Freelancers and End of Year Finances

If you’re a freelancer, you already know that freelancer finances are different from most standard employees. Your income is inconsistent and taxes are a bit more complex. Ultimately, you’re on your own for the majority of your financial journey.

The end of the year can be a good time to take stock of your finances. Understanding freelancer finances can feel tricky, but this guide will set things straight. We’ll focus on end-of-year finances, discussing the steps you can take to close the year strong and set yourself up for success next year. 

Freelancer taxes — be prepared for tax season

Tax season isn’t until April, but it’s best to prepare now. By planning, you’ll have a much smoother tax-filing experience — and may also be able to maximize potential tax savings. 

Though a freelancer salary is anything but predictable, here are some steps you can take to prepare for tax season:

Exchanging tax forms

If you’re a freelancer, any US-based clients will likely want a W9 form from you. This form allows them to report the money they paid you in a year properly. Likewise, if you paid any freelancers or contractors during the year, make sure you get them to fill out a W9 form for you. 

Note: You’ likely will receive 1099-MISC tax forms from any clients who paid you over $600 in the year. However, you likely won’t receive these forms until January or February. 

Organizing business expenses

Self-employed people are allowed to deduct all sorts of expenses from their business income. However, it’s up to the business owner to keep accurate records and know what is and isn’t deductible. Familiarize yourself with what qualifies as a business expense, and deduct any expenses on your tax return. 

Compiling tax records

Start gathering all the relevant information you’ll need for tax season. This includes records of all your income and each expenses (with receipts, ideally). You can use accounting software such as QuickBooks or a simple spreadsheet on Excel or Google Sheets. 

Setting money aside for taxes

TUnique to freelancer finances, the self-employed don’t have employers that are withholding income from their paychecks. It’s up to the individual to set aside money for any tax liabilities come April. 

You can use a tax calculator to estimate how much you may owe (be sure to use the “business income” category to calculate Self Employment tax properly). Once you have an estimate, keep enough money to pay your taxes set aside in a savings account. 

Note: You’ll already have money set aside if you have been paying quarterly taxes (more on this below). 

Registering for health insurance

Freelancers and gig workers typically buy health insurance plans through the health insurance marketplace. Open enrollment typically runs from November 1st to January 15th. Anyone can sign up for a health insurance plan through their state’s health insurance marketplace during this period. 

Contributing to retirement plans

Retirement planning is important for everyone, but it’s particularly vital for freelancers and the self-employed. Self-employed people can generally utilize one or more of the following retirement accounts:

• Roth IRA

• SEP IRA

• Individual 401(k)

Contributing to one of these accounts can help you build wealth and possibly earn a tax deduction (unless you use a Roth account).

In most cases, you can contribute for the current year up until the tax filing deadline of the following year. For example, you can make 2021 contributions until April 15th, 2022. 

Preparing for a strong year ahead

Closing out the current year is important — but equally vital is to prepare for a strong financial year-to-come. Here’s how: 

Estimating income

A freelancer’s salary is rarely consistent, as income can change from month to month. But whenever possible, look ahead and estimate your expected income for the coming year. Do you expect to make about the same amount as this year, more or less?

This is helpful for a few reasons. It helps you establish a personal budget and makes it easier to predict how your financial situation may change throughout the year. It informs you how much you should set aside for taxes.

Paying estimated taxes

In April, you can avoid a hefty tax bill if you start paying estimated taxes, otherwise known as quarterly taxes. The IRS requires freelancers to pay estimated taxes if they expect to owe at least $1,000 come tax time. 

To get started, estimate your income for the coming year, and then estimate the amount of taxes you’ll owe using a calculator or tax software. Then, divide the total owed by four, and send one payment each quarter to the IRS using form 1040-ES.

Keeping detailed records

The better records you keep throughout the year, the easier it will be to file taxes next tax season. This means keeping track of all income and expenses, saving receipts and staying organized throughout the year. 

Reflect — and plan ahead

The start of a new year is a great time to reflect, assess and plan. Instead of getting bogged down by all the tax forms you need to fill out, use this season as an opportunity to build a better foundation for next year. 

What went well this year, and what could you improve upon next year? Are your rates still in-line with your skill level, or should you raise them? How can you improve your business moving into 2022? 

It also might be time to make some plans with your freelancer finances. This could mean starting a budget, cutting back on unnecessary spending, starting an emergency fund or paying off debt. 

Spend some time reflecting on the last year, then sit down and make a plan for next year. Get specific, and set some ambitious goals. As a business owner, you have far more control over your income and work than most employees do — but it's up to you to be proactive.

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