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Financial Tip

Oliver Wendell Holmes, former Justice of the United States Supreme Court, once said, "Taxes are what we pay for a civilized society." Although people work hard to meet their needs and the needs of their families, there are some things they cannot purchase themselves. For example, the taxes paid to state and local jurisdictions help pay for police and fire protection. These taxes also pay for the operation of the local governments, and for local recreation areas such as parks and other public facilities.

On the national level, federal income taxes help pay for defense for the country. They also pay for capital facilities such as highways and other transportation services, and to help those who are poor or ill. These are all services that individual citizens cannot purchase the way they can buy food and clothing and the other necessities of life. When people live together in a society, all of its citizens bear the cost of providing such services. Taxes are the means by which the society raises the money to cover these public costs.

The United States Department of the Treasury has a number of fact sheets that can help people better understand the various taxes imposed in the United States. These include: Economics of Taxation explains how taxes support government services and benefit the country's citizens. Writing and Enacting Tax Legislation explains the process for developing and passing legislation into law.

In addition, Lesson 1.5 of the Yes, You Can Curriculum includes classroom examples of how taxes are collected and used by the various jurisdictions.

Source: Adapted from United States Department of the Treasury.

Financial Tips for Freelancers

Whether created by the weakened job market of the past few years or driven by the desire for more work/life balance, an estimated 53 million Americans - or more than one-third of the U.S. workforce - are working for themselves, according to a recent study commissioned by the Freelancers Union. What's more, experts predict that more than 40 percent of all employed Americans will become "contingent" workers - independent professionals, temporary contract workers, independent contractors, freelancers or consultants - by the year 2020.

While working in an environment you create for yourself provides a great deal of freedom and many personal rewards, being responsible for all of the financial aspects of running a business can present a unique set of challenges many regular employees do not face. Without an HR team, IT support or accounting department to look after important details such as health/disability insurance, taxes, your salary and keeping track of business expenses, those who choose to work freelance are on their own.

Here are tips to help you sustain your business on a daily basis, while keeping an eye on your future financial stability:

Self-employment taxes are your responsibility
In addition to your regular income tax, as a freelancer you are also required to pay self-employment taxes, which can be costly. Check with the IRS Self-Employed Individuals Tax Center for information on your tax obligations, how to make your payments, what qualifies for business deductions and more. If you work in a state with no state income tax, it's a good idea to save what you could have paid in state taxes to help build a cushion to cover any unexpected emergencies or to provide cash should you experience a lull in business.

Make sure you keep track of your business expenses and save your receipts so you can claim these expenses as deductions on your tax form.

Don't let your health insurance lapse
As a freelancer, you are responsible for your own health insurance. Private insurance plans can be costly but with a little research you can find a plan that meets your needs. If you belong to trade associations, check with other self-employed professionals to see how they fill their insurance needs. Keep in mind that staying healthy can help keep your insurance expenses low. You can get a lot of good information from private insurance providers or by visiting healthcare.gov.

Enjoy the feasts, prepare for the famines
Since working freelance or providing consulting services can have its ups and downs in terms of workflow, use the excess of the busy times to build a savings account to carry you through the lean months. Don't make the mistake of overspending during busy periods as this can become a habit and land you in a difficult situation should you lose business or complete a project with nothing new in the pipeline.

One rule of thumb for budgeting is to take what you earned last year and divide it by 12 for your average monthly earnings. After a while, it will become easier to get a picture of your workload trends. Once you have a consistent number as your average monthly income, use that as a baseline for budgeting purposes.

Don't forget to prepare for your retirement years
When you are responsible for every facet of your business, it can be easy to overlook the importance of preparing for retirement. However, with discipline and careful planning, you should be able to pay your expenses and pay yourself as you save for the future.

Resources are available to help you get started and stay on track
Knowing how to manage your money is essential to being a successful freelancer, especially when you're just beginning this career path. There are a number of free online resources, as well as affordable or free finance classes offered by local libraries and community colleges. Also, check out trade associations in your chosen field to see if they offer any resources to help you strengthen your business acumen.

Teachable Moments

Allowing your children to see what it takes to manage the financial aspects of running a business can teach them many valuable lessons, in real-time. Talk to them about the value of sticking to a budget, the benefit of keeping track of expenses and receipts to use at tax time, and the importance of saving for a rainy day. As they observe you modeling this behavior, they will learn responsible habits that will be helpful to them when it comes time to begin their career.