Financial Tips for the Self-Employed

Being your own boss means being in charge, not only of your own income, but also for the finances of your business.

That’s true whether you’re a freelancer, an artist, or a small business owner. And that responsibility can be a pretty scary prospect when you’re just starting out.

Even though I made the switch to freelancing without a whole lot of planning, I realized afterwards that I had a lot of good financial systems in place. These made the transition much easier than it could have been. And while I’m by no means a financial professional, I’m discovering some important dos and don’ts along the way.

1. Have a Savings Cushion

Your income may be (will be) variable for a while, so it’s important to have 3-6 months of expenses in savings, especially if you’re the only income earner for you/your family. And even once your income steadies out, it’s still a good idea to have the cushion, just in case.

I’ll admit that I did not specifically do this before I switched to freelancing full-time. But I’m already pretty careful with my money, and my husband and I had about 3 months of expenses saved up by the time I left my day job(s). Mostly, though, I lucked out. Don’t do what I did. Plan ahead and save.

2. Use Accounting Software

Use it to record every penny that comes in an goes out. It will make everything easier, from invoicing clients to keeping track of how much you’ve spent on your website. And when it comes time to do your taxes… you will be so glad you did.

Quicken and FreshBooks are very popular cloud accounting services, and both come with a lot of support and features to keep your finances organized. Or, if you need something free (who doesn’t love free?) and don’t care about getting fancy, try out Wave Accounting.

3. Separate Your Business and Personal Accounts

When you’re first starting out and you don’t have much income, setting up separate bank accounts can seem like an unnecessary step. In the long run, though, it makes your life much easier (and keeps the IRS off your back). Set up a separate checking account for business expenses, get a debit card and link it to a PayPal account, and you have everything you need to start managing your business finances professionally.

4. Set Up a Retirement Account

Being aware of your long-term finances is even more important for the self-employed, who don’t have company-sponsored 401(k)s or the option for employer contribution matching.

So take charge of your own future and set up an IRA. (I’m a millennial, and we’re pretty big on retirement accounts after seeing what happened to our parents.) You can either designate a set amount that will go into it every month, or pick an income stream and funnel all of it into your IRA. Just make sure you’re contributing regularly.

5. Pay Yourself a Set Amount

Everyone’s system will be a little different here, depending on when you’ve covered your start-up costs and can start taking a paycheck.

But in general, it’s a good idea to think of yourself as an employee. Your “paycheck” should always be less than the total amount clients pay you: that way, you always have money in your business account. I have several clients that I work for on retainer, so I have a fairly consistent “minimum income” per month, and every two weeks I transfer slightly less than that from my business account into my personal account. Everything above that stays in my business checking account.

6. Set Aside Money for Taxes

If you’re self-employed in the US, you need to pay quarterly federal and state taxes (and sometimes city taxes, depending on where you live). Because you have to cover not only income tax, but also the amount that an employer would pay, you should set aside around 30% of your income. (I know. Take a moment to recover. It’s all right.) It might be a good idea to have a second business account where you put money specifically earmarked for taxes.

7. Take Care of Your Personal Health

This one seems both non-financial and like a no-brainer, but it’s a big one. If you’re self-employed and you get sick for two weeks… where’s your money going to come from? Take care of yourself so you can take care of your business. This also includes making sure you have health insurance, since you don’t have an employer to take care of that for you.

8. Insist on Signed Contracts

Getting everything in writing may not guarantee that you get paid on time (or at all). But it does make it more likely that clients will be prompt with payment and gives you some legal recourse if they aren’t. Having everything spelled out in writing also makes it easier to add additional fees if the client asks you to do more work that you originally agreed to.

9. Hire an Accountant

Whether you need to do something big like incorporate, or something mundane like pay taxes, hiring an accountant is definitely worth the expense. Being self-employed means more paperwork for pretty much everything – and also more business deductions at tax time. Hire an accountant to make sure you’re not missing anything.

10. Have Monthly Income Goals

When your income is variable, it can be easy to get dragged into a “whatever happens, happens” sort of mindset. But if you set monthly (or quarterly, or yearly) income goals for yourself, you’ll be more likely to put yourself out there to get more business. This can also help you be creative with ways to diversify your income.

11. Reevaluate

Because nothing stays the same. What work last year (or quarter, or month) may not work this time around. Set aside time to evaluate your work: not just how much money you’re making, but whether you love what you’re focusing on, whether your work priorities reflect your life priorities. If things don’t match up, make a new plan. It’s all right for things to change. In fact, it’s good.