Kristine Kathryn Rusch

Freelancer’s Survival Guide, Money Part Three

Written By: Kristine Kathryn Rusch - Jun• 25•09

The Freelancer’s Survival Guide: Money, Part Three

Kristine Kathryn Rusch

The money topic. As I mentioned two posts ago, it’s difficult for Americans to talk about money. And these last few weeks have borne that out.

The moment I mentioned money, the comments slowed, the e-mail stopped, and so did the donations. If it weren’t for the website statistics and Twitter, I would have thought that people had stopped coming to my website.

Instead, tweets pointing out the posts have abounded on Twitter (thanks y’all) and the number of unique visitors to my website has gone up dramatically since I started the posts about money.

But the silence has been deafening. I’m not sure if that’s because y’all are waiting for me to get through the entire money section before commenting, or if you’re stunned at my candor, or terrified by the actual economics of freelancing.

I’m sure I’ll never know exactly.

So…in the face of this silence, I’ll soldier on, and continue my discussion of expenses.

If you haven’t read the two previous posts on money, go read them now. http://kriswrites.com/2009/06/11/freelancers-survival-guide-money-part-one/ and http://kriswrites.com/2009/06/18/freelancers-survival-guide-money-part-two/ I’m going to be building on them.

In last week’s post, I had three versions of an equation, the freelancer’s financial equation. (The equation, really, that defines all businesses.)

Gross income – cost of doing business = net income

But, I pointed out, that for many freelancers, the actual equation goes more like this:

Gross income – cost of doing business = zero

Or, worse:

Gross income – cost of doing business = net loss

Let’s define terms.

Gross income is all of the income that arrives at your business, from the smallest pennies to the largest checks. All of the income without exception. If you earned the money through your freelance labor, then it gets counted as part of the business’s gross income.

We are only discussing the income that comes into your business, not the income that comes into your household. For many freelancers, that’s a tough distinction. Early on in freelancing, the money you made at your part-time work was bonus money, used to splurge on dinner or perhaps buy a nice pair of diamond earrings for the wife.

I would hope that before you became a fulltime freelancer, you learned how to separate your freelance income from your belief that it’s all bonus money and yours for the taking.

If not, you’re already in a world of hurt, and probably don’t even realize it.

A lot of freelancers, however, only count their primary freelance income as gross income, and that too is a mistake. For example, fiction writers make a lot of money from a variety of sources, from New York publishing houses to audio sales to foreign sales. Some writers believe that checks under $100 are bonus money. Others think that sales from other countries are bonus. If you make money in a way that is somehow tied to your business (selling extra copies of your own books on eBay, for example), then that money is all part of your gross income.

I can hear some of you complain now. You don’t want to keep track of the tiny checks, or the twenty bucks someone hands you for a hard-to-find copy of your novel. Too bad. Set up your accounting system so that you can keep track of every dime. Even if it isn’t important now, it will become important later.

The cost of doing business is precisely that. How much does it cost you to run your business?

Break this down into finite units, depending on your business.

If you have a retail store or an office outside the home, I would break this down into the smallest possible unit: How much does it cost you to run your business every single day?

Some businesses can get by with knowing that figure for the entire week.

Most businesses keep track of costs by the month.

A few keep track by project. (How much did it cost you to do that particular client’s job from start to finish, including overhead?)

For the sake of this piece, I’m going to go over general monthly costs. I do realize that each freelance business is different. I can’t write a piece that will include all the expenses plumbers incur and a piece that will include all the expenses criminal defense attorneys incur.

But I can speak about expenses in general.

Overhead: overhead is the general recurring costs of running your business. Remember last week that I mentioned I realized that even by breathing, we were all incurring expenses? To a business, that’s the overhead.

Overhead includes those expenses that happen even if you’re earning no money at all. Those expenses include (but are not limited to):

1. Rent

2. Utilities, including telephone and internet (and cable, for those of us who are freelance storytellers or freelance reporters).

3. Salaries (your salary as well as the salaries for any employees)

4. Vehicles/large equipment (trucks, tractors, large machinery, etc.) (I’m figuring that you’re amortizing the cost of these machines over the year, instead of writing off the cost of purchase in the month it occurs.)

5. Office equipment (computers, printers, photocopiers, etc.) (Again, see the note for #4)

6. Supplies (the monthly things you need to keep all of that running)

7. Maintenance (from equipment maintenance to janitorial services)

8. Business insurance(s)

9. Taxes. All of them, from sales tax to property tax to social security tax.

Costs per project: People who own storefronts usually don’t have this issue but the rest of us work on a piece-work basis. We don’t get paid a salary (except through our own business). We generate income by finishing projects. Each project will have general, predictable costs, and several unpredictable costs. All projects also have basic costs that most freelancers ignore. These costs include (but, again, are not limited to):

1. Materials specific to the project. For example, a friend of mine makes quilts. She has fabric, thread, batting, and all the other things she needs for the average quilt, but if someone wants a quilt made from a specially imported silk, that silk would be specific to this project.

2. Gas/transportation/travel expenses/meals. Any errands you do associated with this project and this project only, you should include a per diem expense for the vehicle used or the exact mileage and cost of gas. (For example, most writers never count their mileage to and from the post office as part of the expense of a particular project. But they should.)

As for travel expenses and meals, the IRS has rules as to what can be deducted. But we’re not discussing the IRS here. We talking actual cost. So include the full price of business travel per project, as well as the full cost of each meal.

3. Cost overruns: You should know how much each project will cost to complete. Projects sometimes cost more because the client demands something new or because the project is bigger than initially predicted. Those overruns need to be included in cost per project.

Note: I should include time as part of the cost per project. I am not going to here, because we’re discussing actual cash outlay. But time is an important part of project costs, and I will get to that in a later section. Because time is, essentially, what we freelancers bill for.

But right now, we’re talking internal costs and I trust I’ve taken care of the cost of your time in overhead with the inclusion of your salary (hint, hint).

Other important business costs. I almost called these hidden costs of doing business, but that’s a whole different section. This category, important costs, often includes the expenses that make or break your business.

1. Continuing education. Many professions require a certain amount of continuing education from the practitioners so that they can keep their license. Many state bars require continuing education from attorneys. Most hospitals require continuing education from their doctors (and damn, I wish that was all hospitals).

Freelancers should always continue educating themselves about their business. Sometimes that means attending a class. Often it just means keeping up with the current materials—books on the latest trends, subscribing to the trade magazines, etc.

2. Advertising/The cost of finding new business. Not every business has or needs an ad budget. For example, freelance writers never advertise on the radio. Plumbers sometimes do. Lawyers never used to, but they seem to own late-night television now. (Do they think the sleepless are more inclined to sue?)

But we all have to generate new business, whether that’s through designing and maintaining a website or handing out business cards at the local Rotary luncheon. This doesn’t go into overhead because, for most of us, it’s not a consistent expense, but it does have to go somewhere, which is why I put it here.

3. Advice. Many freelancers engage the services of other professionals to help with particular business matters. They hire freelance accountants to handle their year-end taxes. They hire attorneys to handle a particularly annoying problem. They hire real estate agents to help them buy a new office complex. Freelancers can often go months without paying for advice, but they rarely go years without it. Again, amortize the cost of the advice, and include it into your monthly expenses.

Of course, that’s not all of the costs of doing business, but that’s enough for a general start. You know what your business entails. Sit down and make a list of all the costs—again, from the smallest expense (the cost of the newspaper you buy for fifty cents every day at lunch) to your largest, and then break down those expenses by month. That will give you the monthly cost of doing business.

Subtract that cost from your monthly gross income, and you’ll get (I hope) a net income.

If you don’t, look at last week’s essay.

Notice how many fixed costs there are to running a business? More than most people expect, especially when they started making quilts for friends and then decided to go fulltime with an entire business.

For first-time freelancers, the expenses are often a big shock. As I mentioned in one of the early sections, when you work a day job, you never think of the overhead expenses. The office exists. The lights are on. The phones work. Those things don’t really matter to you, the employee, so long as you get your paycheck on time.

As a fulltime freelancer, you’re now responsible for the phones, the lights, and the office, as well as everything (and everyone) in it. That’s quite a change, and it’s often a difficult one.

Now let’s note what I did not include in expenses.

I didn’t include your house payment or the payment for the car your spouse drives exclusively. Nor did I include the cost of your kid’s ballet lessons.

Personal expenses come out of your salary. Got that? They don’t come out of the cost of doing business. Here’s a pretty solid rule of thumb for you: If you can’t legitimately deduct the expense from your business’s income tax, then you can’t pay for that expense with business funds.

Think of it this way. If you still had a day job, would you ask your boss to buy your groceries? Your boss would laugh at you and remind you that’s what you get a paycheck for.

I can’t be more specific than that. If you’re a fashion designer, then clothing is a business expense, just like theater tickets are when you’re an actor. Each business is different and has different needs. For me, books are a legitimate business expense. But all books wouldn’t be a legitimate business expense for a gardener. Only books on gardening and related topics would be a business expense for him.

Why am I tell you this? Because freelancers horribly intermingle their personal finances with their business finances. You have to keep them separate.

I know most of you work at home. That’s where the trouble starts. You work at home, your family lives there, and you think nothing of intermingling your expenses with theirs.

You can’t intermingle. It has to remain as separate as it was when you had a day job.

You’re going to have to start thinking in percentages. Figure out what percentage your office is of your house’s square footage. For easy math, let’s say that your office is 25% of your family’s house. You only use that office for your business. You don’t store exercise equipment there, or keep your son’s drum set in the back closet. Just your business.

Then 25% of your house payment is your rent for your office. Just like 25% of the electric bill and 25% of the water bill and 25% of the heating bill make up your utility costs for your office. Got that? Be scrupulous about this—and take pictures of your office, so that at tax time, you can prove that you use that office only for your business.

(Please remember here that I am not an accountant or a tax attorney. I’m just a humble freelancer with too much life experience not to share some of it.)

Try to have a car that you only use for your business. Otherwise you’re going to have to figure out usage either by project or daily use. You’ll need a contemporaneous log. That goes for other items with shared uses. Try to keep shared items to a minimum. I know you can’t always do that, but do your best. And when you must share, be very, very clear about how much you used that item.

The personal items problem is the very reason I’m telling you to take a salary from your business. It makes things very simple. The easiest way to do this is to keep a separate business bank account and never ever use it for personal items. Write yourself a salary check every month, and put that money in your personal account. Treat it the way you would treat your paycheck from your day job. When that salary money is gone, it’s gone, even if there is extra money in the business account.

Believe me, that accountant you hire at tax time every year will be much happier with you if you do things this way. So will the IRS auditor if you are ever have to face that music. (And let me tell you, as a person who has had two full audits, it’s really not as bad as the press makes it out to be. Yes, it takes time from your life, but if you’re organized and diligent in your record-keeping, you’ll survive just fine—and live to freelance another day.)

If you subtract those costs of doing business from your gross income, and come out with a net loss, then you need to make changes. The change you cannot and should not make is to cut your own salary.

I’m sure many of you wondered how month after month a fulltime freelancer subtracts the cost of doing business from his gross income and comes out with nothing. The way most fulltime freelancers make that second equation work is by cutting out their salary and letting their spouse handle the personal expenses. All of the personal expenses.

The freelancer’s business—without the cost of the salary—breaks even. Which means, that if you add the salary back in, the business is operating at a net loss.

Which cannot and should not be sustained over time.

I’ve gone two weeks now and I have not discussed that lovely phrase net income. So let me simply say here that most long-term full time freelancers have a rather large net income. We wouldn’t stay in the business if we didn’t.

But a net income creates its own problems.

I’ll deal with those problems—and the positives of freelance income—next week.


“Freelancer Writer’s Survival Guide: Money, Part Three” copyright 2009 by Kristine Kathryn Rusch.

You can now order either an e-book copy of the Guide or a trade paper copy of the Guide. It’s in slightly different format and has been organized, so that related topics are in an easily accessible place.

You can get the print version here.

For those of you who’d like to buy an ebook, here’s the Amazon link as well as the Barnes & Noble link. The e-book will also be available on all the other e-book sites. If you want it in your favorite format, and the book hasn’t yet been uploaded to your favorite site, try Smashwords. You’ll be able to download in a variety of e-book formats.

Send to Kindle

You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

28 Comments

  1. Geri Jeter says:

    Kris –

    That determining a salary and paying yourself out of it is how K. W. and I stayed afloat for years. Even when I was working full-time and he was totally freelance, we would put all his income in a special account and pay him his salary each month. It kept us from getting overexcited when we saw a big check come in, and ensured that we wouldn’t spend it all on high-end stereo equipment. :)

    Now that we both work straight jobs with only a small percentage of our income derived from freelance work, we still pop the freelance money into the separate bank account. It is still business income, not part of the salary.

    This money advice is probably the most important information you can give a freelancer. No one really wants to hear it, but they need to.

    Incidentally, put a mix of self-employed of mixed fields in a room along with standard wage slaves, and they will split the room right down the middle, just like a middle school dance. The self-employed freelance writers have much in common with a self-employed plumber or gardener. And what do they talk about — why taxes, health insurance, and how to handle the income, of course.

  2. [...] is the original post:  Freelancer’s Survival Guide, Money Part Three [...]

  3. Great blog!!
    Thanks for sharing.

  4. Pati Nagle says:

    All this is good stuff, Kris.

    When I first went freelance (with a belly dance supplies business – part time) the first thing I did was set up a separate checking account for the business. That’s absolutely essential and I can’t fathom why any freelancer would neglect to do this, but they do.

    A separate checking account helps you mentally separate the business finances from your personal finances. It also makes taxes much easier to deal with.

    I’m currently running two freelance businesses, with a separate checking account for each. And actually, for one of the businesses I just set up an additional checking account just for PayPal, because I don’t want my other business income mingling with my PayPal income. (That’s just me – I like to be very cautious with anything money-related on the Internet.)

    The checking accounts are free; no service charges. I’ve never had trouble finding a bank that offers free checking. There’s just no reason not to do this.

  5. James says:

    Hi. In this post you said:

    “2. Utilities, including telephone and internet (and cable, for those of us who are freelance storytellers or freelance reporters).”

    Not really a question for the freelancer book but more from the writer p.o.v., would you mind going into why cable is a necessary business expense for a storyteller? What do you get out of it, how do you avoid it becoming a time-sink, etc.? (I have some ideas but I don’t want to influence your answer.)

    • Kris says:

      James, scroll down on my site and find the link to Joseph Finder’s post on movies and thrillers. That’ll answer you in-depth. But the short answer is that storytelling is storytelling is storytelling. You should always study story, in all of its forms. As for the other reason, you do hope some day that your books/stories will sell to Hollywood, right? So you need to keep up on what Hollywood is producing, just like you should be keeping up on books published–in all fiction genres. But your time-sink comment is good as well. Writers write–first, at least. Then they watch TV.

  6. Annie Reed says:

    I’ve had a separate checking account for writing income for a long time now. When I got my fellowship grant, all of that money went in my business account as writing income. I paid writing-related bills – cable, cell phone, workshop fees, book purchases, supplies – off that grant money for a long time.

    Great posts!

  7. Kris, your web site is one of the few web sites I make sure to hit every single day, just to check if there has been something new added. This was true before I came out to Lincoln City two weekends ago, and it’s even more true now.

    I won’t lie. I’m one of those people who thinks writing full-time would be fun because then I wouldn’t have to worry about money. I also don’t do the finances in our home — my wife is our business manager, since she’s much better at it than I am.

    You and Dean said it: being a full-time writer is basically owning and running your own business. I’d be stupid to not educate myself on the realities of that business model. I therefore consider these Freelance posts to be a form of distance learning.

  8. Kris says:

    Thanks, Annie. Great example on how to do things right.

  9. Kris says:

    Brad, since your wife is your business manager, you should have her read these posts as well. That way, you’re both on the same page about most of this stuff. She’ll probably have questions that you won’t, since she handles the finances.

    Thanks everyone for the great responses to this one. I no longer feel like I’m whistling in the dark. :-)

  10. Rob Vagle says:

    Hey Kris! I can’t seem to reply from my phone, so I have to wait to reply until I get to the library computer. Which isn’t often.

    One of my biggest regrets is not using that place I lived in on River Road in Eugene (George’s place where the Yorks and Ray lived once, too–you know, the Writers Commune) to save money and stop using credit cards. Alas, we all make mistakes with money and hindsight is 20/20.

    Today, my wife and I avoid using credit cards and have done so for the past few years. We have our money budgeted weekly into catagories–groceries, cat money, personal allowances, gas money, etc. (this always gives me the impression that we’re better off financially than I ever believed). We even paid for our entire wedding with cash (yes, we had a savings category started more than a year before the wedding). We’ve built up a savings and still have it even during this poor economy and unemployment (however we’re both working now). We still put money into the savings account. We’re paying down the credit card debt bit by bit and sometimes I wish it could go faster.

    Alot of this is thanks to my wonderful and intelligent wife. :-) My mom never could get me to save money.

    This whole money section of the freelancer takes some time to absorb and I’m relishing this information.

    As for salaries for the freelancer–how does one determine the amount of one’s salary? And this can be done even while working a day job?

    Great stuff here, Kris!

  11. Rick Dickson says:

    Hi Kris,

    I’d imagine that the silence is because this IS such a big subject and we didn’t want to get ahead of the conversation. Good stuff.

    I’m not sure if these “nits” fit into the discussion, but on the subjects above… two things I learned from watching “per project” consultants over the years:

    1) Consider getting a credit card for the business expenses. (Also, consider the benefits of choosing a card that is accepted everywhere.) Keep it paid current. You never know when that big job is going to come through and you suddenly need all of your credit. You’re also hoping that your business will grow. Keeping the card current shows you can handle money and may give you the chance to raise your limit as your needs increase. (Remeber that there will be a timing issue after the project is over… the card company will take a few weeks to process the last of the expenses. Don’t forget about that last cash outlay.)

    Never leave an unpaid balance on that card. Ever.

    (Consider discussing the implications of a credit card with your tax advisor. Sometimes it makes a difference in how they prepare your forms… might be worth the small fee they’ll charge you in order to set this up correctly ahead of time.)

    If you’re on a “cost-plus” basis, do a cross-check between the expenses on your credit card statement and the expenses you’ve billed your client. An expense forgotten is an expense that you eat, dropping your margin. Freebies are nice for the client. Unintended freebies are a nasty shock for you.

    Check with your card company to see if they can give you a summary of your annual charges. Many of them can do this. Most don’t send it to you unless you ask — they don’t want you to see how much $$$ you spent during the year (for sticker shock reasons), but this can be a handy little tool to help ensure that you’ve captured all expenses on your business (and tax) records.

    2) Your time: You’ve mentioned a method for paying yourself, which is something that many people don’t consider. Time can also be used as a leading indicator to tell if something about your business model has changed or becomes broken… the rate that worked last year may not work this year. If you wait until you notice this trend in your bank account, it’s tough to fix.

    A suggestion might be to divide net income (without your salary) by hours spent on the project to give a rough idea of how much your company earned per hour. If that starts falling, and if you didn’t intend that it should, you need to wake up. You may have a productivity problem or an expense issue that you need to nip in the bud.

    Thanks again for all the thoughts, Kris. It’s a very handy little guide. I’m sure we all appreciate the time you’re spending to chase down and tackle this elephant.

    Regards!

    Rick

  12. Kris says:

    Great post, Rob. That’s a marvelous way to do things. When Dean was bartending, he kept jars in his kitchen, labeled with the name of each bill. He’d stuff his tips in the various jars, filling them up through the month. I used to do something similar when I was a waitress. I really do prefer the cash-based system.

    As for salaries, you figure out what you can afford to pay, just like any employer does. Early in your career, that’s not going to be enough to live on. It might be low ($20 per month, for example). As the business improves so does your salary. And yes, you can do this while on a day job. That way your writing money is allocated, including some to you for needs. You can also use Annie’s system (see her comments above). Just be realistic. Everyone would love to have a 7-figure salary, but most businesses can’t afford it. Yours probably can’t either. Yet. :-)

  13. Kris says:

    Thanks, Rick.

    Credit cards are one of those job-specific things, which is why I didn’t discuss them much. Writers should have one that they use when needed (and you’re right; never have a balance), but that’s all. As irregular as writing income is, there’s too much temptation to pay bills with it. Better to use Rob’s system.

    If you’re a consultant or a contractor or someone who has to buy a lot of materials to start a job, then you’ll need credit and credit cards are good for that. Again, never keep a balance.

    But each of us who freelance have different needs. For those who don’t need a lot of materials up front and are paid once every few months if at all during the year (sometimes one check lasts several years), credit cards are a very bad idea.

    The other thing about credit cards is this: if you’re not freelancing yet, but plan to go freelance, figure out your credit card needs–and get the cards before you quit your day job. As a freelancer, you probably won’t qualify for a credit card, and if you’re doing one of those jobs that requires one, you’ll be in trouble.

    Great post on time. (Rob, check out his suggestion on payment) I’m going to do an entire section on time in the future, but your short comments are a great start for that.

    It’s okay to get ahead of me. Sometimes it points out things I need to examine (and forgot) and sometimes it provides a nice segway into the next section. So comment away, folks!

  14. Rick Dickson says:

    Absolutely. 100% agree. Thanks for clarifying — and great thought on getting the card before you leave your day job.

    Good thoughts from Rob, too.

    I did a poor job of setting up my comment. I didn’t mention that I was mentally watching a budding young freelancer paying for items #1 and #2 of the “Costs per Project” section (above) as I was jotting down my notes. Sorry.

    Presuming that these types of expenses will be paid with a card (airfare, rental car, hotel, meals for a three-week assignment, etc.), try not to use a personal card, if at all possible. Consider getting one for business. And then, only pull it out of your pocket for business purposes.

    Hope this helps set those other comments in the proper light.

    Regards!

    Rick

  15. Patrick says:

    I do wonder why we don’t talk about money more and it isn’t taught in school. I think it’s because actual incomes can make people uncomfortable, because ‘class’ is a big divide in the US.

    Talking about my challenges with paying for a 10K per year private school for my son with someone not making much more than 10K is – well – it’s a weird conversation.

    But if you think of it all the same – that just factors into my personal cost of living.

    A couple years ago, after a personal finances disaster – I started downloading all of my cards into Quicken. I use it for post mortem tracking to figure out where all my money was going. When ever I wrote down all my monthly bills, I had a huge monthly surplus, yet I had still screwed up somewhere.

    It wasn’t until my wife and I put everything in Quicken and could see where everything went that we really knew what happened. Now, since we look at it at least monthly, but I try for bi-weekly, we keep ourselves on pace.

    The additional benefit of this is now I have a few years of spending history. I know where my splurges happen(you don’t want to know how much I spend eating out). I know my cost of living. I have a history of unexpected costs and what that did – things I couldn’t do because I had to deal with a dead car – etc.

    I also know things not included in my Quicken. Taxes. Insurance. So when I try to figure out what my income requirements are for going independent, I have a realistic view of where I can cut back and how much I need to pay myself.

    The reason I love these articles is because like you said Kris – the majority of first time freelancers fail because of something they didn’t plan for.

    I feel confident in knowing what I need to become freelance – whether as an independent computer consultant, landlord, writer, stock market guru(this one seems less likely), inventor of a giant death ray, or some mix of those together.

    Personally, I do like to think in income streams. Even with a dayjob, I prefer to have more than one source of income. It doesn’t need to be 50/50. Heck 98/2 is fine, or 95/3/2. It’s a balance though.

    But I suspect I am missing something. I don’t know how to ask what I am missing, but I am keeping my eyes peeled.

  16. Patrick says:

    Oops – forgot a big one

    Things not showing up in my Quicken(the way I use it)

    Insurance
    Taxes
    *Retirement savings(401K and employer match)

  17. Steve perry says:

    You write for money? Not for … Art?

    Oh. Oh …

  18. Susan Kroupa says:

    Great post, Kris. This whole series is excellent and inspiring.

    I’ve have my separate checking account for years, but generally haven’t made enough writing not to use personal money for writing expenses. (And spouse has not been happy with the string of years declaring a loss on my Schedule C.) Then, last year, I made some (modest) money and quickly blew it–using some of it for personal stuff rather than saving it to cover upcoming writing expenses. The result was that I almost didn’t get to attend the marketing workshop and worse, I disappointed the spouse, who is a meticulous financial planner.

    Now, I’ve resolved never to let that happen again. Your posts and the comments here offer good guidelines and tools to follow that resolution.

    Thanks!

    • Kris says:

      Good post, Susan. That’s how we learn, though, is to make a mistake and then correct it. Sure wish it worked differently, and what I’m trying to do with these posts is steer folks away from some of the mistakes (that I made, dammit!). So sounds good. :-)

      And yes, Steve. I write for money. So do you.

  19. Steve perry says:

    Oh, yeah, that’s right — I do. Oops.

  20. I finished reading pt. 4 and came back to reread pt.3 and the comments. I think I’ll probably end up going over the whole thing again to make sure I have it all clear in my head. Thanks for doing this series!

  21. For those of you who want to try all of this out, Quickbooks has a free product you can download:

    http://quickbooks.intuit.com/

    Just playing with something like this will give you some good practice with the concepts that Kris is teaching here.

  22. Jean says:

    I just found this series last week and I’m catching up, but everything I’ve read so far is invaluable. Thanks so much for doing it, Kris.

    Where I’m getting confused is that everything I’m using in my freelance business–namely my laptop, internet connection and cell phone–are things I already had anyway and I’m just using them to make money now. I would still have and use them if I wasn’t using them to run a business. So do I count them as overhead? I also use them for personal stuff and entertainment, so do I just count a percentage as overhead?

    I run a virtual assistant business and I set out to run it with what I considered no overhead. Except for the three tools listed above, all of the software I use is either free and open source or was already installed before I started. My web site is free, and all of the marketing I’ve done (so far) has been free. So apart from taxes, I’m not really sure what I should be counting as overhead and business expenses. But I feel like I must be doing something wrong.

    As for taxes, I haven’t read ahead to see if you’ve addressed them yet, but that’s where all of my biggest questions are right now. I know freelancers are supposed to report income several times a year, but I don’t even know where to get started with all of that.

    Thanks again for this, Kris. I’m one of the “suddenly unemployed turned freelance as a matter of survival” people, and I’m not doing well enough to be able to donate anything yet, but I’m telling people about this site every chance I get.

    • Kris says:

      I’m not going to do much on taxes, Jean, because I’m not a lawyer, accountant or tax expert. I just do mine. My rule of thumb is know everything you can possibly (and not even the IRS auditors can keep up on all the rules) and make your best guess. Make sure it’s one you can defend in front of an auditor. If you can’t defend it, don’t take the deduction. Otherwise, take it.

      As for things you already own, it depends on the structure of your business. If you’ve started a corporation, you can sell your laptop, etc, to the corporation. If you’re just doing a Schedule C, I’d look into depreciation schedules and the like. I’d also take a percentage–depending on your business. In mine, the entertainment is part of the business (I sell to comics/games, etc, and must keep up). So figure how you’ll do all of that.

      Btw, you don’t need to report gross income several times a year. You only need to report taxable income. So if you’re only going to break even as the IRS defines it, then don’t worry about it. Otherwise, find some small business books on taxes (there are a million of them), and start reading.

      Good luck with everything. I’m glad the site is helping. I hope this opportunity turns into the best decision of your life. Best, Kris

  23. [...] The moment I mentioned money , the comments slowed, the e-mail stopped, and so did the donations. If it weren’t for the website statistics and Twitter, I would have thought that people had stopped coming to my website. …Continue Reading [...]