Managing Finances As a Freelancer or Small Business Owner

Managing Finances As a Freelancer or Small Business Owner

Riley Fortier | Contributing Writer

Starting a new career as a small business owner or freelancer can be exciting, but confusing to navigate financially. Saving money can feel daunting, taxes seem more complex, and you don’t have an employer contributing to your retirement fund. This is why financial literacy is a critical skill for anyone who is self-employed. River Nice, owner of a small financial planning firm, and Kaitlyn Arford, an experienced freelance writer, share their tips for successfully managing money when you are self-employed.

*This information may vary by country, and it is important to note that a few specific tips in this article may apply to American audiences more so than others.*

With tips from:

Kaitlyn Arford, Freelance writer www.kaitlynarford.com; Twitter: @kaitarford

River Nice, Financial Planner www.beintentionalfinancial.com; Instagram: @rivernice.financialplanner

Saving Money

Saving money as a freelancer or small business owner is different from saving money as an employee at a company. Kaitlyn Arford puts it simply: there isn’t a set amount of money a freelancer can rely on like someone could at a typical salaried or hourly job.

Kaitlyn Arford

Arford calls this the “feast or famine” cycle, in which there will be points of the year where you get a lot of income and have “extra” money. Then there are months where it will be slow and those “feast” months will help finance you for these parts of the year. Unfortunately, there’s not a fool-proof way to plan for this. Some months are slower than others, but there are some tips to help make that easier.

As a freelancer, Arford puts away 30% of the income from every article she writes into its own savings account that she has dedicated for taxes. This also helps her set her prices per article, because she’s thinking about how much she will actually make with that 30% taken out.

River Nice says you should have a separate bank account for your small business and for your personal finances. First, you should pay your business expenses, then you should pay yourself, and then you can pay/save for what Nice calls “joy expenses,” things like personal goals, vacations, etc.. After a while, you can estimate how much you make on a month-to-month basis to try and stabilize how much you’re paying yourself (but this does take some time).

Filing Taxes

American accountants and finance specialists say you should put away 30% of your income for taxes. This is because normally that 30% would be taken out of your bi-weekly pay stub at a traditional job for state and federal taxes. When you work for yourself, this isn’t taken out; you get the full revenue, but you still will have to owe this 30% back at the end of the tax year.

The first year of freelancing is a bit more challenging because you won’t really know how much you’ll be making or how much you’ll need to owe at the end of the year. However, after the first year, you can set up quarterly tax payments to the government (based on last year’s earnings) so that you aren’t hit with the upfront cost all together at the end of the next tax year. On the other hand, there are some things that you can write off as a freelancer and small business owner that you might not have been able to write off while working with a traditional employer. Arford writes off things she uses while working from home, like her phone bill, part of her office space/rent, part of her internet bill, etc. Nice additionally writes off any other type of business expense like their marketing materials, software, or contractors/coaches they use for their business.

There are many different ways that you can keep track of this, and it’s up to personal preference. You could keep all the receipts in envelopes or in their own folder in your inbox. You could be like Arford and use an Excel sheet. Or, you can be like Nice and pay for a bookkeeping/expenses service to keep track. There are pros and cons to each, but it’s critical to find a sustainable method that works for you.

Preparing for Retirement

The third consideration is retirement. For-profit companies offer a 401(k) retirement account and non-profit organizations offer 403(b). When you’re a freelancer or small business owner, you yourself have to make it a point to save for your own retirement because there’s not an account already set up for you that you can opt into. Nice lays out a couple different ways to do this.

An IRA (Individual Retirement Account) is one way to save for retirement. You can create a traditional IRA or a Roth IRA. A traditional IRA gives you an income tax break during the tax year in which you put money into the account. Once you put money into an IRA, don’t forget to invest the money by buying stocks, bonds, mutual funds, or similar investment products. A Roth IRA flips that. You pay your income taxes now while you’re not in retirement, and then you don’t have to pay them when you’re actually in retirement. A benefit to a Roth IRA is that if you take out retirement money before your actual retirement, you don’t have to pay any extra withdrawing penalties like you would from any other type of retirement account. Nice notes that there are some nuances when it comes to this, so make sure you check with a professional to see which option is best for you. Another option is either a SEP IRA or a Simple IRA. This is usually for individuals who can easily put away more than the $6,000 cap on a traditional or Roth IRA. Again, check with a professional to see if this is the right choice for you.

The biggest takeaway with these is that yes, you should be saving for retirement. Don’t just put money into an IRA account and let it sit there because, as Nice says, “that might as well just be cash under your mattress,” because it’s not growing over time.

Don’t have a retirement account yet? Don’t panic! It’s not the end of the world. But, it is something you should look into. Arford laughs when she says that she doesn’t have a retirement account set up yet, but she does realize it’s important and she is planning on talking with a professional this year to help her get started.