Financial planning for freelancers, part 2.
Three things are certain in life: Death, taxes, and the need for a ‘rainy day fund.’
A little while ago, we talked about how, as a freelancer, to manage your finances. You may remember it as somewhat of a love letter to spreadsheets.
Spreadsheets can incite some stress, but they also give you the info you need to keep working for yourself.
Knowledge, even uncomfortable knowledge, is power.
But don’t worry, this isn’t another love letter to spreadsheets. Today is all about where your money goes after you’ve tracked in a spreadsheet.
Namely, to the government (taxes) and to future you (the rainy day fund).
After some years running a business in a country we are not from (👀), we’ve made our fair share of mistakes. Hopefully, by us sharing what we’ve learned from these here, you can neatly sidestep them and tell us how great it is being a freelancer and how you’ve never run into any financial problems. This is what we want for you.
Taxes
We all like nice roads until the day comes to pay for them, am I right?
The nice part about freelancing is you don’t lose your taxes in your paycheck because - you don’t get a paycheck!
The less-nice part comes later when the government sends you a bill for all of it courtesy of your tax return.
The least fun but most sensible thing to do: Each time an invoice gets paid, set some of it aside for the tax man. (Revolut’s multiple accounts are great for this, but most banks have this function - or set up a savings account just for it).
As for how much to set aside: every country is different, but whatever percentage you think it is - round up. Trust me. It’s a lot nicer to have money left over than it is to get a larger tax bill than expected.
While you’re at it, go ahead and save whatever it costs for you to get your taxes done as well. That way, when that time of year rolls around, you’re ready.
If you don’t know how much your taxes will cost you, this is a great time to find out. It might be more than you think. Especially if you’re running a business in a different country than the one on your passport.
Rainy Day Fund
It’s great and good to have savings in the bank for when your business needs it, but you still have to balance this carefully. Depending on where (and how) you’re set up, you may also need to pay taxes on the profit remaining in your bank accounts (i.e., corporate income tax).
For all things tax and financial advice, always talk to your accountant and/or tax advisor. If you don’t have one, we strongly suggest you get one. The internet can only tell you so much!
Here’s what to ask them:
Is my structure the best one given my revenue? When you start doing well - really well! - you can graduate from being ‘just’ a freelancer to being a company, or even two companies - your ‘operational’ one and your ‘holding’ one, as it starts to pay off when it comes to taxes, liabilities, etc., and for holding a ‘Rainy Day’ Fund.
Are there pensions/investment schemes I can invest in to lower my tax bill? This is more common than you think and means you can set aside money for your future, pre-tax. However, check the fine print: Can you withdraw funds early if you need to? Is there a fee for doing so? (Spoiler alert: This is common, so be sure you know going into it).
I consider myself a person who likes a plan. I married (and created a company) with someone who likes a plan, too. We did tonnes of research on all of this. So many hours trying to understand company structures, calculating tax rates, how much tax filings cost….
And even after all of that, we still got surprise tax bills.
It seems that while having to pay taxes is a certainty, knowing precisely what amount of tax that may be is anything but. Until you’ve gotten through your first year of it, anyway. And even then! Laws change! I know. The audacity.
You will never precisely predict how much you have to pay in taxes; just as you’ll never know how much rainy day fund money is the perfect amount for whatever storm heading your way. But having something saved > nothing saved, and is much nicer to future you.