In 2024, the Small Business Administration reported that 99.9% of all businesses were “small.” If you’re one of the many self-employed people in the U.S., your business may be considered small, but your financial challenges are likely big.
As a sole proprietor or someone who owns a one-person business, you typically earn less on average than most W2 workers. Plus, you must pay for your health insurance out of pocket, keep track of your personal and business budgets, and handle your business taxes.
How can you make it all work? Instead of leaving things to chance, you can use systems that help you separate and manage your business and household finances.
In This Article
1. Pay yourself
One of the most common problems small business owners have is mixing their business and personal finances together. In fact, 70% report using a personal credit card to pay for a business expense.
As a business owner, you might feel like you don’t have enough revenue (the total money your business earns) to separate your business and personal finances. Or you might even mistakenly assume that your revenue is the same as your income.
But separating the two is essential. One of the easiest ways to do this is by taking an owner’s draw, which is the income paid to you by your business. This is the only money that should pass from your business to you.
Even if your business has limited cash flow, make a point to withdraw funds from your business account before using them for personal expenses. As you build financial reserves for your business, you can even pay yourself a set salary from your business account.
Then, you can treat excess earnings the same way you would treat an annual bonus from a traditional job.
With your financial plan in place, you might use the money to beef up whatever goal you’re working toward, whether it be building your emergency savings, contributing to retirement or otherwise.
2. Create an emergency fund
Everyone needs to save money for emergencies. But having money in your personal savings account is even more important when you’re self-employed and your income is unpredictable.
How much should you save? For self-employed people, more is always better, with six months’ worth of living expenses being the end goal that’s recommended.
That might seem too lofty a goal, but keep in mind that your emergency fund is what you’ll turn to for life’s inevitable emergencies and inconveniences (like a surprise car repair or medical bill).
On top of that, you may need the money to supplement your income when work is slow or you get sick.
3. Open a business bank account
No matter how much or how little you earn while self-employed, having a business bank account will make your life easier. Yes, you’ll have an extra account to manage, but you also get these significant benefits:
- Easily view how much your business is spending and earning
- Quickly catch and address trends like decreasing revenue
- Simplify the process of creating reports and itemizing expenses for tax filing
Having a separate account also adds a layer of security for you and your business since you won’t have to send your personal bank details to new clients.
4. Record your business expenses
If you’re not recording your business expenses, you could be losing a lot of money.
Most business-related expenses can be claimed as tax deductions that help lower your annual tax bill. In fact, the IRS says any expense that’s both “ordinary and necessary” for your industry can be deducted.
But you can’t claim those expenses if you don’t have a way to track them. One of the easiest ways is to pay for the purchases from your business bank account. But you’ll also need to keep each receipt in case you need to prove that individual expenses were business related.
What expenses can you claim for tax purposes? Common deductible business expenses include the following:
- Transportation and travel related to work
- Housing and utilities (if a portion of your home is used as a dedicated home office)
- Interest paid on business loans
- Legal and professional fees
- Business property depreciation (loss of value)
5. Develop your own benefits package
When you’re self-employed, you’re solely responsible for covering your benefits, including health insurance and retirement savings.
As a sole proprietor, you can apply for health insurance through the Health Insurance Marketplace. Depending on your income, you may be eligible for Medicaid or tax credits that lower your monthly premiums.
You can also contribute money to tax-advantaged retirement accounts, meaning accounts where your contribution reduces your taxable income.
For some accounts, such as IRAs, you can contribute up to the tax filing deadline for the previous tax year (April 15, 2025, for the 2024 tax year). Here are some options to explore:
- Traditional or Roth IRA
- Solo 401(k)
- SEP IRA
- SIMPLE IRA
6. Save for self-employment taxes
One of the biggest financial mistakes to avoid as a freelancer is overlooking your tax responsibilities.
As an employee, you may not have realized that your employer was withholding Social Security, Medicare and estimated income tax payments from each paycheck on your behalf. But now, you have to make those payments on your own.
That includes paying the self-employment tax (Social Security plus Medicare), which equals 15.3% of your net earnings. Plus, you have to pay income tax which ranges from 10% to 37% of your gross income, minus deductions.
If you don’t save up for those costs, you may be tempted to wipe out your emergency savings, or worse, turn to high-interest credit cards to cover the cost.
7. Remember to pay quarterly taxes
When you’re self-employed, you may not receive the tax refund you grew accustomed to as a W2-employee. On top of that, you must pay your taxes through estimated quarterly payments instead of just filing and paying all at once.
If you don’t make the quarterly payments, you’re likely to be hit with a Failure to Pay penalty of 0.5% for each month or part of a month the tax payment was overdue, plus interest.
Even if you’ve had low penalties for missing these payments in the past, don’t assume they’ll stay low. While the penalty interest rate was just 3% per quarter in 2021, it rose to 8% in 2024.
When you’re making your financial plans for your business, be sure to include the IRS due dates for quarterly estimated taxes. They typically fall on the following dates:
|
Quarter |
Period covered |
Due date |
|
1 |
Jan 1 – Mar 31 |
Apr 15 |
|
2 |
Apr 1 – May 31 |
Jun 15 |
|
3 |
Jun 1 – Aug 31 |
Sept 15 |
|
4 |
Sept 1 – Dec 31 |
Jan 15 (of the following year) |
8. Know your bare-bones budget
Creating a personal budget might seem like a strenuous activity, but at minimum, you need to find out what your monthly living expenses add up to.
Pinpointing that figure will help you understand if your business revenue will be enough to cover your monthly needs and help you make adjustments when necessary.
For example, you may need to supplement your income with money from your emergency savings after a slow business season and then replenish your savings after the busy season.
Alternatively, understanding how much you need to earn each month might help determine that you urgently need to increase your business income by pursuing new clients.
9. Track your monthly earnings
Tracking your monthly business revenue helps you prepare for the future. Your tracking doesn’t have to be complex: you can look at your business bank account and find the monthly payments received.
When you do, you can start comparing month-to-month or year-to-year revenue, helping anticipate seasonal changes.
For seasons that you know will be slow, you might use that time to focus on professional growth, financial planning for the year or even take some time for a vacation.
10. Work with an accounting professional
As your business grows, you can save time and money by hiring an accountant. These professionals help in several essential ways:
- Identifying tax-saving opportunities
- Making sure you have the proper documentation for deductions
- Advising you on how much to pay for quarterly estimated taxes
- Verifying your bookkeeping
- Advising you when to consider a new business structure
In addition to saving time and money, hiring an accountant can have other benefits. In a QuickBooks survey, 98% of small business owners said having an accountant boosted their confidence in their business.
Manage your finances with confidence
Self-employment is both exciting and intimidating. After all, you’re investing your time and energy into an idea you believe in without guaranteeing it will pay off.
In the mix of anxiety and excitement, don’t forget that success isn’t an accident. It takes careful planning to help a business survive and grow, including planning for your money.
If you want to succeed, take some time outside of sales and marketing to work on the financial side of things, too.
Written by Sarah Brady
Sarah Brady is a financial writer and speaker who’s written for Forbes Advisor, Investopedia, Experian and more. She is also a former Housing Counselor (HUD) and Certified Credit Counselor (NFCC).