How Much Do You Need to Earn?

If you’re anything like me, the end of the year prompts a lot of thinking about money.

How much did I make? How much did I want to make? How much do I need to make next year?

And that of course, leads to an important question for any freelancer:

Do you know how much you need to be making?

It’s not as simple as adding up your bills and knowing your living costs. You need to take one more step — a step most freelancers forget.

What’s the extra step that you need to take?

Setting aside money for taxes.

Rates vary, of course, depending on where you live. But when you don’t have an employer withholding money from your paycheck, you should plan to set aside about 30% of your income to pay your taxes. Which means that the amount of income you want to have is not actually the amount of money you need to make.

To figure out what you need to make, take the income you’re shooting for and divide by 0.7 — that’s how much you need to make per month.

That means, if you want to make $2000 per month, you actually need to make (2000/.07) = $2,857 per month. $857 of that you set aside for taxes, $2000 of it is your take home.

It doesn’t seem that complicated, of course… and yet it’s something that many freelancers forget to account for. All of a sudden, it’s tax time, you didn’t set aside any money, and your scrambling to figure out how to pay what you owe.

Of course, when it comes to actually calculating your taxes, there’s more than goes into it. 30% is how much you should plan to save… not necessarily how much you will owe.

If you’d like a few more tips on planning for taxes as a freelancer (which you should think about long before they’re actually due) check out this very helpful (and very easy to understand) tax article from The Finance Geek.

And if you’re living in the US, I’ve got an extra tip for you: