Freelancing can be a liberating and lucrative career decision for many people. You get to decide whom you work with and whom you do not, set your own rates and decide when you want to work and sign a contract template or agreement template with. However, many things come as a surprise to new freelancers, especially when it comes to getting paid for submitted invoice templates. Here are five tips in personal finance for freelancers to help you keep your freelance career running smoothly.
One of the biggest surprises freelancers face comes at tax time. Because your traditional employer withholds federal, state and social security taxes for you, you usually don’t realize just how much goes towards taxes. When you transition into freelancing, it is entirely up to you to pay what you owe. If you do not prepare for tax season, you could end up with a massive bill, with added fines and estimated tax rate penalties, in April.
As a freelancer, you are responsible for both the employer and employee portion of employment taxes; depending on your tax bracket, that can be anywhere between 20 and 30 percent of your income. The best way to prepare is to set money aside for your 1099 taxes. Most accountants recommend you take a third of every invoice and stash it away in a savings account designated just for paying your taxes. That way, you will have the funds handy if you do owe money when you file a tax return.
Depending on how much you make, you may also have to make estimated tax payments every quarter. This can be a tricky process since it can difficult to figure out just how much you owe without underpaying or overpaying. If you pay less taxes than you owe, you'll pay a tax underpayment penalty. It is also a good idea to read a freelance taxes guide or work with a tax professional used to working with self-employed clients, so you know what to expect. Check out our full guide on how to file quarterly taxes.
While the full price of health insurance can come as a shock when compared to employer-subsidized plans, it should be non-negotiable for freelancers. Medical debt is the number one cause of bankruptcy in the United States, often due to people needing significant medical care who have no insurance or are underinsured. While you may be healthy, accidents still happen. Health insurance is the safeguard from losing all of your assets to a single emergency.
If you are relatively young and do not have any current medical conditions, you can opt for a plan with a lower premium and high-deductible that only covers catastrophes. If you have left your job to start a freelancing career or have another life-qualifying event, such as getting married or having a baby, you are eligible to enroll in health insurance under the Affordable Care Act at any time at Healthcare.gov. Otherwise, open enrollment begins November 1, 2016 and ends January 31, 2017.
Without a 401K and an employer match, retirement might fall off your radar. However, as a freelancer, preparing for your own retirement is vital. There are several options available to you to start savings, including a ROTH IRA, SEP IRA or solo 401K. If you have been putting it off, it is important to start saving now. As your earnings grow, contribute the maximum to as many accounts as you can to build a solid nest egg.
If you are carrying any debt, such as student loans or credit card balances, that can put a significant burden on your freelancing career. High interest rates can drive up your monthly payments, taking a lot out of your income. Refinancing the debt to get a lower interest rate can reduce the pressure on you as you build up your freelancing clientele.
If you have federal or private student loans, check out if refinancing is an option for you. In some cases, you might have student loans with interest rates as high as six to eight percent; by refinancing, you can reduce your interest rate to just three percent, saving you hundreds or even thousands over the course of your loan.
If you have credit cards with a high interest rate—some can range from 12-30 percent—you can lower your payments and interest by taking out a personal loan to consolidate your balances. You’ll be able to pay off your high-interest debt and make one simple payment at a lower rate.
When you are caught up in your work, it is easy to forget about routine purchases you make that keep your business running. However, from pens to ink toner, those expenses add up. Moreover, if you do not keep track of them (by using a 1099 template in Excel, for example) and hold on to the receipts for taxes, you could miss out on valuable 1099 deductions. You can deduct anything that helps support your business, including computers, conference fees and more. An accountant can help you identify all of your potential deductions and what kind of documentation you need to submit at tax time to reduce how much you owe. You could also try our 1099 expense tracker to automatically scan your bank/credit card receipts to do it for you.
As a freelancer, you not only produce the work, but you also are your own bookkeeper and are responsible for following up with clients to make sure you get paid. Establishing an organized system for creating and following up on invoices can ensure you get paid promptly. A good invoicing system coupled with a freelance contract creator will keep you from losing out on funds you are owed.
With so many people seeing the appeal of working for themselves, more and more are becoming freelancers. While it gives you a lot of freedom and earning potential, freelancing also means you have more responsibilities, particularly when it comes to handling money. By taking the time to understand your new challenges and obligations, you can effectively manage your finances and build a secure financial future.
Manage your freelance business with Bonsai, sign up for the free trial.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?