Your Quick Guide: How To Manage Finances As A Freelancer

Do you have dreams of managing your own freelancing business, whether you’re a website designer, copywriter, translator, graphic designer, artist or another type of professional? Freelancing is an attractive opportunity that offers flexibility, additional income and a way to continuously hone your skills.

However, money management takes on a different lens when you’re a small business owner. Let’s go beyond how to be a freelancer and learn more about how to manage finances as a freelancer and how to set up your freelancing business.

These are critical steps to managing your finances as a freelancer, and we'll discuss each step in-depth later in this article:

1. Set your business structure.
2. Establish rates for your services.
3. Create a separate business bank account.
4. Be ready for tax season.
5. Get insurance coverage.
6. Save for retirement.
7. Set up an emergency fund.

1. Determine Your Freelancing Business Structure: LLC Or Sole Proprietorship

Like other self-employed people, freelancers may need to choose a type of business structure for their freelance work. We'll review the pros and cons of a limited liability corporation (LLC) and a sole proprietorship.

A limited liability corporation (LLC) protects your personal assets if you’re involved in a lawsuit or experience business failure. It can help protect you if you incur financial losses, debts and other liabilities.

Pros And Cons: Limited Liability Corporation

However, a sole proprietorship may better fit some situations. This is an unregistered, unincorporated business that one proprietor runs. Sole proprietorship means that you control all aspects of your business, including production, sales, etc.

Pros And Cons: Sole Proprietorship

2. Establish Your Rate

As a freelancer, you don’t earn a steady paycheck like you might at a salaried job. Therefore, it’s important to figure out how much you should charge. Start by researching your industry to learn more about the average income in your sector. That will help you form some ideas about your pricing ranges for freelance work.

If it’s easier, work backward.

1. Determine your ideal annual salary based on your desired monthly income.
2. Divide that annual amount by 52 to learn what you should earn per week.
3. Take that amount and divide it by 40 to learn your hourly rate. 

Understand Your Expenses

What business expenses do you have? Businesses have a wide variety of expenses depending on the nature of your business. For example:

• Utilities
• Phone and internet expenses
• Business insurance
• Office equipment
• Marketing expenses
• Taxes
• Licensing or permits
• Business travel
• Education
• Other fees

Make a list of your expenses, though note that unexpected costs could pop up. Compare your rates against your expenditures to ensure that they mesh. If your expenses are higher than your proposed rate, you’ll need to either change your rate or lower your expenses.

Create A Schedule

Next, create a schedule. Putting projects on paper (or on your Google calendar) can help you track your time and estimate the time you should take to complete the project. Therefore, based on your rates, you know how much time each project deserves.

Learn about your workflow and how it can best fit into your day-to-day life. Reflecting on your schedule as a freelancer can help you create the right cadence for your life and business.

3. Create A Separate Bank Account For Your Business

Consider creating separate bank accounts for your business and personal uses. It can simplify your accounting come tax time because you can view one account instead of several. You can also simply hand your accountant your bank statements at tax time. You can also more easily manage credit cards and business bank accounts.

You can also protect your assets – it can affect your legal liability if you have combined accounts. In short, if your company gets sued or files for bankruptcy, you could lose your personal assets too. 

It also makes your business look more credible. It doesn't look legitimate if you're sending out checks from your personal account.

Whether you elect to put freelancing income into a savings account, a separate bank or business bank account, consider using an app like Rocket Money^SM to track your separate business and personal accounts. Rocket Money’s intuitive mobile app allows you to link all your accounts (including retirement and investment accounts) so you can track your purchases, income and savings in one place.

Tips For Keeping Track Of Freelance Income

What should novice freelancers know about tracking their freelance income?

As a freelancer, it could be worthwhile to speak with a financial professional to help you establish a process for organizing and tracking your income and expenses. You’ll also need to understand how to estimate your quarterly taxes, secure health insurance for yourself and to save toward retirement.

4. Be Ready For Tax Payments

Prepare to pay taxes while self-employed. You must file an annual return as well as pay estimated quarterly taxes. You must pay self-employment (Medicare and Social Security contributions) as well as income taxes.

Because you don’t have those taxes coming out of a paycheck automatically as a sole proprietor or independent contractor, you have to pull out enough money to cover those tax payments.

You may pay quarterly tax payments four times a year, unless:

• Your business generates a net loss of income
• If you haven’t been in business for a full year
• You have earned $600 or less from your business

You can use last year’s return and the Form 1040-ES to pay about one fourth of what you expect to owe the IRS at the end of the year.

You also need to file an annual return. If you’re self-employed, you pay a 12.4% Social Security tax on up to $160,200 of your net earnings and a 2.9% Medicare tax on your entire net earnings. An accountant could help you streamline that process.

5. Get Insurance Coverage

As a full-time freelancer, you still need health insurance coverage unless you can get on a spouse’s policy. You can purchase insurance in the Health Insurance Marketplace created through the Affordable Care Act (ACA). Your former job (if you recently left it) may also offer you an employer-based plan for up to 36 months.

Professional associations like the Freelancers Union may also offer health care coverage. Carefully consider your needs before choosing the right type of health insurance.

Consider getting professional liability insurance, also known as errors and omissions coverage, which helps cover claims regarding anything from copyright infringement to personal injury on the job.

6. Save For Retirement

Wondering how freelancers save for retirement? Just as you’re on your own with financial planning, you’re also on your own with your retirement plan.

You may have heard of the common recommendation of saving between 10% to 15% of your paycheck as an employee, but when you’re self-employed, your income may not be that predictable. Therefore, consider saving 10% to 15% of your yearly income instead of your income monthly.

You can choose from many retirement plan options, including:

• Traditional IRA
• Roth IRA
• Solo 401(k)
• SEP IRA
• SIMPLE IRA
• Defined benefit plan

Consider researching all of these options to decide which may work best for you.

What Do With 401(k) Accounts From Previous Jobs

If you have 401(k) accounts from previous employers, you have several choices. You can:

• Keep it in the 401(k): You can keep your money in your 401(k) from your previous employer – if your employer allows it. However, ask yourself honestly: Will you remember it’s there? And will the maintenance and other fees be higher than what you could find in another type of account?
• Roll it over: You can also roll your money over into an individual retirement account (IRA). You may have a wider range of investment options if you roll your old 401(k) into a traditional IRA, perform a Roth conversion or roll a Roth 401(k) into a Roth IRA. You may want to talk to a financial professional about the pros and cons of each option.
• Cash it out: You can tap into ready cash through your old 401(k). However, the downside to cashing it out is that you will incur local, state and federal taxes because it is considered income. If you leave your employer prior to age 55 or are younger than 59 ½, you will pay a 10% withdrawal penalty on top of these taxes. 

Consider A SEP IRA

Planning for retirement may seem trickier because you have to take extra steps to open an account with a brokerage instead of going to the HR office.

However, you may be pleasantly surprised to learn that you may encounter more options, including a Simplified Employee Pension (SEP) IRA. If you’re the only employee, this would allow you to set up one account and contribute up to $66,000 for 2023, or 25% of your compensation up to that maximum. If you take on additional employees, you’ll be responsible for contributing an equal percentage of salary to each eligibly employee’s account.

7. Set Up An Emergency Fund

Cash flow is king. Unfortunately, unexpected expenses come up and your average income might waver from month to month. An emergency fund might help when your business generates less income than expected or when you need to spend more than expected.

Try to stockpile at least three to six months’ worth of expenses, though you might want to build up more due to the volatile nature of self-employed income.

FAQs: Financial Advice For Freelancers

Let's look at a few lingering questions you may have about becoming a freelancer.

How do freelancers handle money and payments?

Freelancers may use a payment system connected to their bank accounts (PayPal, Bill.com, Venmo or another type of payment system). Freelancers may also elect to get paid the old-fashioned way, via check or by ACH direct deposit, an electronic funds transfer into your checking or savings account. Some clients have an established payment system, so find out what your clients offer.

How do I pay myself a salary as a freelancer?

First, estimate your freelance revenue, calculate business expenses, determine how much you’d like to get paid and how much you want to keep in the business. Finally, set up a payment method and decide how often you’d like to pay yourself. You can move money from your business account into your personal account to create a salary for yourself.

How do I manage finances as a 1099?

One of the most important ways to manage finances as a self-employed individual involves separating personal and business finances. Also, keep track of all your expenses, from travel to office expenses for tax purposes. Develop a budget for your business and learn as much as you can about accounting so you can predict your income stream and make plans to grow your business.

The Bottom Line: Freelancing Requires Effort To Manage Finances And Handle Taxes

From quarterly tax payments to retirement savings, becoming self-employed may throw you a huge learning curve. In addition, personal finance becomes even more personal as you learn how to keep track of freelance income and learn new financial planning techniques.

Gathering financial advice for freelancers may seem like a daunting task, but it can also start becoming second nature as you learn on the job.

You can also use technology that helps freelancers manage their business. Get the Rocket Money app to have complete visibility over your freelancing income and expenses.