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Freelancing is ripe with opportunity, but there are certain financial mistakes you will need to avoid to ensure your success as a freelancer.
The world of freelancing is ripe with opportunity, but also comes with more personal financial responsibility.
From not claiming back taxes, to severely compromising your rates, there are certain pitfalls which will cost you.
Here is a list of financial mistakes that every freelancer should avoid:
1. Not Claiming Back From SARS
Freelancers are subject to Pay As You Earn (PAYE) tax, which is calculated based on your income from a client, multiplied by 12 months. The reason for this is that, due to the freelance nature of your job, the income you've earned by the end of the tax year, and the number of employers, is not set in stone. SARS would rather tax a higher rate, than under-tax you and risk never seeing the extra money owed. Usually your freelance employer will deduct this tax when paying you for a commission. Each and every payment is subject to PAYE tax, meaning quite a chunk is taken out of your earnings However, the tax rate often ends up being higher than your yearly income. After all, you might not necessarily earn the same every month. Therefore, when the time to file your taxes comes, you need to make sure you submit the relevant documents. SARS can then pay you back if you fall into a lower tax bracket. Sometimes, you'll find out that you don't need to pay tax at all and can get a full refund. You can also apply for certain rebates, which can lower your PAYE tax amount if you qualify.2. Not Saving For Retirement
Freelance positions don't typically come with perks like a retirement, or provident funds and investment plans. Rather, the responsibility falls on you to set up your own retirement or provident fund and make sure that you make contributions every month. You won't want to make these contributions too high, in case you have a month with few commissions. However, you definitely will want to save. You should also look into putting savings into higher-yield and guaranteed-return accounts, so that your money can grow with interest. Often, freelancers are stuck in the present, working on surviving and meeting a decent monthly income. But, you also need to plan for your future.
3. Lowering Your Rate Too Much
There are usually freelance associations which cater for specific industries, such as media, IT, and design. Often, these associations set out guidelines for rates - since undercharging clients affects all freelancers. However, your rate should depend on your experience and the requirements of a project. You can also negotiate with clients based on their budget and needs, as well as the period of your contract. Therefore, you may want to charge a slightly lower rate for a client who commissions you regularly for a recurring contract and quota. This in exchange for the secure and guaranteed income. But, a big mistake many freelancers make is compromising their rate too much. Working for a very low rate wastes your earning potential. You could use those hours for commissions which pay a fair rate. Furthermore, it's unlikely that an employer that you've charged an extremely discounted rate will agree to move up to your regular rate. Rather spend your time on clients who are willing to pay a fair rate.4. Working For 'Exposure'
There are clients who go further than wanting to pay extremely low rates, and would rather pay nothing at all. You'll often hear that these clients are offering you "exposure" - especially in the media industry. This is the oldest trick in the book and freelancers are waking up to it. While there are times that creating something for a large, prominent company can actually increase your reputation, most of the time you're simply being used for free labour. If a company has the kind of reach that will, in fact, give you exposure, they should also have the budget to pay you. Occasionally you will want to leverage a client's platform, or reputation, for exposure - even without pay. But you shouldn't be tricked into making this a regular habit. There are many clients out there who are willing to give you both exposure and compensation for your work. After all, exposure doesn't pay the bills.5. Not Keeping Receipts For Business Expenses
Since freelancers, essentially, run their own businesses, there are certain expenses which come with it. Tracking costs, which can qualify as business expenses, can help you during tax season. But you need to keep receipts. You should also not overstate these expenses. While that new outfit is perfect for meetings, it is a personal purchase rather than a business one. However, certain data and transport costs can be classified as business expenses, if you used them for business purposes. According to FreelanceTaxation.com, freelancers have a range of tax-deductible expenses that qualify. This includes internet and phone packages, office rent, postage, business insurance, business-related equipment and software, and certain travel expenses. Keeping records of these expenses is essential, though, if you want SARS to take them seriously.