The Ultimate Guide to Payroll for Freelancers: Managing Your Finances Efficiently
In this post we’ll be looking at:
- What freelancers should know about payroll services
- Set up your structured payment system
- Freelancers and Tax Knowledge
- Invoicing clients & late payment handling best practice
- Software Tips
Plus
- Retirement planning for freelancers
E&P Services is an established employment and payroll service in Liverpool covering the local area, Merseyside and beyond. In this article, we outline what you need to know as a freelancer, and how to be efficient in making the most of your income and your outgoings.
What Freelancers Should Know About Payroll Services
Are you keeping a record of all your income? Do you know all your outgoings? Knowing both in detail will secure your financial health and prevent any friction with His Majesty’s Revenue and Customs (HMRC), the department responsible for the collection of taxes.
It can appear daunting when you start on the life of a freelancer but with our tips in this article, you’ll be well armed and able to cope with the minimum stress.
You will know the income from clients BUT income is calculated once you take your expenses into account. It pays, in the long term, to employ a financial advisor who can guide you and your earnings to a secure retirement.
Expenses include:
- Mobile phone contracts
- Broadband
- Travel
- Marketing yourself
- Office Stationery
- Software subscriptions
And:
- Office space (a decent accountant will help here)
Plus:
- You are putting away a regular percentage to cover your taxes as a self-employed freelancer or corporation tax if you have created a limited company. Do keep an eye on the fluctuation of tax rates.
In short, stay organised.
Set up your Structured Payment System
One thing to ensure is having a contract to use with clients stating your terms of payment and what your service includes and DOES NOT include. Standard templates are available on the web, personalise with what you think is relevant.
Use a database of some sort. At the most basic this can be a spreadsheet. If the revenue for your work is regular then you can look at online solutions eg Xero for invoicing (and much more) and Dext for bookkeeping and keeping your expenses. There are other solutions, Xero and Dext can be synchronised and Xero allows you to import your bank accounts.
Questions to ask yourself:
- What is my hourly rate?
- Will I offer work by project for a fee?
- What will my payment terms be, 15 days? 30 days?
- What percentage of my fees will go into saving for tax payments?
- What are my monthly outgoings?
- Think seriously about tracking your revenue and your outgoings and consider software help, which will pay off in reducing stress.
Freelancers and Tax Knowledge
In HMRC terms freelancers do not exist, in the main, you’ll either be a ‘sole trader’ or a ‘Limited company’, both have their advantages. The government website has various guides like Working for Yourself [https://www.gov.uk/working-for-yourself].
As a freelancer or rather being self-employed means filling out a self-assessment form by HMRC and going through these steps:
- Register
- Be aware of the deadlines for tax payments
- Take note of your UTR (Unique Taxpayer Reference), which identifies the self-employed and companies for tax purposes
- Online account setup: where you file your tax returns
Do take time to understand about taxes. HMRC runs workshops locally and online. Employing an accountant should be the eventual aim as this will remove a great deal of stress. Most accountants will also supply the software you need (for a subscription fee) and offer insurance (for a fee) that will support you if HMRC decides to audit your business.
Invoicing Clients & Late Payment Handling Best Practice
As mentioned above having an online accounts package like Xero is ideal. Other software is available like Quickbooks and Sage, best to shop around as you may find cheaper alternatives.
If you can not quite afford a system like Xero then you may be using office software like Word and Excel. That’s not as easy to manage but it is possible to run a business with these two pieces of software.
What should be on an invoice?
- Name of client contact
- Business name
- Terms (when you expect to be paid by)
- The fee
- A unique invoice number
- Date of issue
- Your name/business or trading name
- Your address, phone number and email address
- Accepted payment methods
- And a simple thank you for your business note
It is common practice to do all your billing on the first working day of the month for the previous month’s work. Be consistent and use the same subject line in your emails eg ‘Your July Invoice’ so you can search your email to confirm the invoice sent, to who and the date.
Late Payments
The contract is the foundation of the business. Your Terms & Conditions of service should be clear and this should be agreed by your client.
The first step is a simple reminder, written in a friendly manner, saying this may have missed your attention, payment is now due, and it would be appreciated if payment is made.
Court action should be avoided at all costs. The courts are costly, time-consuming and not always likely to find on your side.
Debt collectors are an option. Many will work on a percentage of what is owed. Again, this is a stressful option and may injure your reputation.
Most people in business will understand non-payment as a fact of life. Do take a deposit if the expected fee runs into hundreds of pounds. Payment in instalments is common practice. The deposit, the maintenance fee for part completion and the final payment for completion of the project.
Software Tips
You’ll be spoilt for choice when you look for software to streamline your invoicing, expenses, and taxes. As mentioned above, you can do all this with Word and Excel. But you want to get away from this and on a recognised platform like Xero.
- Access the subscription fee – can you afford it every month?
- Software bloat – are there many features of the platform you won’t use?
- Certification – Does the platform integrate with other useful software eg Xero & Dext?
- Security – is the level of encryption of the highest standard?
- Backup- is the data backed up on a regular basis and allows roll back to previous data?
- And finally does the platform offer or insist on two-step verification, for utmost security?
A Word About Retirement
Spending some money on sound financial advice is worthwhile. You have a future to provide for and that will need regular money. You’ll have to work out how much you can afford to put away in a pension per month and increase the amount as you progress through your freelance career.
Conclusion
- There’s a fair amount of knowledge to gain. Seek out resources like tax webinars from the HMRC.
- Processes, once set up run themselves, can be easily audited, remove stress and save you time.
- Software and accountants are worth every penny.
- Save monthly for your tax bill.
- Invest in your future with pension planning and contribute every month.
If you need any further advice contact us, we’re a friendly team.
Contact E&P Services for a friendly chat today.
The E&P Services Team
[image credit: Windows, unsplash.com]