How to manage your money when you’re self-employed

August 25, 2022

Ten tips for keeping your finances steady when your freelance salary isn’t.

 

Working for yourself can be a dream, but it comes with challenges. These strategies can help you manage inconsistent cash flow, retirement planning and the legal and tax rules for being your own boss.

 

1. Separate your business and personal bank accounts

A business-only account can help you track income and expenses and help you implement several of the following strategies. Open a business checking or savings account with your Employer Identification Number or open a separate personal account if you’re a sole proprietor.

 

2. Pay yourself a salary

Budgeting for a personal salary can help address a common challenge: varying cash flow. Set up an automatic transfer from a business bank account to your personal account, like a regular paycheck. This can also help you plan budgets and calculate taxes.

 

3. Automate your budget

Apply a similar strategy to stay on top of building savings and paying debt. Set up automatic transfers to an emergency fund, savings account, retirement accounts, etc. You can always adjust how much goes toward each account month to month.

 

4. Don’t forget your emergency fund

It’s even more important to have a dedicated emergency fund as a freelancer. The typical advice of covering three-to-six months of expenses might need to be adjusted as well. Given the varying nature of freelance income and more frequent tax requirements, you may want to keep an even larger buffer to cover potential slow months or unexpected expenses.

 

5. Plan for retirement

Research retirement plans for self-employed individuals, like SEP IRAs, which have some of the tax advantages available to traditional full-time employees. Then, set up automatic transfers to the account. Financial professionals can help you navigate the options available.

 

6. Keep investing

Don’t squirrel everything away in retirement accounts. While retirement accounts carry important tax advantages, allocate assets outside of them for growth as well. Investments in brokerage or automated investment accounts can also be easier to access if you experience cash-flow issues and need funds. How much equity you keep in your portfolio should be informed by your age and your risk tolerance.

 

7. You’re responsible for Social Security and Medicare

As your own boss, you pay the combined employee and employer Social Security tax rate of 12.4% on up to $147,000 of your net earnings, and the 2.9% Medicare tax on your entire net earnings.1

Fortunately, there are two income tax deductions available to self-employed individuals to help offset the share of the taxes that an employer would usually cover. Eligibility for Social Security benefits also requires that you work and pay tax for a period of time to accumulate credits. The necessary amount depends on your date of birth, but nobody needs more than 40 credits (or 10 years of work).

 

8. Pay quarterly taxes

If your expected tax liability on freelance income for the year would be $1,000 or more, you are required to file an annual return and pay estimated taxes quarterly. There are also tax deductions for freelancers to help reduce their tax burden, like home office and business expense deductions. Reference the IRS website for details.

 

9. Cover yourself with insurance

Employers typically provide health, life, and disability insurance to their employees. However, self-employed individuals are on their own when it comes to selecting and purchasing coverage. State-based exchanges are a good place to start for browsing health insurance options. Life and disability insurance may be critical if you have family depending on your income. Make sure to look for an “own-occupation” policy tied to your specific career.

 

10. Keep track of your hours

Many people begin working for themselves to control their hours and schedule. To ensure work doesn’t take over other important things in your life, consider logging your hours and note how much overtime you work, so you can easily flag it.

 

You have more freedom when you’re self-employed, but you take on more responsibility when saving for retirement. Read retirement planning in the gig economy to help you find the right tax-qualified plan for you.

 

1If You Are Self-Employed,” Social Security Administration.

Related content

Key components of a financial plan

5 times you may need a financial advisor

How to manage your money: 6 steps to take

Start of disclosure content

Investment and insurance products and services including annuities are:
Not a deposit ● Not FDIC insured ● May lose value ● Not bank guaranteed ● Not insured by any federal government agency.

U.S. Wealth Management – U.S. Bank | U.S. Bancorp Investments is the marketing logo for U.S. Bank and its affiliate U.S. Bancorp Investments.

The information provided represents the opinion of U.S. Bank and U.S. Bancorp Investments and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank, U.S. Bancorp Investments and their representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

For U.S. Bank:

U.S. Bank does not offer insurance products but may refer you to an affiliated or third party insurance provider.

U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Investments, Inc.

For U.S. Bancorp Investments:

Investment and insurance products and services including annuities are available through U.S. Bancorp Investments, the marketing name for U.S. Bancorp Investments, Inc., member FINRA and SIPC, an investment adviser and a brokerage subsidiary of U.S. Bancorp and affiliate of U.S. Bank.

U.S. Bancorp Investments is registered with the Securities and Exchange Commission as both a broker-dealer and an investment adviser. To understand how brokerage and investment advisory services and fees differ, the Client Relationship Summary and Regulation Best Interest Disclosure are available for you to review.

Insurance products are available through various affiliated non-bank insurance agencies, which are U.S. Bancorp subsidiaries. Products may not be available in all states. CA Insurance License #0E24641.

Pursuant to the Securities Exchange Act of 1934, U.S. Bancorp Investments must provide clients with certain financial information. The U.S. Bancorp Investments Statement of Financial Condition is available for you to review, print and download.

The Financial Industry Regulatory Authority (FINRA) Rule 2267 provides for BrokerCheck to allow investors to learn about the professional background, business practices, and conduct of FINRA member firms or their brokers. To request such information, contact FINRA toll-free at 1-800‐289‐9999 or via https://brokercheck.finra.org. An investor brochure describing BrokerCheck is also available through FINRA.

U.S. Bancorp Investments Order Processing Information.