Three things you need to know about finance as a freelancer or sole trader

If you’re transitioning from being an employee to a freelancer or small business owner, it can be tempting to put off certain financial matters.

I did, but it only brought a world of overwhelm later on. Now that I know what I know, I’m keen to share three tips that can help set the financial foundations.

Your pricing should reflect your value

Figuring out what to price your products or services can be a mind-bending experience. Whatever your specialty, there are three common things people often forget to factor into their pricing – annual leave, sick leave, and superannuation.

Without accounting for leave from your business, you have no buffer for taking time off. As a result, you put yourself on the fast track to burnout. Furthermore, if you don’t make superannuation contributions and save for your retirement, you’re putting your future financial security in peril.

Factoring these three things into your pricing means that the true value of your work is reflected in what your customers pay. If a customer requests a discount, take a pause and think about what it means for your future. It’s likely to result in less time off in the short-term, and less money to live your best life in retirement in the long-term.

Separate business and personal (at the bank)

When many people enter into the world of self-employment, they often end up using their personal bank account for their business. However, as the business grows, this becomes more problematic.

When you look at your bank balance it can be hard to visualise your business cash flow and expenses in relation to whatever amount is available for you to spend. Our brains have trouble separating one dollar from the next, so when you look at one big sum you might see a nice overseas holiday instead of your tax bill, GST, and superannuation.

Setting up a separate business account for all of your business transactions makes it much easier to see if you really can afford that trip to Bali once tax, GST and superannuation have been paid.

Superannuation is about being smart with your business (and personal) finances every year

For employees, superannuation is part of a “set and forget” mindset. Their employers handle super and it gradually grows bigger without the employee having any major input. Freelancers and sole traders don’t have this luxury as superannuation becomes their direct responsibility. Thus, too many retire with just half the superannuation of their employee friends.

First of all, if your income is below a certain threshold and you make a contribution to your super, the government will match up to half of your contribution. For the 2020/21 financial year, if your taxable income is below $39,837 the government will make a co-contribution up to a maximum of $500.

In other words, if you contribute $1000 to your super, the government will give you $500. If you earn between $39,837 and $54,837 the government will also top up your fund, but the maximum benefit reduces as your income rises.

The other way super contributions can work to your advantage if you’re a sole trader is to reduce your taxable income by claiming your super contributions as a tax deduction. Doing this will mean that your superannuation contributions will be taxed at 15 per cent, instead of the rate relevant to your income bracket – potentially saving you some serious dollars.

To do this, you’ll have to fill out an “intent to claim” with your super fund – and this can be a painful process unless it’s automated to the extent our system is – where all you have to do is check a box.

Self-employment is a juggling act, but if you follow these tips your future self will thank you.

Branka Injac Misic, Co-founder, GigSuper