About 59 million Americans, or 36% of the workforce, freelanced in 2020 (1). That number is expected to grow to almost 90 million by 2028. 

Working for yourself definitely has its upsides: being your own boss, doing work you love, setting your own hours and enjoying the flexibility of time off when you need it.  

But self-employment isn’t without its downsides, either: fluctuating income, having to wear all the hats and manage all aspects of your business, being responsible for taxes and insurance, knowing that time off might mean you don't get paid. 

To weather the ups and downs of self-employment, it’s essential to have good financial habits and smart business practices in place so you’re always two steps ahead. Read on for some tips on managing your finances as a solopreneur. ‍

Please note: all of the following are suggestions; we recommend speaking with a personal financial advisor regarding your specific situation.

Separate Business and Personal Finances

Two big reasons you may want to keep your personal and business accounts separate are to simplify your accounting and streamline your taxes. 

Start by creating a separate legal identity for your business and register as a sole-proprietorship or LLC. Consult the Small Business Administration for guidance on which structure is right for you, as each has different benefits and implications. 

Open separate checking/debit or savings accounts and, if you can, a business credit card that’s used exclusively for business-related expenses.  

Funneling your business’s income and expenses into separate accounts not only allows you to easily track your finances, but will make doing your taxes more straightforward. On a federal level, you may be able to deduct certain business-related expenses such as supplies, travel, internet, cell phone, or a home-office, but only if you can provide the IRS with a paper trail that shows how these expenses were related to your business. You may also want to check what your state’s limits on what can be deducted as business expense, as well. In short: eligible business-related expenses can be written off, or deducted from your revenue, which lowers the taxes you have to pay on your revenue. 

Keep accurate records and save all receipts to avoid accounting headaches later on, and to ensure you don’t miss out on any tax deductions (find a list of other miscellaneous deductions here). 

Create a Budget 

Think of a budget as the road map that’s going to get you where you want to go. You can’t set financial goals for your business if you don’t know what’s coming in and what’s going out. 

When you’re self-employed, your income inevitably varies from month to month. You can calculate an average of what your business is earning by looking at several months worth of income and then develop a business budget based on that average. 

Think of a business budget as “the cost of running your business.” Do you use a cell phone, computer or the internet to run your business? Account for those monthly costs in your budget. What about a car or other transportation? Add line items for gas, insurance and vehicle maintenance. Do you advertise your business? Don’t forget to create a category for marketing. 

Other business expenses to include in your budget might be supplies, travel, yearly web hosting fees or other software licensing, continuing education or professional development or subscriptions. 

Once you have a clear picture of what it costs to run your business, you’ll have a better idea of how much profit your business is actually or capable of generating. 

You might consider using budgeting software (possible tax deduction!) to help keep track of your finances. Many budgeting programs are easy to use and allow you to set and track income goals, monitor spending, create expense categories, generate and send invoices or quotes and pull reports with detailed graphics for a complete financial snapshot of your business on any given day. 

Budgets don’t need to be complicated. You can customize a free online spreadsheet, find an app that works for you, or use a good old notebook. Whatever you choose, keep it simple. 

Remember, the best system is the one you’ll use regularly. 

Pay Yourself First

Many freelancers find this advice challenging, but many financial experts agree: set a salary and pay yourself every month like you would any employee (2)(3). 

Determine what you need to comfortably cover your personal expenses each month, $3,500 for example, and use that as your salary. 

Your personal expenses should include not only rent/mortgage, child care, insurance, food, utilities and other monthly bills, but also account for: 

Paying down personal debt. If you have personal debt, factor in paying it down as quickly as reasonably possible. It’s tempting for solopreneurs to ignore this advice in favor of keeping extra funds handy in case their business has a down month. But, paying off debt could help raise your credit score and eventually allow you to redirect the money you were using for debt payments back into your business, creating more wiggle room in your budget.

Saving for retirement. Having a retirement plan in place is a vital part of the solopreneur “pay yourself first” mantra since you are solely responsible for saving for retirement. Too often retirement contributions get pushed to the back burner or are made only “when there’s extra cash” available. That’s paying yourself last, not first. Depending on your goals and how close you are to retirement, a good rule of thumb is to set at least 10% of each paycheck aside for retirement (4). 

There are plenty of retirement plan options for solopreneurs including a simple IRA, SEP IRA or a one-participant 401(k). If the prospect of opening a retirement account seems overwhelming, consult a professional and get some advice on which structure is right for you. 

Having a retirement plan in place now is essential for financial freedom down the road.

Contributing to an emergency fund. Three to six months-worth of expenses is typically what experts recommend you have as a safety net to cover emergencies like a medical bill, car repair, or unforeseen capital expense for your business (laptop crash?!) (5). As your income ebbs and flows, take the extra money on the up months and stash it in your emergency fund. 

Set Money Aside for Taxes

Just like saving for retirement, paying federal, state and other taxes falls on your shoulders as a solopreneur, since taxes are not automatically taken out of your paychecks. 

Each time a client pays you, whether it’s $100 or $10,000, set aside between 15-30% to help avoid tax surprises. Making quarterly tax payments may also help you avoid under-withholding penalties. If it turns out you’ve overpaid, you’ll receive that money back as a refund. 

Some freelancers find it helpful to have two separate savings accounts. One account is for all incoming funds. A percentage of those funds is then moved to the second account to cover quarterly tax payments. 

Get Help and Support When you Need it

Investing in the services of an experienced tax accountant is good for your bottom line. Using a bookkeeper when you need one frees you up to actually run your business. Having a lawyer make sure you’re compliant with federal, state and municipal regulations may cost you up front, but could save you from future hassles. 

Don’t be afraid to turn to professionals for outside help when you need it, especially if it will help your business run like a well-oiled machine. 

You can also lean on your fellow solopreneurs for guidance, tips or recommendations. When you’re part of an online community or mastermind group, chances are that someone was once where you are now and is more than willing to share their advice.

You’ve got This

You’ve planned for the unpredictability of self-employment. You know that one down month doesn’t define your business, just as every month won’t be spectacular. You have smart business practices in place and set your priorities to invest in yourself and your future. 

You’re positioned to enjoy the upsides of self-employment because you’ve got this.

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Sources:

1. “New Upwork Study Finds 36% of the U.S. WORKFORCE Freelance amid the Covid-19 Pandemic.” Business Wire, 15 Sept. 2020

2. Kagan, Julia. “Pay Yourself First.” Investopedia, Investopedia, 25 Apr. 2021

3. Pant, Paula. “Budget Better: Pay Yourself First.” The Balance, 29 Aug. 2020

4. VanSomeren, Lindsay. “I Got Hit with a $10,000 Tax Bill This Year, but MY 3-Prong Money Management Strategy Meant It Wasn't a Problem.” Business Insider, Business Insider, 21 Feb. 2020

5. “What's the Right Emergency Fund Amount?” Vanguard