Are you a freelance professional? A consultant? Have a side hustle? How do you manage your money as a freelancer?
I have always written articles on the side to supplement my income. Yet, I began really growing my freelance career back in 2009. In the beginning, I developed relationships with editors at several publications. Soon, I began regularly submitting freelance articles after my full-time workday.
Around October 2009, I quit my job as a technical writer for a government contractor. I dove head-first into freelance life and made many mistakes. I learned there are significant differences between working as an employee and a contractor. Today I want to talk to you about some tips I learned for managing your finances if you’re a freelancer.
At least 59 million Americans did gig work over 2020, representing 36% of the U.S. workforce, an increase of 2 million freelancers since 2019. – Upwork
In recent years, the number of Americans working in freelance roles has blossomed. According to Upwork, 59 million people in the U.S. work in the gig economy, representing 36% of workers.
You may fall into this category. This includes people that do temporary work or have a side hustle. It also includes those who work as a consultant or juggle a couple of part-time gigs or contracts.
Your money situation will look very different than a W-2 employee for a few reasons.
Manage Your Money as a Freelancer, Not a W2 Employee
When you’re a W-2 employee, you likely receive the same amount in regular iterations by a single company. Perhaps you’re paid every two weeks, twice a month, or once a month.
Regardless, you most likely have a predictable idea of what your income and bills would look like.
As a freelancer, you may be getting paid from various sources. You may even be getting paid for a variety of different service lines.
If you’re a blogger, you may earn money writing for companies, and websites. You may make money from selling your online information products or even merchandise.
You may sell speeches, courses, or coaching services. Learning to manage your money as a freelancer means managing income from different sources at different times.
Emergency Funds Are Critical for Freelancers
While every person needs an emergency fund, having one is critical if you’re self-employed.
You need enough money to cover an emergency and even take care of your living expenses if you cannot work. Unlike W-2 employees, freelancers don’t get sick leave, maternity leave, or FMLA. If you literally ARE the business, how will you take care of yourself if you get ill or injured? Financial experts suggest having an emergency fund of three to six months of expenses. However, I would use six months as a minimum when you work for yourself.
Employee Benefits Versus Freelance Freedom
In addition to sick days, W2 employees may have health insurance and a 401k program. They may have life and short-term disability insurance. Depending on the employer, they may receive vacation days and paid time off.
The tradeoff for these cushy benefits is committing to this single employer. You must commit to working a significant part of your week –usually five days a week for a least 8 hours a day. Most people work in their jobs for at least a few years, though there is always a chance you could lose it. Many employees get a sign beforehand if layoffs are coming, even if it’s just water cooler talk.
The independent worker receives none of this type of financial security. What do you get instead? Freedom.
As a freelancer, you can work for whomever you want in whatever ways you want. You can pick the projects you want and the fee you will accept.
While you can always lose a client, you can’t lose your job the way a W2 employee can. Still, you have to manage your money as a freelancer differently. This is especially true when it comes to taxes.
Straightforward Versus Complicated Taxes
If you’re a W-2 employee, your employer withholds your federal and state income taxes from your income. They take care of your Social Security and Medicare payments, too.
Your employer may offer some kind of retirement and health insurance benefits. If so, you will have those automatic deductions.
At year-end, you receive your W-2. Gather this and any interest statements, and you’re ready to file your taxes.
Figuring out how to manage your money as a freelancer means navigating more complex taxes.
You’re responsible for paying your own taxes. You must file a Schedule C form with your personal income tax return. On this form, you will report your business income and expenses.
As a freelancer, you’re also responsible for paying estimated taxes throughout the year. You’ll pay estimated taxes based on your income quarterly. Instead of paying one large chunk, you can spread your tax payments throughout the year.
Some freelancers I know save anywhere from 15% to 30% of each client’s payment for taxes. Check with your accountant to confirm what you will need for your situation.
Manage Your Money and Deductions As a Freelancer
Freelancers have a bit more options with deductions than W2 employees. This is because you can deduct any business-related expenses incurred throughout the year.
Generally, this includes transportation expenses such as mileage when you drive to and from client meetings. If you fly to see clients, take a taxi, Uber, shuttles, etc., you will want to keep records of those expenses. In addition, keep track of the money you spend on research publications, subscriptions, and office equipment. For more info, check out the IRS website and discuss with your CPA.
Freelance Home Office Expenses
Another possible deduction you have as a freelancer is your home office. This doesn’t have to be a dedicated room; it could be a corner of a room where you keep your desk and work materials. Make a note of your home’s square footage, the work area’s square footage, and any related expenses. You may be able to deduct a part of your utilities, Internet bill, cell phone plan, etc.
Provide these numbers to your CPA. For more info on this, check out the IRS publication about the business use of your home.
Manage Your Money By Keeping Organized Records
The varying nature of freelance and unique tax considerations taught me how important it is to be organized. Planning ahead can make all the difference in freelance finances.
Learning to manage your money as a freelancer is easier when you have easy access to your information.
Most freelancers have a filing system that includes an inbox for incoming paper receipts and invoices. In addition, they usually have a folder on their computer or cloud to keep electronic records. These include PDFs of online bank statements, credit card statements, and scanned receipts.
Many stores like Staples, for example, offer the option to get your receipt printed or emailed to you. You may have things saved in different ways. The important thing is that you have some type of system.
Even if you go paperless, you may still need to choose an interim place to put documents until you can scan them. Consider getting a shredder to destroy papers with sensitive information.
Double check with your CPA about the terms of limitations for record-keeping. Most of what I’ve read says to keep documents for at least seven years. However, if you didn’t file a return during a particular year or had an issue with your filing, keep those records.
Manage Your Cash Flow as a Freelancer
As a freelancer, you will likely experience some seasonality in your work. Some months may be busy, and you find yourself earning lots of money. Other months may be very quiet. These slow months could cause a cash flow problem if you are not saving money for them ahead of time.
This is one of the biggest challenges I hear a lot about and have experienced myself. The feast-or-famine nature of freelancing can lead to cash flow problems when bills are due.
Creating systems to sock money away can make all the difference during lean months. Saving can help you manage your money as a freelancer in a proactive way.
Get The Right Bank Accounts
Most people I know have two basic bank accounts – usually a checking and a savings account. Some of them may also have a 401k and a vacation or holiday fund.
As a freelancer, you need a business checking account separate from your personal checking account.
Having your business expenses and income in one place can make money management easier. This is crucial come tax time when you’ll need to provide accurate records of your income and expenses.
A business bank account will also make getting a business loan or line of credit easier. You will also need a savings account for good ‘ole Uncle Sam.
A Savings Account for Freelance Taxes
I recommend having separate business savings account for taxes.
Once a client payment hits your account, move a percentage into your savings account. Do this before paying anything else.
Depending on your business situation, you may not need all the savings you have set aside for taxes.
Still, getting into that habit of saving for taxes is one of the best things you can do for your business.
Come tax time, you won’t be surprised by a massive tax bill.
Have Multiple Personal Accounts For Sinking Funds
I also encourage you to have multiple personal bank accounts for sinking funds.
A sinking fund is an account you can use to save money over time to pay for significant expenses or investments. You save money gradually through regular contributions. Once you hit your goal, you use the money to pay for big things.
You could use something like Ally’s Buckets for this purpose.
Buckets is a tool the bank offers within savings accounts to help you earmark money for different purposes. They work like digital envelopes. You can put your savings into different categories, each dedicated to a specific goal.
Whether you use multiple bank accounts or something like Buckets, use sinking funds to meet your goals.
Your tax savings account could be a sinking fund. You can create sinking funds for other regular expenses like your car insurance. Divide the premium by 12 and set aside money each month to prepare the total payment.
Do the same for your HOA payment, holiday spending, and life insurance premium. Identify the accounts you will use for these expenses and set up automatic transfers to make the process easier.
Instead of a general account number, you can rename the accounts to reflect their purpose, i.e., Costa Rica fund, quit my job fund, etc.
When it’s time to pay one of those once-a-year bills, log into your bank account, transfer the money from your sinking fund, and make your payment. Done!
Set Percentages Aside From Each Dollar You Make
How do you figure out how much money to put into your sinking funds?
Freelancers can use percentages to save rather than fixed dollar amounts since our income comes in different amounts at different times.
Maybe you set 20% of any payments you get for taxes, leave 10% in your business account for operations, and pay yourself with the other 70%. Take your income and set 10% aside for your investment accounts. This is just an example.
If you have a budget, review your specific expenses to get some ideas for what things you may need to save for.
If you have been working as a freelancer for a while, review your previous tax returns and bank statements to get an idea of what your income will be.
Depending on how your income fluctuates, the amount of money you may be able to save might vary.
Find a system to help you consistently transfer your savings before it goes out the door.
Manage Your Money and Income as a Freelancer
In addition to planning for expenses, good cash management involves tracking your income.
I have used everything from simple Excel spreadsheets to software programs like Quickbooks to keep track of income.
One of my early tools was a Google Spreadsheet with formulas to automatically calculate percentages for taxes.
I would log each project, amount, and invoice date. I would log the date when the client paid so I could follow up on outstanding payments.
I would also note the date that I deposited the payment into my bank account. Use what works for you.
Unless you have consistent retainer clients, it can be challenging to use automatic transfers to save.
Instead, put simple notes on your calendar to remind you to go into your account once your payments clear.
For example, if you get a check in the mail and deposit it via mobile deposit, it usually takes a few days to appear in your bank account. Add a calendar reminder to go in and check for it later, and then you can do your transfers manually.
Final Words About Managing Your Money as a Freelancer
Managing your money as a freelancer is entirely different than the experience as a W2 employee.
With the hustle and bustle of taking care of clients and meeting deadlines, it can be challenging to work on your business rather than in it.
But taking even a couple of hours to dedicate a space for your files and organizing them can do wonders for your operations and finances as a freelance professional. If you need some coaching to help you get to the next level, reach out to us!
How do you keep your freelance finances organized? Let me know in the comments.
Photo by alexandermils on Unsplash