This is a guest post from Sophia Dagnon. Sophia has been freelancing since 2014 and helps thought leaders, SaaS companies, and D2C eCommerce brands connect and sell through conversion-focused copy. She works with the amazing folks at Copyhackers and GetUplift, and (occasionally) takes on private clients.
Being a freelancer can seem tempting thanks to the freedom from a 9 to 5 schedule, having to commute, and being tethered to an office to work. When you freelance, you can set your schedule, opt-out of annoying meetings, and run your work life the way you want.
But before you can get into the freedom of it all, you need to set up your freelancer finances. Without this crucial step, your whole business can crumble. So lets walk through 5 things you should do, whether you’re in the US, UK, Australia, Canada or New Zealand.
Note: This article is not to be taken as professional legal or financial advice. Please consult your lawyer or accountant for your specific situation.
1. Choose the right business structure for your freelance business
While you may occasionally wear PJ bottoms with a blazer on top during Google Hangout calls, freelancers are still business owners. And having the right business structure will make things (like paying yourself, hiring contractors, and saving for the future) much easier.
Setting up a business in the USA
Setting up a freelance business in the USA can feel overwhelming. There are so many options – and the best one can vary from state-to-state. Should you set up an LLC, go the DBA route, or stick with freelancing as a sole proprietor under your own name?
This is the first and probably the most important decision you’ll make when setting up your business. The best way to decide on your business structure is by consulting a lawyer and an accountant. But if you’re not sure how to start that conversation, here’s some useful info to consider.
DBA (Doing Business As). These are the corporate equivalent of a pen name. It allows you to advertise your business and collect payment using a different name from your own. DBAs provide no liability protection for you if something goes wrong with your business. While setting up a DBA is pretty straightforward and relatively low cost, but you may want to consider other options before you do.
LLC (Limited Liability Corporation). This limits your liability in case something bad happens to your business, like insolvency or legal issues. Because an LLC is a separate entity, you’re not usually personally liable if something goes wrong. This business structure is popular thanks to the protection it affords, but it’s not invulnerable, so make sure to check that it makes sense for what you’re planning.
If you decide to go the LLC route, you need to decide between S Corps and C Corps. This affects how you’ll file your taxes with the IRS.
Tip: An LLC is a business structure, whereas the following options are tax elections.
- S-Corporations are businesses that have elected to pass-through profits and losses to the business owner’s tax return. This option can be great for freelancers as income is only taxed once. The downside of S-Corps is that the business has to be owned entirely by US citizens or permanent residents.
- C-Corporations tax profits at the corporate level and on individual returns. Salaries and benefits are tax-deductible and can limit what you pay in quarterly taxes. All LLCs start life as a C-corp, but some can file an adjustment of status to be treated as an S-corp if they meet the criteria. This option is useful to consider if you want to grow your freelance business into an agency or you want to employ people.
Setting up a business in the UK
When it comes to setting up a business in Britain, there are a few things you need to consider. HMRC requires any business that generates more than 1000 pounds of revenue in a tax year to register as a sole trader or limited company.
Sole traders in the UK, like sole proprietors in the US, retain all the liability for their business. Should anything happen, your personal finances and property could be forfeit. However, you can purchase liability insurance to protect your personal assets. On the plus side, getting set up as a sole trader is easy and relatively low cost. Sole traders are required to file a self-assessment tax return at the end of the year, but these forms are pretty straightforward.
A Limited Company (LTD) is designed to protect your personal finances. Just like its American cousin the LLC, an LTD is a separate legal entity. To set up an LTD, you need to apply and register your business name with Companies House.
Setting up a freelance business in Australia
Commonwealth nations like Australia, New Zealand, and the UK all share some common expressions for business. But be careful, your experience in one system might not translate well, even when entities share a name. You’ve got two options: you can set up as a sole trader or form a Pty Ltd.
Sole trader businesses are inseparable from the owner that registers them. Sole traders in Australia can employ contractors and full-time staff. However, like in other countries, the sole trader is liable for all actions of their business and may lose personal assets in the event of legal action.
Proprietary limited companies (Pty Ltd) are unique to Australia and South Africa. These companies offer protection for personal assets but are much more restrictive than British limited companies, including how the company can raise seed money. (As a freelancer though, you don’t need to worry about that last part.)
Setting up a business in Canada
In Canada, the sole trader registration is called sole proprietorship. The legal standing is the same both in terms of taxes and liability. Canadian taxes can be tough to navigate, so the structure of the sole proprietorship simplifies the process by treating business and personal income as one and the same.
Limited companies in Canada offer the same liability protection for personal property, as we discussed so far. When filing your articles of incorporation with the Canadian government, you need to register your business as an Inc, Ltd or Corp. The title you choose doesn’t make any difference to how your business runs, but you will need to use it on all official correspondence.
Setting up a business in New Zealand
In New Zealand, there is no requirement to register as a sole trader. The definition exists for contractors as well as the self-employed and is simply a means to differentiate employees of a large company from smaller independent businesses. The liability for your work is the same as in most other jurisdictions. However, as a sole trader in New Zealand, you can still paid parental leave and access the superannuation fund.
LLCs follow a more traditional definition in New Zealand and do require you to register with the companies registrar. There are a few more hoops to jump through to register an LLC, but the liability protection may be worth it. New Zealand is also one of the few countries where you can register an LLC as an offshore business. Though you do need to maintain a local address for filing purposes.
2. Setting up your business accounts
Whether you’ve decided to do business as yourself or set up your territory’s version of a limited liability company, it’s crucial to keep your business and personal finances separate. Here’s a quick checklist that will help you get started.
What accounts to open
Step 1: Open a business checking account
As soon as you register your company – or choose to act as a sole proprietor – set up a business checking account. A business checking account makes your operation look more professional, separates your finances, and starts the process of building a business credit history.
Step 2: Open a savings account
A savings account isn’t essential, but it helps keep your taxes and savings separate from your usable cash flow. Be careful how interest is paid in your savings account; money market shares and bank interest allow ready access to funds, but some higher returns may require you to give notice before withdrawal.
Step 3: Apply for a business credit card or line of credit
Freelance work can be unpredictable. A credit card makes it easy to pay for tools or contractors while invoices clear. Plus, certain cards come with useful perks.
Having these three facilities at your disposal will help your freelance business thrive in any economic environment. But where do you go to set them up? Don’t worry, that’s what we’re going to cover next.
Where to open your accounts
Option 1: Using a local bank or credit union
If you have personal accounts with a local bank that you’re considering for your business, talk to their business specialist. When forming a company, much of your business’s credit history comes from your personal file. Credit unions and local banks often offer preferential rates to existing private clients who want to start a business.
Your bank may not have a dedicated business liaison, and smaller institutions tend not to have the best online experience, so if you’re planning on being a digital nomad this may not be the best options.
Option 2: Using an online bank
Online banks like Capital One and Azlo usually have a great user interface and use of AI to answer account questions quickly. But when it comes to more complicated transactions, service can be slow. The downside of this format is that you will often deal with several different people to resolve a single issue. Online banking is great if you’re traveling or want a tech-first banking experience.
Option 3: Offshore banking
Sadly this is not as cool as it sounds. Due to monetary regulations, it’s almost impossible to maintain a bank account in a foreign currency. But if you do a lot of business with the same overseas countries, it can be beneficial to be paid in their local currency and exchange it when rates are favorable.
Changing money can be a drawn-out process and might not be suitable for businesses that need ready access to their capital. Banks like HSBC have some of the easier to access offshore accounts due to their global presence. If you’re in this situation, check in with your freelance community and see what solutions other nomads are using.
3. Set budgets
The first step of budgeting is figuring out what you’ll owe in taxes. This will depend on your business structure, so talk to an accountant or check the government site for the country you are in. If you’re in the US, you’ll have to take state taxes into account too. Once you know how much you’ll owe in taxes for a given contract, set that money aside as soon as the invoice clears and don’t touch it.
Once your taxes are sorted, calculate your recurring business expenses like software subscriptions, education, professional investment and equipment costs. Set this money aside too. Then – based on your business set up – decide how much money you need to pay yourself. This will depend on your expenses, where you live, and how much you want to invest back into your business.
4. Invoicing and day-to-day business management
Your cash flow is what will make or break your business, so you need to make sure you’re getting paid for the work you do and that you’re keeping track of where that money goes. One of the first pieces of software you need to invest in is a proper billing and invoice manager like FreshBooks, Square Invoices or Wave. Test our different software and find the one that works for you. Once your invoicing is in check, it’s time to fill the two financial roles that affect your success: the role of bookkeeper and accountant.
- Bookkeeping: You can keep your own books using excel sheets, use software like 17Hats, use a service like Bench or hire a bookkeeper. Whichever option you choose, make sure you do it. Come tax season, future you will thank you.
- Accounting: An accountant handles your tax liabilities and makes sure you take the right deductions on your return. Accountants specialize, so make sure you pick one who works with other freelancers.
5. Plan for retirement
It’s never too early to plan for retirement. The best way to set up depends on where you’re based. Let’s take a look at some different options.
Setting up for retirement in the US
US retirement options can be a bit confusing. When you’re ready to take this step, talk to a professional. In the meantime, let’s walk through some of your options.
1) Individual retirement accounts are great if you are just starting out saving for retirement or have left an employer-sponsored plan like a 401k or 403b. You can rollover your savings from these plans to a traditional IRA without penalty or pay the taxes on your retirement savings and convert to a tax-free Roth. IRAs are flexible so you can contribute when you have spare cash, but they are limited if you want to save more quickly.
2) A solo 401k is a great option if you’re a one-person outfit. This program is like your company 401k but designed for an individual business owner. You can add a spouse to a solo 401k if you hire them to the business, but if you take on employees, you won’t be able to contribute anymore. Solo 401k’s are great if you want to save more quickly while still being flexible. Just be careful of program fees when setting one up.
Traditional IRAs and solo 401ks both allow contributions to be directly deducted from your taxes. They grow without having to pay taxes on profits but are taxable when you withdraw from them at retirement.
Setting up for retirement in the UK
If you’re based in the UK, you’ve got three great options:
1) Cash ISA. An individual savings account provides a great way to save beyond Britain’s state pension scheme. The annual limit is currently twenty thousand pounds, and cash accounts usually have a better rate of interest than a regular savings account.
2) Stocks and Investment ISA. The UK keeps investment savings accounts separate from the cash you’re putting toward retirement. This can make saving a little confusing, because the 20k annual limit is split between these two options. Investment ISAs let you invest in the stock market and hopefully outpace inflation.
3) Innovative Finance ISA. This retirement plan is particularly interesting for entrepreneurs as it allows you to invest in peer-to-peer lending, crowdfunding and charitable bonds. Like the cash and investment ISAs, your yearly limits apply so make sure your total investment in any combination of accounts is under 20,000 pounds.
ISAs use after-tax money so there is no direct benefit to your current tax filing status. However, these accounts do grow exempt, so any withdrawals won’t be subject to income tax. There are no penalties for early withdrawal, but you might lose out on interest depending on who manages your account.
Setting up for retirement in Australia
Australia’s superannuation fund is often ranked as one of the best national retirement plans in the world. Unfortunately, most of those benefits don’t transfer through to the self-employed. What you do get is the ability to pay in 25,000 Australian dollars per year and offset a good size chunk of your personal taxes.
When you reach retirement you can make tax free withdrawals, but be careful. Getting access to your money early is almost unheard of so don’t invest capital you may need in the near term.
Setting up for retirement in Canada
Canada’s Registered Retirement Savings Plan (RRSP) is a tax deferred savings plan. You can deduct contributions to an RRSP from taxable income and growth is not taxed while inside the plan. There are limits to what you can contribute and withdrawals will be taxed as ordinary income.
Tax free savings accounts (TFSA) let you put your after tax money to work for your future. Because the money you invest in this type of account has already been paid for through your regular filing growth, is not taxed when you withdraw from it in retirement. TFSAs can be invested in the stock market so be sure to take a hard look at the options available.
Setting up for retirement in New Zealand
The KiwiSaver is a national savings plan that’s voluntary to join whether you’re employed or a business owner. KiwiSaver accounts are held at designated banks that are pooled together into large investment funds. Like most countries’ national plans, withdrawals before retirement age are difficult and only allowed under specific circumstances, such as significant hardship or buying your first home.
What if you’re a digital nomad?
If you are a digital nomad, setting up your freelance business may be a little harder. If you retain citizenship in any of the countries we talked about in the business structure section, you can still apply for a sole trader or proprietorship registration. You’ll still be liable for taxes regardless of where your travels have taken you but you can legally operate your business.
If you’re not a citizen of one of those countries – or you’re looking for a different option – Estonia has become the first country in the EU to offer digital residency to anyone wanting to open a business in the European Union. You can learn more about it – and the requirements – here.