows the insecure feeling you get when you are lurching from flush months to lean months as work (and on-time payment) waxes and wanes.

Since the majority of budgeting advice starts with the assumption of a steady paycheck, it may seem like budgeting is out of reach for the average person with an irregular income. Nothing could be further from the truth. Not only can you successfully budget an irregular income, but creating and adhering to a budget can mean the difference between surviving the lean months and thriving through them. (See also: The Smart Way to Budget on a Freelance Income)

Here's how to create a budget if your income is inconsistent or irregular.

The cash flow bucket system

Before you even get started, you should know what budgeting success will look like. According to Roger Whitney, certified financial planner and podcaster, "the goal for inconsistent income is to slowly build up your savings to the point where you can pay yourself a regular monthly salary out of your cash reserves."

How do you do this? By using a method called the cash flow bucket system. With this system, instead of having your paychecks deposited into your checking account, they will go into savings. Once a month, you'll transfer the amount you need for expenses and bills into your checking account. This is your own self-created "monthly paycheck." This system is a great fit for anyone with irregular income, because it keeps excess money from burning a hole in your checking account, and will help you smooth over the irregularities in your income.

However, creating a cash flow bucket system can take a little more time with inconsistent income. Here are the steps you need to follow to get this system to work for you.

1. Capture excess income

Before you plunge headlong into depositing all of your income into your savings account, start by putting away excess cash during high-income months. This can take some discipline.

Anyone who has received irregular income knows the feeling of being flush when several paychecks or client payments come in all at once. It's very tempting to use that excess income for discretionary spending, especially if you can thank your own hustle for the huge payday. But before you blow the big check on a steak dinner, slow down and remember how tough it is to go grocery shopping with the change you pilfered out of the couch cushions.

That's why it's so important to recognize when you are experiencing a flush month and immediately put aside as much of the excess income as you can. The larger your savings account is as you start the cash flow bucket system, the easier it will be for you to smooth over the inconsistency of your income.

2. Determine your minimum budget baseline

The next step is determining your baseline expenses for a regular month. This baseline should be comprised of the expenses that are the absolute essentials for maintaining your life — such as your rent or mortgage, utility bills, transportation, groceries, and child care.

This figure should be relatively easy to calculate. Write down your fixed expenses, such as your rent or mortgage, and estimate the fluctuating expenses, such as utility bills and groceries, by figuring the average cost over the past six to 12 months.

When you know your baseline minimum, compare it to your existing savings account balance. Assuming you already have some money saved, you can see how many months' worth of minimum expenses you have set aside in your savings account — or how much you need to accumulate. It's a good idea to have three to six months' worth saved up, depending on the variability of your income. Just recognizing that you could survive with no money coming in for several months can help ease a great deal of the financial stress that comes with an inconsistent income.

3. Calculate your discretionary expenses

Once you know the bare minimum that you need to have on hand to keep the lights on and everything running, it's time to calculate how much you spend each month on discretionary purchases. This will include your spending on everything from dining out, to entertainment, to your hobbies.

It's a good idea to go over several months' worth of bank statements and credit card bills to figure out how much you have spent on average on these discretionary expenses in the past. This way, you can come up with an average monthly discretionary budget.

Be prepared to cut your discretionary spending as needed, since that can help you smooth over your inconsistent income more quickly.

The best way to pare down discretionary spending is to cut things from easiest to hardest. If you love your weekly movie date with your best friend, then make sure that $15 you spend per week is preserved in your budget. But if you get coffee at the local coffee shop out of habit rather than enjoyment, then be prepared to start brewing your own.

4. Start having your paychecks deposited into savings

Now that you've beefed up your savings account during flush months, and figured out your baseline budget level and monthly discretionary spending, you can start having your payments from clients deposited directly into savings, rather than checking. Then, on the first of each month, transfer your "monthly paycheck" from your savings account into your checking account to pay for your monthly expenses.

This is where things differ between someone with a steady paycheck and someone with irregular income. Depending on how much money you have already set aside in your savings account, and how frequently you deal with lean months, early on you may need to decide from month to month whether you will be living on your baseline budget or your baseline budget plus discretionary spending.

However, as you build up your cash reserves, you will be able to eventually switch to an automatic transfer of your baseline budget plus discretionary spending.

5. Keep an eye on the system

Your checking account will be nearly depleted by the end of the month, but if you calculated your budget correctly, the money should last you until the first of the following month.

If you find you are running short before the end of the month, you will need to look at your expenses to see where your calculation went wrong or your spending was too high. You can also decide to move more money from your savings account into your checking account or end all unnecessary spending until the next month begins.

6. Start saving for the future

The final step of budgeting irregular income is to incorporate saving for the future. While the cash flow bucket system will put excess income into your savings account and hold it for your lean months, it does not take the place of saving for retirement or other financial goals.

Once you have reached a point that you have enough savings to consistently pay yourself a monthly salary, factor saving for the future into your monthly budget. Set up an automatic transfer of that amount from your savings account to your retirement fund or (other savings vehicle). Though you won't see that money in your monthly "paycheck," you will need to factor in the deduction from your savings account.

Budgeting like a boss

Earning an irregular income can feel overwhelming. Not knowing how much you make from one month to the next may seem like a liability. But with the right money management, your irregular income can empower you to take control of your finances, your career, and your life.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Signs It's Time to Close Your Business

Kat Tretina — Tue, 27 Jun 2017 08:30:14 +0000

Many people dream of launching their own business. Some start small, with a side gig or moonlighting on top of their full-time job. Others jump right into launching their own company. Regardless of the business type, surviving can be difficult. According to the Small Business Administration, 50 percent of new small businesses close within five years of opening.

However, it's hard to know when to shut down when you've poured your heart and soul into a business. Making a smart, objective decision can be compromised by the passion you have for your company and the thought of the money and time you invested. Having a list of concrete indicators can help you make a wise choice.

Here are five clear signs it's time to make the difficult decision to close.

1. There's no more profitability

It can take a while for a small business to break even, let alone turn a profit. But while you should expect some time to ramp up your clientele, your business should show progress and eventual profitability. Otherwise, you'll be unable to pay your bills, buy inventory, or afford basic essentials.

If you've been working around the clock and cannot get in the black month after month, it may be time to reconsider your business model and sustainability.

2. You cannot take a large enough salary

Many entrepreneurs forgo paying themselves to help their business grow and succeed. The expectation is that after a year or two, they can start taking a salary. In the meantime, they have to live off their savings or rely on credit cards to fill the gap.

That's a dangerous game to play for too long. Going without pay — or working for less than minimum wage with a side gig — can cause you to go into debt and give a false sense that your business is doing well.

3. The market changed

While your side hustle or business idea may have been successful for the first few months or even years, the market can change. What was a hot business can cool down quickly as time goes by.

For example, driving for ride-share services was a great way to make extra money. Some drivers found it so lucrative they quit their jobs to drive full-time. However, there's been more competition in the industry, and companies like Uber and Lyft have cut drivers' rates to attract new customers. That can make it more difficult to make money, and many are making a fraction of what they used to.

If you see your earnings decline continually, don't hold onto hope for a recovery for too long. It's better to cut your losses and pursue something else than to be overly optimistic about a return to form.

4. You no longer enjoy it

When you first started your business or side gig, it may have consumed and fulfilled you. But while working on a passion project on a part-time basis can be enjoyable, it can change when you devote more of your time to it or make it a full-time endeavor.

Work can start feeling more like a drag than fun. If you go to work every day dreading what's to come, consider shutting down to give yourself the freedom to start elsewhere.

5. It's just not worth your time

Make sure to calculate how much you need to earn (and not just to pay your bills) for your small business to be worth your time. If you're working 20 hours a week, but making just a couple bucks an hour, it may be a better idea to invest your time in another business or just enjoy your hobbies.

Closing a business

Shutting down a business of any kind can be hard. Whether you invested $100,000 to launch a restaurant or just $500 to start an online craft store, you likely feel very passionately about your work. The idea of closing it and admitting defeat can be difficult. But doing so can save you thousands over time, and free you to pursue a new career or side business you enjoy.

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This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Work Perks You Can't Get as a Freelancer

Dr Penny Pincher — Mon, 08 May 2017 08:30:07 +0000

In some industries, the number of gig economy workers is growing faster than the number of payroll employees. Working as a freelancer certainly does have its advantages, the biggest of which are flexibility, freedom, and the ability to experience variety in your work.

But if you find yourself staring at the walls of your cubicle, daydreaming about escaping the 9-to-5 and finding freedom as a freelancer, don't overlook the perks you could be getting at your regular job, right now. It may not be so easy to leave these things behind.

1. Stable income

One of the biggest benefits of a regular 9-to-5 job is the steady paycheck. As a salaried employee, you can plan your budget based on a stable stream of income. As a freelancer, your income can vary significantly from one month to the next. A few slow weeks can throw your finances into disarray, so you'll need to shift your entire budgeting strategy to make sure this doesn't happen. (See also: The Smart Way to Budget on a Freelance Income)

2. 401(k) match

Many traditional employers offer matching contributions to 401(k) plans. In other words, when you make a contribution to your retirement fund out of each paycheck, your employer will also contribute something. This is free money, and can total thousands of dollars each year. In the gig economy, you won't get this kind of assistance building your retirement fund. You'll need to make efforts to save for retirement all on your own, such as with an IRA or solo 401(k). (See also: A Simple Guide to Retirement Plans for the Self-Employed)

3. Retirement counseling

Employers frequently offer training or educational programs to help workers plan their retirement investment strategy. Often, they'll even provide free access to financial planners to answer questions. Freelancers are on their own to figure out the road to retirement, and consulting with financial pros will have to come out of your own pocket.

4. Health Savings Account

A valuable benefit that many people miss out on is participating in a health savings account. Every paycheck, you can contribute pretax dollars to be used for health-related expenses. Some health savings accounts allow the funds to be placed in investments where the money can grow until it is needed. As a freelancer, you may be able to set up your own health savings account, but you will need to do a lot more research than someone who simply signs up for an established program through their 9-to-5. (See also: How an HSA Saves You Money)

5. Paid vacation and holidays

Paid time off is an undisputed benefit of a regular 9-to-5. As a freelancer, you don't earn a paycheck while on vacation or holiday. If you want time off, you take time off from earning any income, too. This can certainly put a damper on enjoying your down time.

6. Making connections

As a 9-to-5 employee, you'll have opportunity to build relationships with the coworkers and senior-level staff you see every day. These connections can give you a special level of access to approach and meet other influential people in your company. Plus, it never hurts to have a few people to chat with as you pass the day. Freelancers can still find plenty of opportunity to network, but they'll need to go out of their way to make it happen. It won't be as simple as showing up to work.

7. Tech support and replacement

I have thousands of dollars worth of computer equipment sitting on my desk. It gets supported, maintained, and upgraded by my employer. As a freelancer, you are on your own to buy and support your technology needs. Do you need a special monitor? You'll need to shell out for one. Is your computer too old to do the job? The replacement comes out of your pocket. If something breaks? The repairman will be billing you directly.

8. Training, certification, and professional development

Companies often invest in their employees by providing training or certification programs to help them be better workers. Staying up-to-date on skills, technology, and industry trends is incredibly useful to the employees as well, and makes them more valuable in the marketplace. Freelancers will need to find, purchase, and commit to their own training. It can be very easy to rest on your laurels and let your skills become outdated, especially with no boss insisting you keep learning.

9. Awards and recognition opportunities

It looks great on a resume to list awards and other work honors that you have received. Many employers have some form of "employee of the month" or similar recognition. You may not be able to stock your resume with such accolades if you go out on your own. At the very least, you'll have to seek out and apply for awards, where you'll likely be up against a much larger pool of talent.

10. Employee discount programs

Another perk that businesses offer their employees is discounts on products and services. These can range from cellphone plans, to personal computer purchases, to fitness club memberships — even discounts on concert and amusement park tickets. As a freelancer, you'll miss out on these discounts.

This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Ways Freelancers Can Make Sure They Get Paid on Time

Kentin Waits — Thu, 04 May 2017 09:00:08 +0000

After 10 years working for various digital marketing agencies, I jumped ship and went freelance in 2005. Though making the switch was stressful, I've never looked back. Freelancing has given me control over my schedule, put an end to my mind-numbing commute, and allowed me to work from anywhere. (See also: 7 Things I Learned About Money After I Went Freelance)

Of course, all that freedom assumes one big thing — that I'm getting paid on time. If late payments are derailing your freelance dreams, listen up. Here are eight ways to make sure you always get paid on time:

1. Track everything

Getting paid on time starts with you. That's why organization is one of the life skills every freelancer needs. Keep meticulous records of all work completed and the payment status of every invoice. I rely on a basic Excel spreadsheet that's organized with the following headers: Client Name, Project Description, Hours/Rate, Amount Invoiced, Date Invoiced, Date Payment Received, and Notes (for tracking important communication with clients and the dates any payment reminders were sent).

2. Invoice immediately

To get paid promptly, you have to invoice promptly. Waiting weeks or months to invoice exposes you to client-side staff turnover, shrinking budgets, and sometimes even insolvency. Strike while the iron is hot. Unless you've made other arrangements, send a detailed invoice within 48 hours of completion of the work.

3. Tighten up the terms

Avoid confusion about payment terms by making them a standard part of your invoice template. Some variation of "Payment is required within 30 of receipt of invoice. A late fee of 5 percent will be assessed each month payment is past due" will usually do the trick. Oh, and be sure to include your contact information on every invoice. You always want your phone number front and center in case a client has billing questions.

4. Pave the way for easy payment

Encourage quick payments by making things easy. Set up a PayPal account or work with other payment apps like Google Wallet or Wave, which allow clients to pay online with a credit card. Though there's a nominal fee to process payments, it's well worth the immediacy and convenience.

5. Be kind, remind

Though some freelancers send follow-up reminders for every invoice (whether payment is late or not), that seems a little heavy-handed to me. Focus on what's unpaid and keep the tone of your message friendly and positive. Remember, the goal is to facilitate payment, not ruin a relationship.

6. Levy a late fee

Applying a late fee to past due payments is sometimes a necessary motivator. To minimize ill will from valued clients, make sure your late fee structure is modest (say, 5 percent each month), consistent, and clearly stated in the payment terms on every invoice.

7. Polish your professional image

If late payment is an ongoing problem, maybe your business isn't being taken seriously enough. Upgrade your image and work on how you present your business in all communications — including invoices. Download a free invoice template, tailor it to fit your needs, and add your logo. Better yet, create, track, and manage invoicing with a service like Freshbooks or Zoho.

8. Set up a retainer

Retainer agreements are simple work contracts. They provide freelancers with a recurring and predictable source of income, while at the same time allowing clients to reserve your services for extended periods of time — usually in preparation for big projects. Though invoices are still required in most retainer arrangements, they don't drive the payment process. For repeat clients, suggest establishing a retainer and offer an incentive. I reduce my hourly rate by 10 percent for all work completed under a retainer agreement of three months or longer.

In the freelance world, getting paid on time takes the same skill set that built your business in the first place: an obsessive attention to detail, a big dose of diplomacy, and a touch of ingenuity. Still need some motivation to speed up those slow-paying clients? Just remember how terrible your commute used to be. It works for me every time.

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's How Your Taxes Will Change After You Start a Small Business

Dan Rafter — Mon, 10 Apr 2017 08:30:17 +0000

Starting a small business or taking on a side gig can do wonders for your household income. But that entrepreneurial spirit does come with at least one negative: Filing your income taxes will become much more complicated.

How will your taxes change after you start a small business or take on a side gig? Here are five key ways. Make sure you understand all of them before you start filing your income taxes.

1. Say hello to estimated payments

Starting a successful small business will introduce you to the world of quarterly estimated tax payments. As the name suggests, you make these payments four times during the tax year. It's a way for the federal and state governments to ensure that you won't owe them big dollars every April 15.

Business owners who file as sole proprietors, partners, and S-corporation shareholders must make estimated tax payments if they think they'll owe $1,000 or more for the given tax year. Generally, your estimated tax payments, made to both the federal government and your local state government, are due April 15, June 15, September 15, and January 15 of the following year. (These dates might change if they happen to fall on a weekend or holiday.)

How much you pay each quarter depends on how much money your business makes. The IRS says that calculating your estimated tax payments requires you to first determine your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

It's all complicated. And even if you take your time calculating a quarterly figure, there's no guarantee that you'll pay enough each quarter so that you won't owe your state or the federal government tax money at the end of the year.

Your best bet is to hire an accountant or tax expert to work with you to determine the right amount of estimated taxes to pay each quarter. (See also: What Freelancers and Side Giggers Need to Know About Income Taxes)

2. Self-employment tax can be a big hit

When you work for an employer, that employer withholds 6.2 percent of your paycheck for Social Security, and 1.65 percent for Medicare. Your employer also matches these amounts, meaning that, in essence, 15.3 percent of your income each year goes into Social Security and Medicare taxes on 92.35 percent of your net earnings (but as an employee, your employer splits the cost with you).

If you are running your own business or side gig, you are responsible for paying the entire amount. Make sure that you prepare for this by setting aside 15.3 percent of your net revenue throughout the year. This is money that you don't include in your quarterly estimated payments. Instead, it's due in April when you file your income taxes.

If you don't set aside this money, you might be scrambling to come up with thousands of dollars to send to your state government and the federal IRS. (See also: The 5 Biggest Mistakes Freelancers Make)

3. You'll have to become a master at tax deductions

Not all of the tax changes that come with owning a business are bad. Consider tax deductions. In general, you can deduct the cost of anything that you use to run your business. If you buy a new computer for your business, you can deduct the cost of it. You can deduct the cost of office supplies and health insurance. You can even deduct part of the costs of travel and business meals, as long as these trips and dinners really were held for business-related matters.

If you run your business out of your home, you can also deduct home office expenses. This means that you can deduct a portion of your utility bills, for instance, depending on the square footage of your home office. Just be careful with home office deductions. You actually have to use your home office only as an office. Don't try to trick the government. If you get caught taking a larger deduction than you actually deserve, you could face heavy fines.

Be honest about your business deductions in general. Don't try to write off an expensive meal if you only spent two minutes during it bragging about the success of your business. That doesn't count as a business expense.

Remember, too, that deducting something doesn't make it free. It just means you'll be paying a bit less for it. If you spend, say, $1,000 on new office equipment, your deduction — depending on your tax bracket — means you might only pay $750 for it. Don't treat tax deductions as an excuse for overspending. (See also: 7 Surprising Tax Deductions You Might Miss)

4. Goodbye, 1040EZ

Before starting your own business, you might have filed your income taxes using the 1040EZ or 1040A tax forms. Once you are running your own business or side gig, your tax form will become more complicated.

Most people starting new businesses operate these enterprises as a sole proprietorship. When you are filing in this category, you'll have to file your taxes with form 1040 while also including either a Schedule C (Profit or Loss from Business) or Schedule C-EZ (Net Profit from Business).

If you are responsible for paying self-employment tax, you'll also have to include a Schedule SE.

5. You'll probably need tax help

Odds are high that you'll need help from an accountant or tax-prep firm when filing your income taxes as a business owner. Taxes simply get more complicated, and making a tax mistake can cost you big in the form of missed deductions or penalties.

Hiring an account or tax-preparation firm isn't free. But it's usually an important investment for business owners to make. (See also: 14 Reasons Why an Accountant Is Worth the Money)

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Reasons You Might Have a "Phased" Retirement

Dan Rafter — Tue, 04 Apr 2017 18:21:50 +0000

The prospect of working full-time one day and then heading into a complete retirement the next doesn't work for everyone. Some people don't want to work a full-time schedule as they get older, but they don't want to completely ditch the working life altogether.

Instead, they prefer what is known as a "phased" retirement. Rather than leaving the working world completely, they work on a part-time basis for several years, or even pursue freelance or small business opportunities, until they are ready to retire permanently. (See also: 6 Great Retirement Jobs)

Some will embark on a phased retirement because they want to stay active. Others will do so because they have little other choice; they need the money from part-time work to supplement their retirement income.

As you near your retirement age, a phased retirement might be in your future. Here are four reasons why you might choose this nontraditional retirement path.

Your current employer offers a version of phased retirement

A growing number of large employers are offering flexible retirement options for their workers. According to a 2015 report from WorldatWork, about 30 percent of large employers — those with 1,000 or more workers — offer flexible retirement plans, anything from allowing their employees to work on a part-time basis to letting them participate in job-sharing programs.

If you're fortunate enough to work for a company that offers such a program, entering a phased retirement will be relatively easy. Instead of working full-time for your company, you'll shift to part-time or job-sharing duties. This could be a simple way for you to slow your work schedule while remaining active in the working world and bringing in extra funds each month.

You need the money

The most common reason why older workers choose a phased retirement is because they need the money. Not everyone enters their retirement years flush with cash. Even with Social Security benefits, savings, and, for the fortunate few, pensions, many retirees can't afford to maintain the lifestyle they want. Working on a part-time basis, or starting their own consulting services, can help these seniors afford the retirement they want.

The key to deciding whether phased retirement is a smart move is to create a detailed budget that lists all of your retirement-year expenses. Depending on where you want to live and whether you want to boost your travel, the income from a phased retirement could make all the difference in how happy your retirement years might be. (See also: 9 Easy Ways Retirees Can Earn Extra Income)

You'd be bored without working

Then there is the specter of boredom. Relaxing days spent reading books, golfing, binge-watching TV, and visiting your grandchildren might sound great when you're commuting to work every day. But in reality, retirement can be long and boring. You might find that you don't have enough to fill the hours of your suddenly emptier days. You can only travel so much, after all.

A phased retirement might be the solution. You can still travel, visit your family, and spend relaxing afternoons catching up on your reading or pursuing favored hobbies. But you don't have to relax all the time. By working on a part-time basis, you'll retain some of the structure that many people need in their days.

And if alleviating boredom is the issue and not a lack of retirement funds, you're free to pursue only that work which interests you the most.

You've always wanted to be your own boss

Maybe you won't spend your phased retirement working for your former employer. Maybe you won't spend it working with any company. You might spend your phased retirement working for yourself.

Your retirement years might give you the opportunity to finally start that business you always dreamed of running. Maybe you've always loved animals and you want to start your own pet-sitting or dog-walking business. Maybe you're the inventive type who's created your own product. In your retirement years, you can devote more energy to building a business around this invention.

If the entrepreneurial spirit has always burned inside you, a phased retirement might provide the perfect opportunity to unleash it. Freed from the chore of driving into work each day, sitting through meetings, and filing reports, your retirement years can provide you the time you've always lacked to finally build your own business.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Tell if That Home Business Opportunity Is Really a Pyramid Scheme

Holly Johnson — Fri, 03 Mar 2017 10:30:39 +0000

Work from home! Get out of debt! Make a full-time income selling products you love! Such are the promises of companies and their agents looking to recruit people to be distributors or "consultants" for them.

These types of "job opportunities" are called multilevel marketing (MLM), and most people who sign up never realize the benefits. If you're considering becoming a distributor for an MLM company, beware of the many warning signs that you could end up making little to no money, or worse, adding to your debt. (See also: Multi-Level Marketing: The Future or Folly?)

Tupperware, Avon, and Mary Kay are some of the best known MLM firms, though they sometimes shun that term in an attempt to distance themselves from controversy-laden companies such as Herbalife and Amway. Both of those companies have been accused of making inflated earnings claims and of being pyramid schemes. The main difference between MLM companies and true pyramid schemes is that the primary purpose of a pyramid scheme is recruiting other distributors, rather than making direct sales. Pyramid schemes are illegal. (See also: 8 Terrible Work-From-Home "Jobs" You Should Avoid)

What Are MLM Companies?

MLM companies, also called network marketing or direct selling companies, incorporate a business model in which representatives make money in two ways. The first is direct sales to consumers — often friends and acquaintances — through parties, social networks, and other web sales. The second income source is commissions from sales made by team members you recruit, also known as "down line" distributors.

IBISWorld estimates the direct selling industry makes $41 billion in revenue and employs about 800,000 people. Intense competition from mass merchandisers has kept growth to a modest 0.6%.

MLM Promises Are Tempting

The sales pitches of MLM companies can be alluring, especially for stay-at-home moms, students, and the unemployed. Just imagine, they exclaim, a work day that includes jumping on social media, talking up strangers at the grocery store, or networking with friends. By selling products you love and believe in, you could earn extra money while enriching others' lives. And if you could convince a few friends to become distributors beneath you, you could have your own business — becoming the "boss" for the first time in your life. The promise is this: If you pour your heart into your business, get people to sign up beneath you, and never give up, you can (and will) become successful — no matter what.

And when it comes to recruiting new distributors, some MLM companies pull out the big guns. It Works! — a company that sells body wraps, supplements, and personal care products — advertises huge cash payouts for new distributors who meet specific sales goals. How huge? The company frequently advertises bonuses of $15,000 or more for their top tier sellers, although it's hard to find concrete data on how many sales you need to make to earn these bonuses, or how they are paid out. (See also: 17 Part-Time Jobs to Do While Your Kids Are at School)

The Problem With Multi-Level Marketing Operations

While people can and do earn huge sums of money with MLM companies, there are myriad pitfalls to avoid. First, it can take a ton of sales to get anywhere near the mind-blowing income levels posted on corporate websites. And to reach the highest ranks of earners with any MLM, you may need to recruit dozens of people to work beneath you (with them recruiting people to work beneath them as well).

Secondly, as we mentioned before, the line between MLM firms and pyramid schemes is fuzzy. In a pyramid scheme, the price of the products sold is inflated, making them hard to sell and causing the vast majority of participants to lose money. The Federal Trade Commission (FTC) warns of the similarities, noting:

Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it's probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.

Even if the company is legitimate, most MLM companies require a "buy in." You'll need to pay a certain amount of cash upfront to sell their products. While these "starter kits" normally cost a nominal amount (a few hundred dollars), they will certainly start your business in the red. If you're trying to make money to pay off debt, that's the last thing you need. (See also: 11 Signs the Job Is Too Good to Be True)

How Much Do MLM Distributors Really Make?

If you make money right out of the gate, then a nominal investment could be money well spent. Unfortunately, most distributors for MLM companies barely eek out a profit, let alone earn a full-time income from home. You can find proof directly on their websites.

Let's go back to It Works!, the body wraps and personal care products company. According to its 2015 annual income disclosure statement, 82% of its representatives had been with the company for an average of one month and were still on the first rung of the payment hierarchy — distributor status. Their monthly earnings ranged from a low of $1 to a high of $3,847, with a monthly average of $54.

Income grows incrementally up the ranks, and tends to coincide with longer time spent growing the business. But income growth is slow, and the percentage of distributors who stick around more than a month drops dramatically. Only 7.8% of It Works! sales people are at the Executive level. They've been there an average of three months and earn an average of $231 a month. About 0.6% of reps are at Double Diamond level, making an average of $4,741 a month after 13 months of effort.

Of course, some huge, mythical incomes do exist. According to the disclosure, the top tier income earner (. 02% of all distributors) — Ambassador Diamond — pulls in around $37,583 per month.

Unfortunately, the average income for all It Works! Distributors was only $227 per month in 2015.

And It Works! is far from the exception; their distributors actually make more than those working for many other MLM companies. Check out these annual income figures from other multilevel marketing disclosures for more proof:

Thirty-One Gifts: a company that sells organizational totes and monogrammed bags. In 2015, the average consultant (92.1% of distributors) earned $548 per year.
Scentsy: a company that focuses on candles and wax warmers. In 2014, the average lowest-level rep, called an Ecsential Consultant, earned $81 per year, while the average Certified Consultant (one level up from Ecsential) earned $463 per year.
Advocare: a company that sells nutritional supplements and diet products. In 2015, the average annual compensation paid by Advocare to active distributors was $1,586.
BEACHBODY: a company that sells fitness products and nutritional shakes. In 2015, the average BEACHBODY coach earned $502.
Isagenix International: a company that focuses on nutrition and diet products. In 2015, 87% of Isagenix business builders earned between $702 and $2,101, on average per year.

As you can see, the average "little guy" is not making bank with any of these companies. In fact, your average distributor may be earning $100 per month or less. If they're a hobbyist who signed up for product discounts, then that might be fine by them. But when someone signs up to follow their dreams, the reality of not earning much can burn.

MLM supporters argue that the reason so many people don't earn more is because they aren't really dedicated to building the business. Barriers to entry are very low, so many people sign up, then lose interest and give up in a way they wouldn't if they were building a regular business in which they'd had to invest more.

But there are also real challenges to growing a viable business using the MLM model, even for committed salespeople. For example, many MLMs ask you to focus your sales efforts on family members and friends, which can be awkward and presents a limited pool of customers. Even if you expand your sales network, the products may be overpriced, making them difficult to sell.

Lastly, it's not easy to grow your sales if your MLM is overly saturated with distributors already. And if you happen to recruit a distributor (the key to earning commissions), they then often become your competition.

Tips for Vetting an MLM Company

Just like anything else, it pays to do some research before you sign up for a multilevel marketing company. As the FTC notes, it's smart to not only consider the products, but to learn more about the company itself.

Questions to ask should include:

How long has the company been in business?
What is its standing with the BBB?
Has the company been sued for deceptive business practices?
What are the company's annual sales?
What percentage of average sales are made to distributors, as opposed to retail consumers?

Beyond those considerations, the FTC suggests making sure you understand compensation structure, terms and conditions, and potential business expenses. Also, get all the company's details, including their refund policy, in writing.

The U.S. Securities and Exchange Commission also offers an array of tips for people vetting a MLM and trying to avoid a pyramid scheme. According to the SEC, you should:

Watch out for MLMs that don't appear to offer a product or service. If you can't figure out what a MLM sells, run.
Be leery of MLMs that promise huge returns in a short amount of time. If it sounds too good to be true, it probably is.
Be skeptical of companies that offer compensation for little work. Terms like "easy money" and "passive income" should be a red flag.
Look for proof of retail sales. Ask to see documents that show how the MLM generated revenue from the selling of its products to people outside the program.
Think long and hard before you "buy in." Question the value of any opportunity that makes you purchase a product to get started.
Watch out for complex commission structures. If it's hard to understand how you'll get paid or you can't figure out how commissions work, beware.

Lastly, the FTC and SEC both suggest avoiding MLMs that place a heavy emphasis on recruiting members to work beneath you. The hallmark of a pyramid scheme is when you make more money recruiting than you do for product sales.

Check out these FTC and SEC pages for further details on how to vet a multilevel marketing company. While these companies do offer a path to earning extra income, the reality is that most of that income goes to the very top few earners, not to the average distributor like yourself. And if you don't wind up earning much, the costs of buying a "starter kit" and hosting parties could easily leave you in the red.

This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Common Myths About Starting a Small Business

Dr Penny Pincher — Thu, 02 Feb 2017 11:00:09 +0000

In the "dot com" era of the 1990s, I started a couple of technology companies and ended up running my own profitable small business for five years. Starting your own business and working for yourself sounds great — and it can be! But it seems like many people who dream of starting their own business don't understand some of the hard realities that go along with this undertaking. Don't buy into these myths about working for yourself.

1. You Have No Boss

A big reason some people want to start their own business is so they can be their own boss. But even if you own a business, you still have a "boss." Your customers, investors, and employees are now your boss. The bottom line is your boss, too. Instead of answering to one boss, you now need to answer to many.

2. You Can Work Fewer Hours

While you can set your own schedule as a business owner, you will likely end up working a lot of hours overall to get everything done. In my startup days, I knew entrepreneurs who worked 100 hours per week, including lots of late nights and weekends. Starting a business is generally not a way to gain more free time.

3. Your Minions Will Take Care of the Details

The reality is that most small business owners wear a lot of hats and handle matters big and small to keep the business going, including things no one else wants to do. As the owner, you will get to work on lofty tasks such as business planning and strategy, but you will likely also clean the bathroom at first.

4. If You Build a Better Mousetrap, the World Will Beat a Path to Your Door

A common entrepreneurial myth is that you can invent something great and then sit back and watch people buy it. The reality is that you need to produce the right product at the right time for the right price in the right market channel to be able to watch people buy it. Even if you have an awesome product idea, it takes enormous work and resources to produce your product and bring it to market.

5. You Have More Control Over Your Income

As a business owner, I seemed to have little or no control over my income. I worked hard all the time trying to bring in income and win new business. Sometimes there was a lot of income, but sometimes there was none, despite my best efforts. My income ultimately depended on fickle customer decisions and economic forces beyond my control. Income for small business owners can be quite volatile.

6. Investors Will Throw Money at a Great Idea

I was disappointed after my first few pitches to potential investors. I imagined that I could simply summarize the potential market size, present my brilliant product concept, and walk out of the meeting with a briefcase full of money. The reality is that it is hard to find investors willing to risk their money in a startup business venture — even if you have a great business concept.

7. Determination Can Overcome Any Obstacle

Determination is perhaps the most important attribute you need to start a business, but you also need the right opportunity. Some people throw everything they have into starting a business venture that has almost zero chance of success due to limited market size, faulty assumptions, or other flaws. Persistence can get you started, but a viable opportunity is necessary to build a prosperous business.

8. By Taking Big Risks, You Set Yourself Up for Big Rewards

Another popular myth is that entrepreneurs reach success by trading risk for reward. The reality is that most entrepreneurs trade hard work and a good plan for a modest reward. Successful entrepreneurs reduce and manage risk well in order to avoid quick business failure. Taking big risks should be a last resort, not the primary plan.

This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: