As an independent contractor, properly budgeting your freelancer payments can be challenging. You’ve built the portfolio, pitched the project, closed the deal, knocked the work out of the park and even successfully got paid.
Now how do you manage your business expenses, plan out future expenses and build a cushion for yourself, should an emergency arise?
As it turns out, when you become a business owner, no one hands you a manual to follow on all things finance-related. So, there’s a good chance you may never have had to think about saving for retirement and navigating monthly healthcare costs while flying solo.
The good news is that there are numerous helpful resources to get you started in the right direction. Here’s where you begin..
- First, brainstorm a list of the most important parts of your business that you should be paying attention to, related to your income. You’re in luck because we’ve outlined several below.
- Next, break down tangible steps that you can take to either learn more information about the subject (for example: income taxes in your state), or consult an expert who can help you.
- Last, create a recurring task for yourself to review your business’s incoming freelancer payments, expenses, savings and investments. This might be most helpful to do biweekly or monthly.
Review the areas below to get started handling your business’s income more accurately this year. Once you do that, you’ll have a clearer understanding of how much of your freelancer payment income you should be saving each month to cover your costs and live comfortably.
Saving for Taxes
Let’s break down how taxes work as a business owner. You need to understand that, when you work as a freelancer (regardless if it’s part time or full time), the government considers you a business owner. All business owners are required by law to pay a certain percent of taxes on their freelancer payment annually.
Here are a few types of taxes that freelancers need to be aware of:
- Independent contractors in the US are required to cover state taxes and federal taxes, dependent on where you live, of course.
- Freelancers are also generally required to pay self-employment tax. This tax includes things like Social Security and Medicare which an employer would typically pay on your behalf if you were an employee of another business.
- As a freelancer, you’re also required to pay income tax on all freelancer payments you receive from doing client work. This will vary depending on the state you reside in. For example, income tax in Maine ranges between 5.8% to 7.15%, whereas in California it is between 1% – 12.3%.
The list above will help you get started researching which types of taxes are sure to affect your business. It’s important to know how much of your total annual and monthly freelancer payment you should be socking away for taxes (and not spending as if it’s your money to blow)!
Please note, this is not meant to be a comprehensive list and you may be required to pay additional expenses. It’s important to contact your state’s Small Business Bureau or Association to gain a full understanding of what your company is required to pay annually.
Resources to Help:
- The IRS website
- Federation of Tax Administrators
- Expert Tips for Navigating Tax Season
- Filing Your Small Business Taxes
Preparing For Retirement
Similar to paying your taxes, as a freelancer there is no one saving a portion of your freelance income or client payments on your behalf for your retirement. If you’re interested in starting a 401(k), a Roth IRA or exploring various stocks and bonds, it’s your responsibly to learn as much as you can about your different retirement options.
Then, it’s up to you to take action.
Here is a quick overview on a few different types of retirement options to consider exploring:
- An individual 401(k): These allow you to make financial contributions as both an employee and employer. You can defer as much as $18,500 annually to your 401(k). If you’re over the age of 50, you can contribute up to $24,000.
- A Roth IRA: With a Roth IRA, you’re contributing after-tax dollars. The money you contribute earns tax-free and you are not taxed when you withdraw it again. You can contribute up to $5,500 annually to your Roth if you’re under 50, or $6,500 if you’re older.
- A SEP IRA: A SEP IRA is a simplified employee pension and is common among freelancers. These retirement plans allow you to contribute 25% of your incoming freelancer payments (your total compensation), or up to $55,000 in 2018.
There are tons of retirement savings plans available; it’s simply a matter of finding the best possible option for you and your business. If retirement planning feels really overwhelming, don’t be afraid to consult with a professional. They can help explain all of the options you have for you and your business and turn your freelancer payment into a growing retirement fund.
Resources to Help:
- 7 Retirement Savings Accounts You Should Consider
- IRS: Tax Information for Retirement Plans
- NerdWallet: Retirement Plan Options for the Self Employed
- Fidelity Investments: Not 401(k)? How to Save for Retirement
- CNBC: A Freelancer’s Guide to Saving for Retirement
Taking Healthcare Costs into Consideration
In the United States, we’ve grown so accustomed to our employer providing us our health benefits that it may seem like an impossible feat to do it ourselves. However, you’re not alone.
All small business owners have to figure out their own healthcare, whether they are solopreneurs or a small team. And you do have a variety of different options.
- If it’s an option, consider getting on your spouse’ healthcare policy.
- Or, if you’re under the age of 27, you may be eligible to be on your parent’s policy.
- If you’ve recently left your 9-5 job where you were supplied coverage, you have the option to use COBRA insurance for up to 18 months.
- Consider starting an HSA (health savings account). You are eligible to put up to $6,000 of your freelancer payment in an HSA annually to be used towards healthcare costs and expenses.
- Freelancers do still have the opportunity to pay for monthly private health insurance.
- The Freelancers Union also offers health care benefits. Explore their supplemental medical plans for more information.
Resources to Help:
- The Balance: 5 Places to Find Health Insurance for Freelancers or the Self-Employed
- Money: 7 Dos and Don’ts for Freelancers Buying Health Insurance
- HealthCare.gov
Calculating Your Business & Personal Costs
The most important thing you can do when reviewing your monthly and annual freelancer payment income is to also review your monthly expenses.
Ask yourself, how much are my monthly expenses if I were unable to work for a month? 3 months? 6 months? Are there areas within my business that I could cut back on? How about my personal expenses?
Consider some of the following places to alleviate some of your financial pressure:
Business-related expenses:
- Unnecessary office supply costs like pads of paper and sticky notes you can do without.
- Expensive in-person networking events or seminars. Is it possible to save up for 1-2 larger marketing events per year that could bring big value to your business versus attending several conferences that have a lesser impact and cost more?
- Sponsored events that have little ROI. If your sponsorships and community contributions as a business give you quality new clients than you’ll want to keep those in your budget. Otherwise, cut back on where you’re donating money if it’s not consistently benefiting your business.
Personal expenses:
- A gym membership that you rarely use.
- Monthly subscription services that you won’t miss, such as makeup bags, outfit capsules and monthly shoe packages.
- Expensive dinners out each week.
Additionally, consider looking into the FIRE movement, a “lifestyle system followed largely by millennials that’s focused on the goal of achieving financial independence and retiring early.”
Resources to Help:
- Financial Tips for Freelance Content Developers
- How to Grow Your Bank Account in Your First Year
- Forbes: How To Budget Wisely And Save Money As A Freelancer
- Nerd Wallet: 3 Keys to Budgeting as a Freelancer
- Mint: Best Practice Budgeting Tips for Freelancers
Reviewing Your Business Expenses and Properly Budgeting Each Freelancer Payment
The freedom economy is a wonderful place, but there are a few considerations you have to make when you strike out on your own. By becoming educated on important financially-related parts of your business you’ll be budgeting and allocating your freelancer payments better in no time.
Gain an understanding of what taxes you’re required to pay on your freelancer income by contacting your local government office or seeking help from a professional.
Next, prepare for retirement by looking into various retirement plan options. Additionally, take the time to review your healthcare options, and remember, you have lots of them to choose from!
Last, research where you’re able to cut costs throughout your business and personal life to lessen your financial stress each month.
After completing these steps, you’ll have a better understanding about what percentage of your freelancer payments you should be saving each month to cover your costs.
