7 Tips For Managing Cash Flow & Taxes as a Virtual Assistant

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This post is written by R.J. Weiss, a Certified Financial Planner®. However, you should still seek professional advice from your accountant or legal team that’s specific to your situation.

Managing income, expenses and taxes in your virtual assistant business is vital to your success. But knowing how to properly administer your business’s cash flow isn’t easy, even if you’re great at handling your personal finances. After all, there’s new terminology to learn and important laws to follow, and you may have to account for financial uncertainty — especially if you’re just starting out and have yet to establish a reliable and stable roster of clients. 

While cash flow management can be a challenge, know that there are a few best practices that can help you increase your bottom line and reduce the stress that comes from not having a traditional paycheck.

Here are seven tips for managing your business’s cash flow.

Tip #1: Money Isn’t Earned Until The Check Is Deposited

One rule shared by successful freelancers is that money isn’t earned until it’s deposited in the bank.

Clients sometimes pay late or don’t pay at all, and contracts can get cut off before their agreed-upon end date — often with little or no notice. 

So while it’s absolutely important to understand the cash that’s coming into your business, don’t make the mistake of spending that money before it’s deposited. 

If you do, just one issue with a client payment can cause a downward spiral. A late or unpaid invoice may cause you to take on short-term work that’s below your preferred rate in order to pay the bills. That low-rate work can, in turn, prevent you from taking on more lucrative long-term contracts that grow your business.

Tip #2: Have Separate Accounts for Business and Personal Transactions

One tip every accountant will give you is to separate your personal and business transactions. 

Start the process by applying for a free EIN (Employee Identification Number) from your state. Use this number to get a business checking account, where all your income and expenses can be found. It’s important to shop around though, as some banks may require more than just an EIN. 

Related Tip: If a client asks you to complete a W9, use your EIN instead of your Social Security number. The biggest benefit here is less paperwork floating around with your SSN on it.

Tip #3: Use Small Business Accounting Software

You’ll need a system for regularly tracking your income and expenses. In its simplest form, you can complete this task using a spreadsheet. This works best for VAs with one or two clients and very few expenses. 

Others might want to use software to maintain their books. Small business accounting software is quite cheap these days, and you’ll get some pretty nice benefits:

  • Save time, as transactions are automatically downloaded into your account.
  • Get guidance on important cash flow management issues (such as estimated quarterly tax payments).
  • Gain easy access to monthly, quarterly and year-end reporting.
  • Manage invoices and payments, and set up alerts for accounts that are close to their due date (or past due).

A few of the more popular small business software options worth looking into are:

  • QuickBooks Self-Employed: Plans start at just $5 per month. This is great for those who file their taxes with TurboTax. It also offers free mileage tracking and quarterly estimates.
  • FreshBooks: Plans start at $15 per month. Thanks to its time-tracking feature, this is ideal for VAs who charge by the hour. 
  • Wave: The best feature is that it’s free to use on a monthly basis. You’re then charged a fee if you use the invoicing feature. Unfortunately, there’s no automatic time tracking.

Tip #4: Immediately Set Aside Taxes In a Separate Banking Account

When you’re an employee, taxes are withdrawn from each of your paychecks. These withdrawals cover your Social Security, Medicare, federal and state income taxes. 

But as a freelancer, there are no automatic payroll withdrawals. Instead, you’re responsible for making estimated quarterly payments. 

In general, these payments are due on approximately the following timeline (the specific due dates change from year to year):

  • April 15
  • June 15
  • September 15
  • January 15

Many new freelancers are surprised when they receive larger-than-expected tax bills and don’t have the money available when their quarterly tax bills are due. 

To avoid this, set aside money on a regular basis to make your estimated quarterly payments. Personally, I have a calendar alert twice a month that reminds me to deposit money in a checking account specifically for my estimated quarterly taxes. I pay the taxes directly out of that account. 

The biggest benefit to a system like this is knowing the money is there. However, it also prevents you from feeling like you’re losing your shirt four times a year when you go to make your payments, as you’ve already earmarked the funds for taxes.

Tip #5: It’s a Big Deal If a Client Payment Is Late

An all too common mistake when a client invoice is overdue is using a “white gloves” approach. This sounds something like, “Hey, I know you’re super busy but I just wanted to make sure you saw that last invoice.”

When a client pays late, it’s an issue. I’m not suggesting that you be super aggressive and use threatening language, potentially damaging the relationship. But the fact that a client is late is indeed a big deal – you have bills to pay and have done the work, so it’s important that you get paid as expected.

Here are some best practices to use when following up:

  • On the first day an invoice is overdue, send an email asking the client to pay promptly. 
  • If you don’t get a response to your email, place a phone call a few days later. 
  • If a week or so goes by without a response, consider stopping all work until past invoices are paid. 
  • Finally, don’t be afraid to charge a late fee for any past due invoices. 

Of course, the best-case scenario is to avoid that situation altogether. 

  • Have terms clearly defined in your contract, and bring them up to the client before signing on to the project (in case they don’t read the contract).
  • Bill regularly. The client should know exactly what day your invoice comes in. 
  • Make it very easy for the client to pay.

Tip #6: Don’t Forget About Tax-Advantaged Retirement Accounts

Just because you’re not a full-time employee of a corporation doesn’t mean you can’t have a best-in-class 401(k). To many people’s surprise, there are great options available for tax-advantaged savings for self-employed individuals. 

First, know that since you have earned income you can still contribute to an IRA.

For those with higher incomes, consider starting an individual 401(k), commonly referred to as a solo 401(k) or a one-participant plan by the IRS. 

In such a plan, you can contribute up to $57,000 per year ($63,500 for those 50 or older in 2020). This is much higher than you’d likely be able to contribute working as a W2 employee, and a valuable benefit for those who are self-employed. 

Contributing to such a plan allows you to save on taxes this year, as contributions are deductible from your taxable income. However, in a traditional solo 401(k) your contributions and earnings are tax-deferred. So, you won’t owe taxes on these earnings until you withdraw them at retirement. 

Tip #7: Put Cash Flow Management On Your Calendar

VA businesses have many recurring cash flow management activities. These include paying yourself, sending and managing invoices, projecting income and expenses and much more. 

To make sure everything is getting done on a regular basis, proactively plan time to manage these activities. Personally, I set aside two days a month to go through my checklist of recurring financial tasks. 

Here’s a checklist to help you get started:

  • Pay yourself from the business. 
  • Review credit card statements for expenses.
  • Categorize each expense in your tax software.
  • Set aside income to pay estimated quarterly taxes.
  • Manage invoices, including sending, marking as paid and following up on late payments.
  • Project short-term cash flow to ensure credit card and personal bills get paid.

Final Thoughts on Cash Flow Management for VAs

Cash flow management in any freelance business or work at home job is important for long-term success, and that’s certainly true for freelance virtual assistants. While difficult at first, seek to find a system that works best for you. With a little practice, you’ll develop an efficient system that allows you to reduce your stress and take advantage of some of the benefits of becoming a freelancer.

R.J. Weiss is a Certified Financial Planner® sharing the best of what he knows about making money, saving money and investing it wisely. You can read more of his content on The Ways to Wealth.

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