How to manage finances as a freelancer: Money tips for the self-employed Take the proper steps to thrive while you're self-employed. September 7, 2022 Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word “freelance” means flexibility, meaningful tasks, and better work-life balance. Who doesn’t want to create their own hours, love what they do, and work from wherever they want? Freelancing can provide all of that—but that freedom can vanish quickly if you don’t know how to manage finances as a freelancer. “A lot of the time, you don’t know about these expenses until you are in the trenches,” says Alyssa Goulet, a freelance copywriter. “And that can wreak havoc on your financial situation.” According to a recent study by a global freelancing platform, 59 million people in the U.S. freelanced in 2021. It’s also increasingly becoming a long-term career choice: 36% of the U.S. workforce freelanced in 2021, according to the same study. But for all its virtues, the cost of being freelance can carry some serious sticker shock. “There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.” Most people who freelance for the first time don’t realize that everything—from taxes to business software to setting up retirement plans—is on them. So, how do you manage finances as a freelancer? It’s all about taking charge today and learning how to manage your finances as a freelancer. What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for these five expenses: 1. Taxes for freelancers: Plan for these costs First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial advisor or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation, as well as provide you with even more financial tips for freelancers. For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes on your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these taxes yourself, the IRS says. And if you think you’ll owe more than $1,000 in taxes for a given year, you may need to estimate how much tax you’ll owe each quarter and pay that amount, the IRS adds. That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really,” says Susan Lee, CFP®, a tax preparer and founder of a website on tax information for freelancers. “You think about the take-home pay. With freelance, everything is take-home pay.” When you’re starting to figure out how to budget as a freelancer and determining how often you’ll need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards, and future projections for your work—which Goulet also finds valuable.“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee.One of the most valuable financial tips for freelancers is to know what you can deduct from your taxes. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies, and maintenance and fees for a coworking space, according to Lee. The leftover income will be your taxable income. Pro Tip:To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says. 2. Business expenses for freelancers: Get a handle on two big areas The cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a sophisticated (read: expensive) workspace. Your freelance costs also change as you add new tools to your business arsenal.Here are two budget categories you’ll need to account for as you embark on your own freelance money management: Renting or creating your workspace Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being a freelancer, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks. If you want to avoid office rent or dues but don’t want the kitchen table to pull double duty as your workspace, you might convert another room in your home into an office. When planning a home office on a budget, all it takes is a little creativity and know-how to create a functional, productive space. Amy Hardison, a freelance copywriter and content strategist, retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer, and a squishy mat to stand on so my feet don’t hurt,” Hardison says. Pro Tip:Start with the absolute necessities. When Hardison launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home. Using the best budgeting apps for freelancers and other digital tools There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit to investing in digital freelance tools is that it saves you time, which you can then spend on marketing to clients or producing great work. Software can also help you avoid financial lapses as you grapple with how to manage finances as a freelancer. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them, and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’” Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference, and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month. Pro Tip:When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income. 3. Health insurance for freelancers: Harness an inevitable cost Saving for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In 2021, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidies—a reduced premium based on income—was $450 for individuals and $1,437 for families of four, according to a private online marketplace for health insurance.“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP®, a financial advisor at a wealth management firm. As you begin to lay out your freelance money management strategy, your healthcare costs as a freelancer are a good place to start. Your premium—how much you pay each month to have your insurance—is a key cost.Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy, you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.When you’re getting a handle on how to budget as a freelancer, the federal government offers a healthcare marketplace that can be helpful. Here are a few other options: Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through their employer, you may be able to get coverage under their plan.COBRA: If you recently made a job transition to self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs. Pro Tip:Speak with an insurance advisor who can help you figure out which plans are best for your health needs and your budget. An advisor may be willing to do a free consultation, allowing you to gather important information before making a financial commitment. 4. Retirement savings for the self-employed: Learn to “set it and forget it” Part of learning how to budget as a freelancer is thinking long term, which includes estimating retirement expenses. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for retirement as a freelancer is a big part of budgeting when self-employed.“It’s kind of the miracle of compound interest,” Gunter says. “The sooner we can get it invested, the sooner we can get it saving.”His freelance money management tip is to set aside whatever would have been contributed to an employer’s 401(k) plan and put it on autopilot. One way to do this might be setting up an automatic transfer to your savings or retirement account.“So, if you would have put in 3% [of your income] each month, commit to saving that 3% on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (Traditional IRA CD) dollars from your income now. Pro Tip:Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says. 5. General business expenses: Update your rates to cover them With time, you’ll likely find that one of the best financial tips for freelancers is to build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says.She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working your costs into your rates is essential to freelance money management and building a thriving freelance career. You should annually evaluate the rates you charge.Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money. “A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.” Knowing how to manage finances as a freelancer is the key to a successful career When you understand how to budget as a freelancer and account for the costs of being self-employed, you can build the foundation of a long, prosperous freelance career. From paying your taxes to saving for retirement as a freelancer, your know-how can provide you with both financial stability and peace of mind. “There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.” Working as a freelancer has its benefits, but it also means that your pay can go up and down month to month. If you want to be even more prepared for freelance money management, then find out how to make a budget with irregular income. Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.