Image: Invoice from Wilhelmus van den Einden, 1899
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Often the biggest unknown in launching a DIY career is accounting. Most of us who go down this road are artists of one kind or another, so we don’t necessarily bring a lot of business acumen to the venture. We know how to create but not how to monetize our creation. Of course, not everyone is interested in assigning a value to their art, but anyone who is needs to incorporate some basic business knowledge into their creative endeavor.
It sounds crass, but we might as well admit that artists have a “product” that they hope other people are willing to pay for. That’s where the DIY career begins. That product might be an article or a painting, or it might be something less tangible like editing skills or consulting advice. It’s common for academics to possess some of those marketable skills, whether we recognize it or not. In her Freelance Academic series, Katie Pryal is doing a nice job of outlining the changing face of academic culture and the reasons we should begin taking ownership of our labor.
So, we know we have some valuable knowledge and skills to offer. The question is: How do we turn them into a sustainable living that allows us to work on our own time? Understanding the business aspects of a DIY career is the scariest part for many former academics. Luckily, it’s not that difficult once you know the basics. Having built a DIY career myself, I want to share some of the lessons I’ve learned on key concepts important to any freelancer: bookkeeping, bank accounts, accounts payable, accounts receivable, and taxes.
Bookkeeping. If you’re considering going to work for yourself, you absolutely must commit to keeping track of your own finances. Not keeping accurate records is a great way to end up broke and bankrupt. Bookkeeping is also an integral part of the taxes you’ll have to file as a self-employed business owner.
You don’t have to go crazy with bookkeeping right at the beginning. Start out with a Google spreadsheet or a Microsoft Excel document. Make two columns, one for debits and one for credits, and then make a new tab on the sheet for each month of the year. Record every business expense and every sale. Include the date, the exact amount, and as much information as you need to accurately remember the transaction. Set up your spreadsheet so that it totals each column and then create a master tab that tracks your annual expenses automatically based on the monthly information you’ve entered.
Bam. Just like that you have a basic bookkeeping plan in place. Be sure to enter everything -- lunches with clients, website costs, even pens and printer paper. If it’s business-related, it should be recorded and written off on your taxes later. Save every receipt.
Bank accounts. I strongly encourage you to open a separate checking account for your business. It makes bookkeeping so much easier. The monthly statement will have only business-related transactions, which makes paying taxes a breeze. The other advantage of having a separate account is you aren’t tempted to spend business income on personal expenses. You will get a separate debit card and separate checks, and only use them to pay your business bills.
I recommend using a credit union for your business account. Most of them grant free checking to local businesses with no minimum balance required. All you usually need to open a business account is your Social Security number, but it would be even better if you apply for a Federal Tax ID number, or an Employer Identification Number (EID). Those numbers are free and the application process takes only a few minutes at the IRS website. Once granted, the EID can be used to open your new account instead of a Social Security number.
Accounts payable. Once you have a bank account for your business, the act of paying bills becomes a pretty simple process. People send you bills; you use the business debit card or checkbook to pay them. Another smart option is PayPal. If you do much purchasing online, a PayPal account will come in handy. Most merchants accept it these days, and you can link it to your business card and checking account. PayPal is completely free for the payer.
Accounts receivable. The flipside of paying the bills is getting paid! For me, accounts receivable presented the biggest obstacle. I had no idea how to create an invoice, come up with an estimate, or accept anything other than cash.
The first time I had a customer who wanted to pay me, I scrambled to come up with a process that looked professional. I had used PayPal to make personal purchases online. I hurriedly upgraded to a free business account and I slapped together an invoice using PayPal’s generic template. I sent it and waited. Fortunately, it worked. The next day I received payment for the website I had built.
My accounts receivable system has come a long way in the few years since I created my first invoice. I still use PayPal for some transactions, but I’ve now upgraded to a more complex accounting system that also incorporates invoicing and payment processing.
PayPal does the job for anyone with a small freelancing side gig. With it, you can create invoices and receive payments from customers who have either a PayPal account or a credit card. Setting up a business PayPal account is free and pretty simple. PayPal generates monthly reports that show debits and credits, which helps with taxes. In exchange for using its services, PayPal charges 2.9 percent of all the money you received plus 30 cents per transaction. Not bad.
But PayPal has no way of tracking expenses that are paid via your business bank account. If you start scaling up your business and incurring regular expenses, PayPal becomes less useful. Customer payments made by cash or check are also absent from the monthly PayPal statement, which only records the transactions that it directly processes for you. PayPal is a good starter account but it’s not really designed to be an all-inclusive accounting platform. Eventually you’ll want to upgrade.
When I started outgrowing PayPal, I first looked to Freshbooks and I even briefly considered investing in some serious accounting software like Quickbooks (definitely an unnecessary extravagance for the average DIY careerist). Finally, I settled on a company called Wave that has a cloud-based accounting platform that is marketed specifically to freelancers. Wave’s software includes a suite of free mobile apps designed specifically for things like on-the-go invoicing and expense-receipt management. Wave lets you securely connect your business bank account and your PayPal account and it conveniently displays all transactions in one place. Perfect for bookkeeping and taxes. You can also create multiple invoices from templates and it even has an option to send a recurring invoice each month, something I’ve taken advantage of on more than one occasion.
Anyway, I don’t want to sound like a commercial for Wave Accounting Software, but I’ve been really satisfied with it so far. And it doesn’t cost a penny. Anyone considering a DIY career should definitely check it out.
Filing taxes. I’m not a tax professional, so I’m going to keep this section short and sweet. According to the IRS, if you “expect to pay more than $1,000 in taxes for the current tax year” you are required to file taxes quarterly. If you’re just starting out, your business may lose money (on paper) for the first year or two by the time you claim all of your expenses. But as soon as you get profitable, you’ll want to look into filing quarterly.
You can file your taxes independently, but hiring an accountant will almost certainly save you more money because he or she will be able to recommend tax breaks for the business that you didn’t even know existed.
Accounting for the DIY Career can be daunting--especially for those of us who come from a completely different world where we aren’t used to selling our art and skills. Familiarize yourself with some of these key concepts and you’ll find that it’s easier than you think. And the best thing about this DIY career accounting package: It’s completely free.
I learned about all of these practices on the fly, and I’m happy to help you if I can. Feel free to contact me with specific questions. I’m on Twitter @josh_boldt or you can use the hashtag #DIYCareer.