A Financial Checklist That’ll Take You From Full-Time to Freelance

By Jackie Lam, Contributor, on April 17, 2018

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If you’re an indy currently in the “in-between stage” — that time period when you’ve just left your full-time job and are just starting your freelance career — finding useful self-employed tips on how to deal with an unsteady, variable income is probably at the top of your mind. It’s a tall order, especially when you’re juggling a client search, a new daily structure, building your ideal workspace and finding the right freelancer group. But you’re not tackling this journey alone: In fact, freelancers are expected to make up 43 percent of the workforce by 2020. Here’s a handy financial checklist to help you transition from your day job to going full throttle on your freelance career.

Save for a Rainy Day

When I was first considering whether to take an 18-month, on-site contract job that paid nearly six figures or go it on my own, one of the things that helped me take the scary leap into freelancing was having a robust emergency fund in place. At the time, I had enough saved to get by for a full year.

While you don’t necessarily need a year’s worth of living expenses, you need to have something saved. The general recommendation is three to six months’ worth of expenses, but the more you can afford to stow away, the better.

Get Ahead on Your Bills

I recommend that you get one month ahead, to be exact. What do I mean by that? Well, by the end of the current month, you should have enough in the bank to cover next month’s expenses. That way, you won’t have to constantly worry about paying your bills on time, and you’ll be able to leave most of your bills on auto pay. The more you can automate, the better.

Have Clients in Place

Before you go freelance, the most important thing to have is a roster of clients — people who validate your business and prove that there’s a reason for going it alone. When I made the transition, I had enough work coming in to replace about half of my full-time income. I was also in the “courtship” phase with a handful of clients, which meant I had some extra time to establish the groundwork for my freelance business.

Come Up With Ways to Make More Money

Beyond simply growing your list of clients, you always need try to come up with new ideas that’ll generate more income. If you run a popular blog and have a growing list of newsletter subscribers, consider releasing an associated e-book or online course. Or maybe you have a knack for coaching others, whether it’s helping them grow their own business or bolstering their photography or design skills.

But what about side hustles that have a lower barrier to entry? For instance, dog walking, pet sitting and rideshare driving (if you already have a car) don’t require fancy equipment or specialized skills. Besides writing, I also took care of pets and proctored tests at a local university during my transition to the freelance life. Once your business gets going, you won’t have to take nearly as many side gigs. Personally, I take a few extra gigs on occasion just to get out of the house.

Stay on Top of Your Taxes

So, you’re in that transition year where you have both a W-2 and a 1099. Even though you’re coming off of full-time employment, you will still need to pay self-employed taxes — or you’ll get hit with a penalty. Get used to it: These estimated taxes are due quarterly.

Here’s where it gets a little tricky. Whether or not you need to pay estimated taxes depends on how much you earn on your own. You likely won’t have to pay the tax penalty if:

  • You owe less than $1,000 after withholdings and credits
  • You’ve paid at least 90 percent of your taxes for the current year
  • You paid 100 percent of your taxes from the previous year

Regardless, you’ll need to start saving for self-employed taxes as soon as possible. While the amount owed will depend on how much you earn, try to stow away a good portion of every paycheck — at least 25 percent — to be safe.

Keep Track of Tax Deductions

You’ll also want to stay on top of your business-related tax deductions, so figure out the right system for you and stick to it. These deductions can include everything from transportation and travel expenses to office supplies and seasonal business expenses and gifts. There are few things more daunting than letting all your receipts pile up and having to make sense of each of your expenses at the end of the year. So keep track of your monthly expenses and consider leveraging apps like Expensify, Certify and Shoeboxed that’ll compile images of your receipts and automatically update your expense reports.

Review Your Budget

So, you have your tax system down, but now you have to factor any additional business expenses into your budget. You may be spending more now on computer equipment, software and office supplies. And don’t forget to factor in any expenses associated with your health, dental, life and disability insurance coverage.

But it’s not all bad news and additional spending. If you work from home, you’re probably spending less on gas and transportation — possibly even food. Keep a close eye on your budget, especially for the first few months, and make adjustments to your finances accordingly.

Create a System to Keep Financial House

Once you’ve got all of that down, you’ll need to have a system in place to keep your self-employed finances in order. For instance, you may want to create a process for sending invoices at the same time each month or tracking payments. You can go the do-it-yourself route with a combination of spreadsheets and invoice docs, or you could test out cloud accounting software like Freshbooks or Quickbooks.

As you start your freelance career, keep this financial checklist in mind. That way, you and your finances will be fully prepared for the transition to full-time indy.

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