How freelancers and contractors can spare themselves needless financial pain

LEAVING A SECURE, permanent job to go freelance isn’t a decision that anyone takes lightly.

But it is one that could see you reap rewards that most regular 9-to-5ers aren’t able to obtain: your own clients, challenging yet rewarding work, flexible working hours and, in many cases, higher pay.

However the move to becoming a fully-fledged freelancer or contractor does come with potential health warnings, especially if you haven’t thought about the effects it can have on your finances.

Here are some useful steps you can take to prevent this initial loss of income and fully reap the benefits of freelance life:

Planning is crucial

This might seem like an obvious one, but many people don’t fully weigh up how much financial planning and actual admin work a freelancer needs to put in alongside their day-to- day client work.

Without having an employer to cover your tax burden throughout the year, learning how to calculate what income tax, PRSI and USC you need to set aside can be a daunting task.

You can speak to an expert to get up to speed with your new tax obligations, as well as asking yourself some key questionsl.

Will you have enough work to keep you going for the next six months, or even the next three? And most importantly, if you do have some quieter weeks, do you have enough financial reserves to keep you going?

Once you have clear answers to these questions, you can put in place a financial plan that is realistic and works for you.

Be financially savvy

It can take time for a newbie freelancer to adjust to fluctuating earnings and the fact that you’ll no longer receive holiday or sick pay. Maintaining a rainy-day fund is essential to ensure peace of mind and cover any potential dry spells that come your way.

Some freelancers choose to have two bank accounts: one that serves as a personal current account and the other for receiving payments from clients.

A regular monthly income from the business account can be paid into the personal current account and this amount is usually based on slightly less than average monthly earnings.

Structuring your finances like this means that whether you have a particularly busy or quiet month, your income will remain stable.

Don’t undersell yourself

Learning to accurately value your work is essential when moving from a permanent role. When a freelancer is confident in their ability to service a client, they can charge more, turn down projects they have no interest in and ultimately be more satisfied with their work.

I recommend calculating your hourly rate before undertaking your first contract. While not every job will rely on this, from the outset it’s important to be clear in your own mind what you are worth to a client and what you need to charge to meet your financial goals.

For freelancers just starting out, use a slightly higher rate than you originally estimated because you will generally underestimate the actual time involved in completing the job, particularly when you include the hours needed for management and administration of a project.

Keep your books in order from the very beginning

Clinching your first freelance client or contractor role is an exciting time and is often a reward for a huge amount of hard work.

Inevitably you will have incurred expenses while doing so, and it’s important that you keep an account of everything for which you are entitled to claim, right from the outset.

Log everything – daily if possible, but at least weekly. If you don’t keep on top of your expenses and outgoings, you risk paying too much tax because your overall profit figure will be too high.

From your very first job there are simple things you can do that will ensure good business practice in the long run. For example, keeping all of your receipts safely, including each VAT slip, is essential, as is working out what expenses you can claim tax back on.

Another way to keep on top of your accounting is to put aside some admin time each week to get your books in order.

Staying up to date with these tasks means you will develop responsible tax habits early on and you can avoid that terrible sinking feeling at the end of the tax year when you are scrambling around for receipts, attempting to remember what you did six months ago.

Do you need to hire an accountant?

Hiring an accountant can greatly improve the health of your financial and tax affairs, while also relieving some of the stress that comes with freelance life. But it’s essential to find an accountant who understands your needs.

Only you are in the best position to determine what type of service you want. For example, do you want to be involved in each step of the process, or would you prefer to leave the financial side of things to then while you focus on your client work?

Many people file their tax returns with minimal effort during the first years of their freelance life, enabling them to keep overheads down.

However, there are instances when the services of an accountant are generally unavoidable, for example if you decide to become a limited company.

The more income and expenses you have as your workload increases, the greater the case for hiring an accountant; even if it is just for a periodic review or consultation to ensure you are maximising your tax relief and not making errors on your tax returns.

As you switch to a freelance role, you can take the financial pain out of the process and quickly start to reap the rewards of becoming your own boss.

Sinead Doherty is CEO and founder of Fenero.

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