10 Tips to Manage Your Finances When Self-Employed

Self-employment is a growing trend in the U.S.; the U.S. Small Business Administration reports that over 27 million individuals own a business without any employees. But earning variable income makes it tricky to manage your finances, especially when you’re suddenly responsible for things like self-employment taxes and benefits. 

However, with some preparation, you can smooth out those inconsistencies and create a financial plan that works for you and your business.  

1. Create an emergency fund 

Putting money into savings matters even more when you’re self-employed and have monthly fluctuations in income.   

Your emergency fund needs to cover life emergencies (like a surprise car repair or medical bills) as well as some of your living expenses when work is slow, or you get sick and need to cut back on projects.  

The traditional advice is to have between three and six months of expenses tucked away in a savings account. But you may want to aim for more as part of your freelance money management plan.   

2. Open a separate business bank account 

No matter how much you earn while self-employed, a business bank account makes your life much easier. You can quickly see how much you earn and spend from your business without mixing in personal expenses. Plus, you can quickly create financial reports from a separate account. 

A separate account also adds a layer of security by not having to send out your personal bank details to new clients. 

3. Record your business expenses 

Most business-related expenses could be claimed as a tax deduction to lower your taxable income. Claiming eligible expenses is a smart move that can help you save on your yearly taxes. 

Common deductible business expenses include: 

  • Transportation and travel expenses related to your work 
  • Business property depreciation 
  • Self-employed health insurance 
  • Interest paid on business loans  
  • Legal and professional fees 
  • Business use of your home 

Pay these bills from your business bank account to easily track your expenses during tax season. 

4. Develop your own benefits package 

A huge part of financial planning for self-employed individuals is creating your own version of a benefits package. The two biggest components to take care of are health insurance and planning for retirement.  

When you’re self-employed and don’t have any employees, you can apply for health insurance coverage through the Marketplace. Depending on your income, you may be eligible for tax credits that lower your monthly premiums. 

Even without access to an employer-sponsored retirement plan, you can still access tax-advantaged accounts. Here are some options to explore when you’re self-employed: 

  • Traditional and/or Roth IRA 
  • Solo 401(k) 
  • SEP IRA 

Read more: Self-Employed Retirement Plans: How to Build Your Nest Egg

5. Save extra for self-employment taxes 

One of the biggest financial mistakes to avoid as a freelancer is underestimating your tax liability. Even if you earn as much as you did as an employee, you’ll have to pay more income tax because your employer doesn’t cover a portion of those costs. 

You’re responsible for your total Social Security and Medicare taxes. Known as self-employment tax, this totals 15.3% of your taxable income and is in addition to your regular income tax rate.  

6. Remember to pay quarterly estimated taxes 

Because of the higher tax rate when you’re self-employed, you may not receive the tax refund you might typically expect with traditional full-time employment.  

On top of that, you must also pay estimated quarterly taxes instead of reconciling what you owe once a year when you file. As you start financial planning for self-employment, include the IRS due dates for quarterly estimated taxes. They typically fall on the following dates: 

  • April 15 for earnings between January 1 and March 31 
  • June 15 for earnings between April 1 and May 31 
  • September 15 for earnings between June 1 and August 31 
  • January 15 for earnings between September 1 and December 31 

7. Know your bare-bones budget 

Creating a bare-bones budget can be beneficial when you’re still building your emergency reserves to cover slow months. 

Your budget should include all of your fixed expenses, as well as discretionary expenses you can cut back if necessary. 

8. Pay yourself regularly 

Managing cash flow is difficult when client payments come in at different times. But as you build your financial reserves, you can start paying yourself a salary from your business account.  

Then, you can treat excess earnings like an annual bonus from a traditional job. With your financial plan in place, you could use that money to beef up your emergency account, contribute extra to retirement or reach a new financial goal. 

9. Track your monthly earnings 

Tracking your monthly income helps you prepare for future fluctuations in your industry. Summer months and winter holidays may be quiet if you work with B2B clients, but those periods may be busy if you work with travel or retail clients.  

Over time, you may notice months where you’ll likely be busy and earn more. You might also identify months in which you earn less and can take some time off.  

10. Work with an accounting professional 

As you grow your self-employment income, consider working with a professional accountant. They can help you identify tax savings opportunities and make sure you have the proper documentation to support those expenses. You can also get customized advice from an accountant on how much to pay for your quarterly estimated taxes. 

An accountant can also help verify your bookkeeping. This is beneficial if you ever apply for financing and use your self-employment income to qualify. 

Finally, an accountant can advise on when to consider a new business structure. Most self-employed individuals start as sole proprietors. But as your income grows, an accountant may recommend switching to an LLC taxed as an S Corp, which can reduce your self-employment tax. 

Feel financially confident when you’re self-employed 

Navigating self-employment is both exciting and a little intimidating at times. By implementing these financial tips over time, you’ll build a strong foundation that gives you the confidence and security to keep moving forward with your dreams.

Written by Lauren Ward | Edited by Rose Wheeler

Lauren Ward is a personal finance writer who is passionate about helping people simplify their financial decisions. Her work has been featured in outlets such as USA Today Blueprint, CNN Underscored, and many more. She lives in Virginia with her husband and three children.

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