Top New Freelancer Business Financial FAQs

With the gig economy already in high gear, the COVID pandemic just accelerated enthusiasm for freelancing. There has never been a better time for individuals to start a home business as freelancers, whether they are programmers, writers, customer service people, or almost any other support or management type person.

For those just getting started or thinking about it, there are some frequently asked questions that are at the top of most articles related to the business of freelancing and financial considerationsi.

Q: How much money do I need to get started as a freelancer?

The good news for many is that they will need little or nothing for a cash outlay to get started in freelancing. That’s because most already have access to the Internet and a computer on which to get the work done. If a new computer or other expenses are necessary, many can use a credit card to get going.

Q: If I do need financing, what is available for a new freelancer?

Already mentioned, you can use your credit cards as long as you know you can pay them off with their higher interest. For some higher cash requirements, perhaps for production equipment, a HELOC, Home Equity Line of Credit, can be a resource. Interest is lower than credit cards and it is an acceptable use of your home equity. If your business generates a high level of receivables, invoiced work as yet unpaid, you can use invoice factoring for financing. There are lenders that will lend money by buying your receivables at a discount and collecting on them. It moves your cash flow forward in time.

Q: Are there any tips on keeping receivables paid in a timely manner?

From the very beginning, create a plan for invoicing, follow-ups, and collections of receivables efficiently for adequate cash flow. One way is to create pricing that allows a discount for prompt payment:

  • Terms like: “Take a 5% discount for payment within 30 days.”
  • Or: “5% -1 10, Net 30.” This means they can take a 5% discount if paid within 10 days, but invoice is due in full within 30 days.

Q: Managing cash flow.

With almost all online billing solutions you can create automated reminders to go out with escalating warnings to pay and penalties for late payments. You can word them politely but firmly to spur action on the part of your customers. Offering multiple ways for customers to pay, including credit/debit cards, online payment, and even payment with crypto-currency will aid in faster collections and better cash flow.

When cash is low, consider delaying payments of payable items. Accelerate receivables payments by customers with special fast payment discounts. Short of disrupting sales, delay inventory replenishment to shore up cash balances when necessary.

Q: How to manage periodic larger expenses for better cash flow.

Perhaps you are paying insurance premiums, particularly for vehicles, every six months to lower costs from monthly payments. That is a significant amount of money that can sneak up on you. Another would be quarterly tax payments. Though there are opportunities to request extensions, a better approach is to maintain a separate savings account with automatic deposits that replenish it to result in a sufficient balance to pay those charges when due.

Q: Are there special tax deductions for freelancers?

Normal business-related expenses will be deductible, including office supplies, computers, business website hosting, etc. Also, most freelancers meet the IRS guidelines for a home office deduction. Depending on which method you use, you may take a deduction for a portion of utilities, the mortgage, and other expenses based on the square footage of office space compared to the whole house square footage. The simplified deduction requires less documentation and a simpler calculation.

Q: Are there health insurance premium deductions available to freelancers?

If your business is profitable, and with certain rules, you may be able to deduct the cost of your health insurance premiums on your Form 1040. If you have a loss, you may be able to itemize your premiums on Schedule A of your personal tax return.

Q: Do I need a CPA or tax professional?

A major mistake made by many freelancers or small business owners is to avoid working with a CPA or tax professional due to the cost. What those who decide to take the plunge often find out is that the cost of the tax professional is often mostly or completely offset by tax savings due to better decisions and planning.

It is a great time to start a freelancing business, whether part time or full time. A major component for success is in planning well, particularly when it comes to cash flow management.

i Cash Flow Tips for Freelancers, CPAforFreelancers.com

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