Working as a contractor has numerous benefits, including the autonomy to determine work hours, workload and pay rate. However, because contracting allows a certain flexibility, those who contract might find managing their finances difficult, especially when earnings vary from month to month. Managing one’s finances properly is a vital part of contracting and is the difference between financial stability and instability at the end of every month. Because personal bills do not change regardless of income, smart contractors create a flexible financial plan that prepares them for daily living, emergencies, and retirement.
Financial acuity tips for the savvy contractor
Register with an umbrella company: An umbrella company helps a contractor organize, and more importantly, manage financial responsibilities that go along with contracting. They typically manage contractor pay, taxes, and insurance, in addition to a number of investment-related tasks, so at the end of the year, the contractor only need gather the necessary paperwork to file taxes, invest in retirement funds, and complete other tasks.
Use a bookkeeping system: Contractors should also create a bookkeeping system that tracks the flow of money in and out of their business. That system should include recording invoices and payments made to and from the business so that at the end of the fiscal or tax year money and personal earnings can be accounted for.
Track income: Because contracting work is uncertain, where some months a contractor can make ungodly amounts of money and in others the well goes dry, paying attention to earnings is as important as keeping track of expenses. Tracking income helps professionals with their work schedule, determining whether a person works seasonally or throughout the year. Would-be contractors should pay attention to how much they make in any given interval (monthly, bimonthly) because tracking the influx of money will help the person budget for personal and business-related expenses regardless of the amount of available work.
Separate business bank accounts from personal ones: While it might be tempting to throw all of the money in one pot and spend it, separating business from personal expenses is essential, especially with relation to tax preparation. A business account statement that lists the types of business transaction is more likely to hold up against an audit than one that lists murky transactions that could be business, personal, or both.
Factor in taxes: Contractors benefit from getting their money before the tax man does. This gives contractors the opportunity to invest and stash a good portion of their earnings in tax-sheltered annuities or retirement. However, while contractors get the benefit of pre-tax earnings, they eventually have to account to the federal government for their income. Set aside money depending on monthly earnings (usually 30 percent) for potential taxes.
Contract work allows the professional so much professional and financial freedom. At the same time, this freedom might interfere with a burgeoning business if finances are not managed properly. For today’s contractor, financial management can transform a one-person show into a company with many employees.