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Working as a freelancer gives you the freedom to choose your own projects and set your own schedule. With all this freedom comes some extra responsibility, though, especially when it comes to managing your finances. Not only will you need to budget with an irregular income, but you’re also responsible for paying your own federal and state taxes. If you’re curious about financial planning for self-employed individuals, read on for some tips for budgeting as a freelancer.
What Is a Freelancer?
Freelancers are typically independent contractors who work with a variety of clients. They usually earn pre-tax income and are responsible for paying their own taxes. There’s a wide variety of freelance roles out there, but here are a few of the most common ones.
Web Designer or Developer
Freelance web designers and developers create websites for individuals and companies. Designers tend to work on a website’s front-end design, while developers use programming languages to code a website’s infrastructure. Both positions are in high demand and can earn a high income.
Writer
You can find a variety of freelance writing positions where you write anything from blog posts to marketing copy to guides and manuals. To work as a freelance writer, you’ll need to have research and writing skills, as well as strong attention to detail. Freelance writers may get paid per word, per post, or per project.
Virtual Assistant
Some individuals and companies hire freelance virtual assistants to help with a variety of administrative tasks. You might schedule appointments, respond to emails, and organize company documents. To succeed in this role, you’ll need to work well independently and be proficient in any software the client uses.
Social Media Manager
Savvy social media users can make money from their skills by working as freelance social media managers. You might manage a client’s Instagram, Facebook, or TikTok accounts and help create content, build an audience, and interact with followers.
Accountant
If you have a background in accounting, you could work as a freelance accountant. You might provide bookkeeping, tax accounting, or business accounting services or offer your insights as a financial consultant. Recommended: 18 Freelancing Business Ideas
How to Budget as a Freelancer
Budgeting as a freelancer can be challenging, since your income most likely varies from month to month. However, it’s precisely because your income is variable that it’s important to understand where your money is going. Creating a spending plan — and adjusting it as you go — can help you ensure you pay your bills and meet your savings goals. You might also open a high-yield savings account so you earn interest as you go.
Calculating a Monthly Budget
When it comes to managing your money as a freelancer, your first step is calculating a monthly budget. To get started with budgeting, determine your average monthly income by adding up all the money you’ve made over the past year and dividing by 12. If you’ve been freelancing for a shorter time, base your average on however long you’ve been working.
Factoring Expenses
Once you have your baseline monthly income, take a look at your fixed and variable expenses. Your fixed expenses include rent or mortgage payments, loan payments, car insurance, and groceries. It may also include any fixed expenses that go into running your freelance business, such as bookkeeping software. Your variable expenses are your “nice to have” costs, such as restaurants, travel, and subscription services. Add up both your fixed and variable expenses so you know what you’re spending each month. If some costs are seasonal, such as your gas bill, calculate an average monthly cost. If your expense total exceeds your average income, look for areas where you can cut back or consider taking on an additional freelance client to increase your income each month.Recommended: Budgeting to Pay Off Debt
Setting a Monthly Spend Limit
If you make a good amount of money one month, it might be tempting to increase your spending, too. But going on a spending spree one month could leave you struggling during a slow month. That’s why it’s a good idea to place a cap on your monthly spending. If you stay within your means, you’ll have more financial security in future months when there might be fewer clients and less money coming in.
Use the 50/30/20 Rule of Budgeting
One useful approach to managing money is the 50/30/20 rule. This approach has you spend 50% of your income on needs and 20% on savings and debt repayment. Once you’ve covered those essentials, you can use the remaining 30% on wants. Look over your expenses to see how much you’re spending in each category. If you’re spending more than 50% on essentials or more than 30% on wants, consider ways to reduce some of your expenses. Another approach is zero-based budgeting, which involves assigning a purpose to every dollar you make each month. That purpose might be paying for fixed expenses, covering variable expenses, funneling into savings, or investing.
Planning for Taxes
One of the biggest challenges of transitioning into freelancing is paying your own taxes. When you work for an employer, that employer deducts taxes from your paycheck. But when you’re self-employed, you’re responsible for paying taxes yourself if you earn more than $500 in a year. You can’t pay taxes once per year, either, but instead need to send off federal and state taxes on a quarterly basis. Your estimated quarterly taxes are typically due by April 15, June 15, September 15, and January 15 of each year. Not only do you have to pay taxes on your income, but you’ll also have to pay a self-employment tax that goes toward Social Security and Medicare. This self-employment tax is currently 15.3%. Your total tax liability will depend on your income and filing status, but a general guideline is to set aside around 30% of what you make. Put that amount into a separate savings account so you’re not tempted to spend it. It may also be worth hiring a tax professional, especially if you’re new to freelancing. That way, they can help you estimate the average savings you need for quarterly payments and avoid the penalties that come with missing deadlines or paying too little.
The Takeaway
Working as a freelancer comes with many benefits. You get to be your own boss, set your own schedule, and determine which clients you work with. At the same time, you have the extra responsibility of paying your own taxes and budgeting for an irregular income. Creating a spending plan can help you meet your obligations and save money faster. By managing your money wisely, you can feel financially stable even when your income varies from month to month.
Frequently Asked Questions
How do freelancers budget for taxes?
How do freelancers set up finances?
What percentage should freelancers set aside for taxes?
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About the Author
Rebecca Safier
Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
