- Date : 26/10/2016
- Read: 6 mins
Are you a Freelancer and confused how to manage your income? Get tips on Financial planning for Freelancer.
The burgeoning freelance economy has allowed more and more people in India to take up unconventional career paths in photography, writing, cooking and much, much more.
Additionally, increasing access to the Internet has enabled more people to become self-employed and work from home or even from the remotest corners of the world.
And what people often forget is that freelancing comes with its challenges. Before you dive into the world of self-employment it’s important to plan for it.
Remember, you’re not working for a regular company, which is going to offer you a fixed income every month.
Plus, no health benefits, no employer insurance and no travel expenses. Therefore, you have to become responsible for your own health, your taxes and your loan repayments if any.
Related: Business ideas for women who want financial freedom
With bills to pay and with daily expenses to take care of, it’s critical for you to understand the basics of financial and tax planning if you’re going to freelance. Once you master money management as a freelancer you will be truly ready to enjoy all the perks of being a freelancer.
Planning your finances as a self-employed professional
There’s more to financial planning than saving on taxes or buying a life insurance policy for your loved ones. It’s about creating a structure around your earnings and expenses.
Knowing that you aren’t going to have a fixed income every month it’s crucial you put away a minimum of six to 12 months of your average income into an emergency fund.
Another thing to remember is to separate your business and personal accounts and to avoid using your business account to pay for personal expenses. Understand your personal cash flow and think about all the items you need to spend on every month whether its grocery, clothes, rent, or EMIs.
Once you have a control over your cash flows and have created an emergency fund it’s time to think about an insurance cover. You want to insure yourself and your loved ones for accidents and any health problems so that medical bills are not a burden to your business. Buy a term life plan to make sure your family is not left without support in case something happens to you. For example, if you’re 20 and self-employed it’s not too early to start thinking about life insurance. The longer you wait to get cover the more expensive premiums become.
Even if you’re self-employed you’re not going to be working forever. So to meet your financial goals like children’s education, marriage, retirement, parents’ retirement, etc., you need to start investing your hard-earned money into suitable financial instruments. If you can’t do it all alone, take the help of a certified financial planner.
How you can save tax as a freelancer
If you want to file your tax returns on your own know that it can be a complex process if you’re not aware of the rules or forms you need to fill out.
There are several expenses you can claim on your tax returns as a freelancer to save your tax liability.
- Workspace costs: This is a deductible expense. If you’re working out of a conventional office space any rent paid by you or any expenses incurred to maintain the office can be deducted from your self-employment income. If you’re working from, say your parents’ home, you can claim a reasonable portion of expenses by paying rent to your parents. Then, you can claim this rent as your business expenditure. If you’re working from your own home then certain maintenance expenses can be claimed as part of your freelancing.
- Subcontracting costs: Sometimes you need help when you’re freelancing so any salary you’re paying to another person is also deductible expense. Remember to cut TDS before paying the salary. Any TDS you’re deducting needs to be deposited with the tax authorities.
- Daily costs: Electricity expenses, internet charges, phone bills, printing costs, conveyance expenses, courier charges, meal expenses when you’re taking clients out for lunch, are all deductible. Keep the bills of all these expenses and maintain every invoice. Avoid making any payments in cash because payments more than Rs. 20,000 in cash are not deductible.
- Other expenses: If you’re trying to have an online presence then buying web hosting, paying for a domain name, etc. are all business expenses that can be claimed on your tax returns.
- Investments: Section 80C and 80D of the Income Tax Act, allow you to claim investments in ELSS funds, PPF, NPS, tax-saving fixed deposits, etc., as a deduction on your return
- Insurance: You can even claim deductions on life insurance, health insurance, etc., up to the overall limit prescribed under various sections of the Income Tax Act.
- Asset costs: You definitely need a laptop or a mobile phone for your work. On such assets you can claim depreciation, which means part of the cost of your laptop or phone can be claimed as an expense. And this expense can be deducted from your income. This same rule holds true for printers, desks, etc. You can claim depreciation ever year until the cost of this asset is completely exhausted.
Related: Things you didn’t know about saving tax [Infographic]
Self-employed with income less than 50 lacs a year?
Now there are two ways to file your income tax returns – the regular way using ITR-4 and the presumptive way using ITR-4S.
With ITR-4 you can claim all of the above deductions depending on their applicability to your business.
However, recently the Government of India has offered self-employed professionals (those whose income is less than Rs. 50 lacs in a year) the choice of filing their returns using the presumptive tax system.
For freelancers earning less than Rs. 50 lacs in a year this is one of the biggest tax reliefs. They can either file using the regular method or using the presumptive tax method.
If these individuals choose to file their returns using the presumptive tax method and ITR-4S they can claim expenses at the rate of 50% of the total income. Income tax is calculated on the balance 50% while adding any interest income to it. With this method, one does not need to show proof of the expenses and is not required to maintain accounting records.
So as a freelancer if your expenses are less than 50% of your total income, then opt for the presumptive tax method. But once you opt for this method you’ll have to continue with this same process for the next five years without fail. If you decide to go the regular way before the five-year mark then you won’t be allowed to choose this method for the next five years.
If you’re claiming expenses worth more than 50% of your total freelance income then choose the regular tax method.
The bottom-line: ITR-4S is simpler while ITR-4 is lengthy and tedious.
Before you choose between ITR-4 and ITR-4S think about your expenses carefully and consult a financial advisor or tax planner in case of any doubts.
As a freelancer you have the flexibility to manage your finances and your taxes but you also need to be vigilant about how you’re spending your money. The above tips will guide you and help you with making sound financial decisions.
The burgeoning freelance economy has allowed more and more people in India to take up unconventional career paths in photography, writing, cooking and much, much more.
Additionally, increasing access to the Internet has enabled more people to become self-employed and work from home or even from the remotest corners of the world.
And what people often forget is that freelancing comes with its challenges. Before you dive into the world of self-employment it’s important to plan for it.
Remember, you’re not working for a regular company, which is going to offer you a fixed income every month.
Plus, no health benefits, no employer insurance and no travel expenses. Therefore, you have to become responsible for your own health, your taxes and your loan repayments if any.
Related: Business ideas for women who want financial freedom
With bills to pay and with daily expenses to take care of, it’s critical for you to understand the basics of financial and tax planning if you’re going to freelance. Once you master money management as a freelancer you will be truly ready to enjoy all the perks of being a freelancer.
Planning your finances as a self-employed professional
There’s more to financial planning than saving on taxes or buying a life insurance policy for your loved ones. It’s about creating a structure around your earnings and expenses.
Knowing that you aren’t going to have a fixed income every month it’s crucial you put away a minimum of six to 12 months of your average income into an emergency fund.
Another thing to remember is to separate your business and personal accounts and to avoid using your business account to pay for personal expenses. Understand your personal cash flow and think about all the items you need to spend on every month whether its grocery, clothes, rent, or EMIs.
Once you have a control over your cash flows and have created an emergency fund it’s time to think about an insurance cover. You want to insure yourself and your loved ones for accidents and any health problems so that medical bills are not a burden to your business. Buy a term life plan to make sure your family is not left without support in case something happens to you. For example, if you’re 20 and self-employed it’s not too early to start thinking about life insurance. The longer you wait to get cover the more expensive premiums become.
Even if you’re self-employed you’re not going to be working forever. So to meet your financial goals like children’s education, marriage, retirement, parents’ retirement, etc., you need to start investing your hard-earned money into suitable financial instruments. If you can’t do it all alone, take the help of a certified financial planner.
How you can save tax as a freelancer
If you want to file your tax returns on your own know that it can be a complex process if you’re not aware of the rules or forms you need to fill out.
There are several expenses you can claim on your tax returns as a freelancer to save your tax liability.
- Workspace costs: This is a deductible expense. If you’re working out of a conventional office space any rent paid by you or any expenses incurred to maintain the office can be deducted from your self-employment income. If you’re working from, say your parents’ home, you can claim a reasonable portion of expenses by paying rent to your parents. Then, you can claim this rent as your business expenditure. If you’re working from your own home then certain maintenance expenses can be claimed as part of your freelancing.
- Subcontracting costs: Sometimes you need help when you’re freelancing so any salary you’re paying to another person is also deductible expense. Remember to cut TDS before paying the salary. Any TDS you’re deducting needs to be deposited with the tax authorities.
- Daily costs: Electricity expenses, internet charges, phone bills, printing costs, conveyance expenses, courier charges, meal expenses when you’re taking clients out for lunch, are all deductible. Keep the bills of all these expenses and maintain every invoice. Avoid making any payments in cash because payments more than Rs. 20,000 in cash are not deductible.
- Other expenses: If you’re trying to have an online presence then buying web hosting, paying for a domain name, etc. are all business expenses that can be claimed on your tax returns.
- Investments: Section 80C and 80D of the Income Tax Act, allow you to claim investments in ELSS funds, PPF, NPS, tax-saving fixed deposits, etc., as a deduction on your return
- Insurance: You can even claim deductions on life insurance, health insurance, etc., up to the overall limit prescribed under various sections of the Income Tax Act.
- Asset costs: You definitely need a laptop or a mobile phone for your work. On such assets you can claim depreciation, which means part of the cost of your laptop or phone can be claimed as an expense. And this expense can be deducted from your income. This same rule holds true for printers, desks, etc. You can claim depreciation ever year until the cost of this asset is completely exhausted.
Related: Things you didn’t know about saving tax [Infographic]
Self-employed with income less than 50 lacs a year?
Now there are two ways to file your income tax returns – the regular way using ITR-4 and the presumptive way using ITR-4S.
With ITR-4 you can claim all of the above deductions depending on their applicability to your business.
However, recently the Government of India has offered self-employed professionals (those whose income is less than Rs. 50 lacs in a year) the choice of filing their returns using the presumptive tax system.
For freelancers earning less than Rs. 50 lacs in a year this is one of the biggest tax reliefs. They can either file using the regular method or using the presumptive tax method.
If these individuals choose to file their returns using the presumptive tax method and ITR-4S they can claim expenses at the rate of 50% of the total income. Income tax is calculated on the balance 50% while adding any interest income to it. With this method, one does not need to show proof of the expenses and is not required to maintain accounting records.
So as a freelancer if your expenses are less than 50% of your total income, then opt for the presumptive tax method. But once you opt for this method you’ll have to continue with this same process for the next five years without fail. If you decide to go the regular way before the five-year mark then you won’t be allowed to choose this method for the next five years.
If you’re claiming expenses worth more than 50% of your total freelance income then choose the regular tax method.
The bottom-line: ITR-4S is simpler while ITR-4 is lengthy and tedious.
Before you choose between ITR-4 and ITR-4S think about your expenses carefully and consult a financial advisor or tax planner in case of any doubts.
As a freelancer you have the flexibility to manage your finances and your taxes but you also need to be vigilant about how you’re spending your money. The above tips will guide you and help you with making sound financial decisions.
