Freelance income arrives unpredictably. Freelancers will have some clients that always like to pay out things early, which gets confusing when contrasted with clients that tend to pay months later. Whether you’re trying to balance your budget or work out the taxes you earn, it all comes down to having a good bookkeeping system.
There’s little that you can do to get clients to pay consistently, but with effective bookkeeping practices, you can make sure that you don’t miss any payment and that you always know what’s coming in and out of your bank account every month.
How to Track Freelance Income
You should keep an income mark in a spreadsheet, or if you process a lot of payments in accounting software such as Wave, QuickBooks, or FreshBooks, you should record the client invoice number, invoice date, due date, amount paid, debt paid, and balance. You can rely on your bank’s and going outgoing payments feed to an extent, but those statements don’t make it clear which payments are running away, so your personal spreadsheet should be your primary point of perspective for looking at your freelance finances.
Some kind of reminder system to let you know when an invoice passes its due date, which makes sure you can chase up those clients and not have anything slip through the cracks.
Without payment logs and reminders, it’s not uncommon for some clients to get away with not paying. If you work on freelancing platforms such as Upwork, remember that the platform takes a fee, so you’ll need to subtract this from each payment. You should log the fee separately because, for tax purposes, that fee is usually deductible.
Keep Business and Personal Finances Separate
You should open a business checking account and use it for client payments and work expenses. That way, your personal and business accounts are clearly separated, and if a landlord asks to see statements, you’re not handing over your grocery history alongside your business expenses. A workable system could involve your payment to lending in the business account initially, the work costs coming out of it, and then a fixed share moves into a tax savings account, and finally, you transfer yourself a regular paycheck every month.
Budget for the Slowest Months
You should list your recurring costs, allowing you to get an overview of what your expenses are each month. Consider the following expenses:
- Software: Include any programs or apps you pay for to do your work, such as design tools or accounting software.
- Phone bill: Your phone is often essential for staying in touch with clients, so count it as a regular cost.
- Insurance: Any cover you hold for your business, or yourself, is a fixed monthly expense.
- Memberships: Professional bodies, networking groups, or co-working spaces often charge recurring fees.
- Subscriptions: Smaller ongoing payments, like cloud storage or online services, can add up quickly.
You should review this list every few months and consider cancelling things that you don’t use or that are too expensive to justify the price. When setting up your budget, you should always take a pessimistic viewpoint. Not that you should feel hopeless about your finances, but rather you budget for the worst possible outcome each month.
So, find your lowest earning month in the previous year and work into the assumption that that will be your income every single month for the coming year ahead. This is almost always an underestimate, so it lets you build savings into your system from the start. Anything that you earn above that amount can go into savings accounts or retirement funds and similar long-term financial investments.
Freelance Income Record: Organise Your Documents and Keep Proof of Your Income
This is your key: correctly filed evidence of your income so that if you’re ever investigated by the IRS or something similar, you can easily provide your tax records. The IRS generally advises keeping tax records for at least three years after filing, but many freelancers keep much more than that. If you’re working as an employee for another company, you get pay stubs and W2s, but freelancers have to put their own proof together.
And when you do anything like the following, you’ll need to be able to provide it:
- Renting
- Applying for a loan
- Applying for benefits
- Applying for a visa
You should keep monthly and yearly income summaries as well as bank statements and invoices that match up with them. When you file your taxes, save a copy of the return for yourself. If you’re paying yourself a set amount each month, you can also create pay stubs showing each payment and additional payment details.
Freelancer Financial Management: Predictable Habits for Unpredictable Pay
You can’t control when a client decides to pay, but you can control what happens once the money goes into your accounts. Freelancer income management requires keeping a detailed record of payments and keep supporting documentation stored and accessible.
Paychecks may stay unpredictable, but your finances don’t have to be. If you’re interested in similar topics, see our other blog posts for more articles.