Going solo: Accounting tips for freelancers
How to keep your retirement savings on track when you're out on your own.
Joe Vitale, New York City
I recently left a staff job and am working as a freelancer. I’d like some advice on how to best manage my bookkeeping. Do you have any recommendations on interest-bearing checking accounts that I can link with an account to set up a retirement savings plan such as a SEP?
By Myrlande Davermann, Fortune Small Business contributor
A good bookkeeping program is essential when you're running your own shop. Susan Lee, a tax consultant and financial planner with Freelance Taxation recommends Intuit's (INTU) QuickBooks, a popular choice for small businesses.
For a checking account, check out brokerages such as Charles Schwab. It offers interest-bearing accounts that have automatic withdrawal options for funding different retirement plans.
But approach automatic withdrawals with caution: Lee warns that the first year of freelancing rarely goes smoothly. Income might not come in as regularly as you expect. Lee recommends underfunding your retirement account and setting aside the extra cash in a separate account. That way, it will be available if you need it. When you do your taxes at the end of the year, you can figure out what you can afford and sock the money away.
A SEP-IRA, which stands for Simplified Employee Pension Individual Retirement Account, will allow you to contribute up to 20% of your net self-employment income into your retirement account, up to a maximum of $46,000. If you have a lot of cash you want to tuck away for retirement, another option worth investigating is the solo 401(k), which will let you make contributions both as an employer and as an employee (of yourself).
If you don't have inventory or complex business arrangements, another software program that could fit your needs is Quicken, says CPA Terry L. Jones. She recommends you seek out tax and accounting assistance from a qualified CPA with experience working with to working with freelancers.
"This is a specialized area, and you need a good advisor on your team," Jones says.
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Related links:
The Ultimate Guide to Retirement
Resources to help your company grow
From Richard, Boston, MA To AH Stanton:
You can have a bank CD or a money market account within an IRA, so there is no reason to fear investing. Money in your mattress loses value at the rate of inflation, but at least an interest-bearing account will return something.
From David Preiss For those who are gun-shy about investing their money in equities, I would like to point out that allocating money to a SEP IRA does not prevent you from keeping that money in "Cash". The tax shelter works just as well if your money sits in a Money Market account rather than a mutual fund.
However, if you have an eye for the long term, and you don't believe the Markets will fall into a never-ending depression, than investing the money into funds is wise. I advise using market tracking Index funds because there is no sense in paying heavy expenses for fund managers that can't win in a bad market.
From Srini Lokula I completely agree and strongly recommend that a good bookkeeping program is a MUST when you are running your own shop. I have seen some people use Microsoft Excel for accounting purpose but this is a very bad idea. Now a days, accouting software (such as Peachtree Accounting, Quicken, Microsoft Accounting) costs less than $200, so better to use one of those programs, you cannot go wrong. There are lot of genuine vendors who sells GENUINE software for less money, so shop around prior to buying directly from Software Companies/Publishers.
Now, when it comes to retirement, I have been implementing SEP, it is been a great program but with the current situation most of the money disappeared. You can get help by calling your local SBA or SCORE office. It is all FREE, so please call them. Let me know, if I can be helpful (As a business owner for the last 12 years) as a fellow business man. Good Luck !
From Andrew Schmitz An IRA, like a 401k is money placed in a growth account that is not taxed until it is taken out for retirement. It's a long term investment plan that will payoff by weathering the storm. If you place the money in your bank, the taxes go to Uncle Sam instead of your IRA where it will be used to make more money. IRAs fluctuate like the market, so if you contribute to it when it's down, you invest in more shares and those share prices will eventually go up. SEP IRA funds are an excellent idea for freelancers. Some have higher risk than others, so do your research. I've had one for 10 years and it's down now, but It's higher than my initial investments placed many years ago. I can't pull my money anyway or I'll pay heavy penalties. Contribute to the IRA and simply wait to you retire. Patience…
From A.H.Stanton Gentlemen,after reading all the new I can find on the subject of IRA's,and their many losses in recent weeks, I'm at a loss to understand why anyone would venture to create an IRA as the "fail" rate is discouraging to say the least. A near 30% loss is not unusual. Maybe a "mattress" account would be much safer if not very high on interest gained list.Then, inflation and exchange rates demand their toll as well. Where does it end?
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This is Joe Vitale, thanks for all the info.
I chose to use quicken for my business accounting, and I have set up a SEP IRA.
It's a lot to process, but I feel like I learn a little bit more every day.
Thanks again.