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

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 is useful in implementing 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 when you're self-employed. 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 $168,600 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 plan options for the self-employed to help you find the right tax-qualified plan for you.