Jun 15, 2017
Working for yourself can be liberating, but freelance tutors have a lot to consider when managing their own paychecks.
Working for yourself can be liberating, lucrative, and exciting, which is probably why so many people are leaving the office to freelance. In fact, according to one report, 40% of the population is expected to be involved in freelancing by 2020. Let’s face it, though: breaking into this world isn’t as easy as just pressing start. When you work for yourself, you’re confronted by new responsibilities that you likely didn’t have to deal with before. Full-time salaried jobs often take the guesswork out of finances by automatically withholding taxes and other benefits but, when you break into the freelancing world as a tutor, it’s now up to you to be fiscally aware. It’s important to remain actively mindful of how much money you’re making, where it’s going, and how it’s being divided up to ensure a successful career. Here are four topics for freelance tutors to take into account when navigating finances:
When switching from a full-time job to a freelance tutor, there are three new components of cash flow to consider:
Alternative Expenses: when working for yourself, your expenses are now going to look different than they did if your previous job was held in an office. Most of your day is spent using things purchased by your company when in a traditional setting, from electricity to water to paper towels and sometimes even food. As a freelancer, you’ll want to consider that you’ll potentially be increasing costs through utility usage and otherwise, especially if you’re planning on holding tutoring sessions online or in your home. Make sure you account for this. It also may be helpful to separate business from personal expenses for deduction purposes and financial organization in general.
Irregular Payments: one stark reality many freelancers face when they start out is the irregular payment schedule that inevitably arises without an accounting department. Salaried employees often enjoy on-time and consistent earnings each pay period, whereas freelance tutors may find this is not the case. Much of the irregularity stems from clients not paying on time (which is, unfortunately, not uncommon) and an inconsistent workload during certain periods. You should be very aware of this and plan ahead with regards to your finances instead of relying on consistent income.
Invoicing Systems: now that you’re working for yourself, you should come up with a thorough and efficient invoicing system. It’s important to clearly set payment expectations with new and old clients so they understand your needs. You should also ensure that you’re clearly recording outstanding and remitted payments so you can effectively follow up when needed. It may also be wise to instate a late payment policy, especially for clients who historically haven’t paid you in a timely manner. It may seem uncomfortable to have these conversations with your clients but consider that 71% of freelancers struggle to collect payment on time, according to the Freelancers Union. Remember: you are providing an expertise-based service and you should never be expected to work for free!
As Benjamin Franklin once said, “in this world, nothing can be certain, except death and taxes.” For freelancers, it often seems as if those words couldn’t be more relevant. No matter what your job is, you’re going to have to pay taxes on the money you earn. It’s imperative that you plan for this before tax time rolls around so you’re not suddenly stuck in a hole.
Of course, it can be very exciting to have a lot of cash in your wallet when you start to collect payments. As a general rule, however, you should consider at least 25–30% of that money as the government’s. Unless you know exactly how much you’ll be making for the entire year (which is pretty rare for freelancers), you won’t be able to accurately predict the tax bracket you’ll fall under and 25–30% is a pretty conservative estimate. If you end up in a lower bracket and this amount comes out too high, you’ll get some money back at the end of the year, which is always a nice surprise. Freelancers also often make payments to the IRS quarterly, so ensure you’re sending your estimated payments in on time. Set up a savings fund specifically for tax earnings and immediately deposit into this account with each payment so you’re not tempted to spend it on anything else. You should also habitually track your business expenses to stay on top of possible deductions.
Freelance tutors don’t have income withheld for insurance and benefits, so you’ll need to plan for these expenses as well. In a traditional salaried job, you usually don’t feel the impact of these withholdings as much, but health insurance can be a much higher expense than you’d expect. It’s absolutely not a smart idea to forego insurance with hopes that you won’t run into medical issues. Plus, you can be financially penalized for not holding a health insurance policy. Luckily, many insurance companies have started to recognize this high cost that freelancers face as the industry continues to grow. As far as options, you can shop around at private insurance companies, look for government options through Healthcare.gov or, if you have a spouse with employer-provided benefits, find out whether you can join under their policy. There are also many companies that provide temporary health insurance options if you’re unable to secure a more permanent solution. Either way, you should look at the many different options to determine which makes the most sense for your needs and budget before committing to one.
In a traditional job, it’s easier to save for your future through retirement funds and automatic payment deductions to a 401(k), but now you’ll have to plan on doing this yourself. A 401(k) is only available through employers, and now that you are your own boss you’ll need to look at other options. A Roth IRA is a great alternative — any money in these funds aren’t taxed (until you withdraw it) and you can contribute up to $5,500 per year. Although saving for retirement may not be as appealing in the short term, you’ll eventually be very thankful that you did.
If you managed your own personal savings before, the irregular payment amounts you’ll receive as a freelance tutor may make things a bit more difficult. As a general rule of thumb, a personal emergency savings fund should hold approximately three to six months of expenses. Make sure you plan in advance for uneven income while still aggressively contributing to your personal savings account. As a freelance tutor without a salaried job, financial security should definitely be taken seriously and savings are imperative for this reason.
Working for yourself as a freelance tutor can be a rewarding and lucrative career. However, freelancers need to be cognizant of the financial risks inherently present when self-managing cash flow and expenses. If you’re armed with the right knowledge and take proactive steps to be financially savvy, you’ll be much more secure and thus, much happier with your new gig!
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