Separate your business and personal bank accounts
A business-only account can help you track income and expenses and help you implement a number of the following strategies. Open a business checking or savings account with your Employer Identification Number, or open a separate personal account if you’re a sole proprietor.
Pay yourself a salary
Budgeting for a personal salary can help address a common challenge: varying cash flow. Set up an automatic transfer from a business bank account to your personal account, like a regular paycheck. This can also help you plan budgets and calculate taxes.
Automate your budget
Apply a similar strategy to stay on top of building savings and paying debt. Set up automatic transfers to an emergency fund, savings account, investment accounts, etc. You can always adjust how much goes toward each account month to month.
Don’t forget your emergency fund
It’s even more important to have a dedicated emergency fund as a freelancer. The typical advice of covering 6-12 months of expenses might need to be adjusted as well. Given the varying nature of freelance income and more frequent tax requirements, you may want to keep an even larger buffer to cover potential slow months or unexpected expenses.
Plan for retirement
Research retirement accounts for self-employed individuals, like SEP-IRAs, which have some of the tax advantages available to traditional full-time employees. Then, set up automatic transfers to the account. Financial professionals can help you navigate the options available.
Don’t squirrel everything away in retirement accounts. While retirement accounts carry important tax advantages, allocate assets outside of them for growth as well. Investments in exchange-traded funds or managed funds can also be easier to access if you experience cash-flow issues and need funds. How much equity you keep in your portfolio should be informed by your age and your risk tolerance.
Social Security and Medicare
As your own boss, you pay the combined employee and employer Social Security tax rate of 12.4 percent on up to $128,400 of your net earnings, and the 2.9 percent Medicare tax on your entire net earnings.1 Fortunately, there are two income tax deductions available to self-employed individuals to help offset the share of the taxes that an employer would usually cover. Eligibility for Social Security benefits also requires that you work and pay tax for a period of time to accumulate credits. The necessary amount depends on your date of birth, but nobody needs more than 40 credits (or 10 years of work).
Pay quarterly taxes
If your expected tax liability on freelance income for the year would be $1000 or more, you are required to file quarterly tax estimates. Even though it requires diligence, paying taxes quarterly can be advantageous. Instead of saving for one big tax bill, you’re able break it up throughout the year. There are also tax deductions for freelancers to help reduce their tax burden, like home office and business expense deductions. Reference the IRS website for details.
Cover yourself with insurance
Employers typically provide health insurance and additional offerings like vision, dental, life and disability insurance to their employees. However, self-employed individuals are on their own when it comes to selecting and purchasing coverage. State-based exchanges are a good place to start for browsing health insurance options. Life insurance may be critical if you have family depending on your income. Disability insurance can also help support you in case an injury or illness prevents you from being able to earn an income. Make sure to look for an “own-occupation” policy tied to your specific career.
Keep track of your hours
Many people begin working for themselves to control their hours and schedule. To ensure work doesn’t take over other important things in your life, consider logging your hours and note how much overtime you work, so you can easily flag it.
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