One of the most significant joys of being a freelancer is that you are your own boss. There is nobody to moan at you and tell you what to do; nobody to give you orders. Of course, that means that there is nobody to remind you to do all those little things that your boss used to do for you – like paying bills and tax. So it is vital that you record your finances as a freelancer.
It is possible that you became a freelancer to get away from the dull, mundane parts of working a 9 to 5 job. The problem is that you can’t avoid them altogether.
When you act as a freelancer, you are running a business. You may even use a name for your business and market it as a business.
This means that you have obligations to record your finances like any other business too. No matter which way you choose to earn money online, you will be held responsible for keeping financial records.
Financial Recordkeeping Requirements Depend on Where You Live
You may operate internationally as a freelancer, and accept clients from all over the world. Yet, when it comes to tax and other business requirements, you need to work by the rules of your country of origin.
I’m a New Zealander. Thus I have to meet the requirements for operating a small business in New Zealand. Alright, in our case, there are few formal rules. You don’t need any form of business licence to operate in New Zealand. I would have to register if I were a company, but there is no formal business registration process if you are a sole trader or partnership.
Clearly, there are some types of businesses that have formal rules. I couldn’t just go out and do electrical wiring in people’s houses for instance. But, there are really only two legal requirements I have to abide by. The first is to record my finances and show them on my tax return. I am also expected to pay the relevant ACC (Accident Compensation Corporation) levies. ACC is New Zealand’s accident healthcare system.
Larry, being English, has to follow whatever rules apply in the United Kingdom for freelancers and small businesses.
Freelancers in the USA appear to have more complex rules. They have both state and federal requirements to follow. They have to worry about keeping their financial records for several types of taxes, along with health insurance.
How to Record Your Finances as a Freelancer
Now I admit to being old-fashioned here. As I have an Accounting degree and taught High School Accounting for over 20 years, I record my accounts by hand. I have set up a set of manual ledger accounts, and record my transactions on a daily basis in these.
Alright, I do cheat in one way. I accept the validity of my computer bank records and enter my data from here rather than the original source documents. This might horrify some of my past students who I always told to use bank records only as a back-up.
Because I am a small-time freelance writer and marketer, I am allowed to record my finances on a cash basis rather than an accrual basis for tax purposes. This makes things more straightforward, and this is another reason why I use my online banking records as a starting point.
I am registered for GST – New Zealand’s Goods and Services tax, although in many ways it is irrelevant to me. Over 90% of the money I earn comes from overseas (making it exempt from GST).
To many of you, the last few paragraphs may seem like a lot of gobbly gook. You have probably never written any accounts in your life, and have no intention of starting now.
If that is the case, I recommend that you work with an accountant to ensure that you get your taxes and other legal payments correct.
I must confess that there are times that I feel like changing over to a computerised system. This is because as I have to do monthly balances to ensure I have not made any mistakes. Last month I was out by a measly 16 cents in my balancing and took far too long to find my mistake.
At some point, I will change over to some form of computerised system for recording my finances s a freelancer.
Here in New Zealand, we have two main options: Xero and MYOB. There are a few other choices, but they don’t seem to be as customised to the New Zealand market as the big two are.
If you are in another country, you will want to investigate what is best for your market. I know that there are financial products that people use, like Mint, that are not available in New Zealand for me to try.
As I said above, I taught Accounting for over 20 years, and I showed the basics of MYOB to classes for part of that time. Xero has grown in prominence since I’ve been out of teaching, so I will also look closer at that product when I get around to making the switch.
Whichever Method You Use, Use Something to Record Your Finances
This is an area that you can’t afford to ignore.
One of the hardest parts of being self-employed is making sure that you have enough money to pay your taxes. Nobody else is going to do it for you.
I struggled at the beginning. After starting slowly, and having very little money to pay in my first year, I had an excellent second year. This meant that I struck a problem in my third year. I had to find the money to pay the second year’s tax, as for various reasons I was unable to put aside enough money as I went. But I also had to make an accurate prediction of the third year’s income, and begin paying tax on that in advance.
Unfortunately, I lost a few significant contracts at that point, which meant that I did not have the money I needed. I was lucky that I was able to work things through with IRD, although I still owe them far more than I would have had I been in a position to pay at the correct time.
One thing that helped was that I did at least have good records of what I earned and what I spent.
Remember that it is your responsibility to record your finances as a freelancer, not some boss. That is the cost of the freedom of being self-employed.