On freelancer finances

reading time: 5 min

Figuring out my finances as a freelancer was one of the least pleasant things I did this year, and it took me a long time to piece together all the information out there. I put together this little guide to help other people who are just getting started with freelancing and wondering, “How much money do I actually make?” Use this step-by-step guide to straighten out your finances as a freelancer.

Humongous COA: I am not a financial advisor. This is a just a guide outlining the steps I took to figure this out for myself. If this doesn’t add up to you, I highly recommend consulting a professional.

Step 1: Figure out your gross monthly income.

This is the easy part. Add up the total payments you get per month from your contracts. If you work hourly or by some other variable rate, try to take an average of your monthly income.

For simplicity, let’s pretend you’re receiving $10,000 from paychecks each month.

Step 2: Figure out what financial obligations you have.

Unfortunately, you don’t get to keep the whole $10,000/month that you receive in paycheck(s), so don’t be tempted to live like you do. Here are some of the things you’ll have to set money aside for each paycheck:

1. Taxes (freelancers have to pay quarterly estimated taxes)

2. Health insurance (you’ll need to purchase an individual health plan)

3. Retirement (e.g. Roth or traditional IRA)

4. Other (emergency funds, time off money, student loan repayment, family leave, college savings, etc.)

Figure out which of these apply to you (hint: everyone’s got to pay taxes 🙃) and make sure you have all relevant accounts set up.

Step 3: Calculate how much money you need to set aside.

When you’re figuring out how much money you need to set aside, think in terms of percentage of your paycheck. As a general rule of thumb, they say you need to set aside 25–40% of each paycheck to cover the above costs, but that depends on your income bracket, state of residence, what type of health insurance plan you have, how much you want to set aside for retirement, and any other recurring obligations you may have. In reality, you might have to set aside much, much more.

Using the $10,000/month income example, here is how you estimate (remember: I am not a financial advisor!) the percent of your paycheck that you should be setting aside:

1. Taxes: 41.28%
   Go to this site and input your estimated yearly income (for this example, I input 12 x $10,000/month = $120,000), city of residence (I used New York, NY), and filing status (I used Single). In the Your Income Taxes Breakdown chart, find the Total Income Taxes Effective Tax Rate and add 7.56%. You do this because, as a freelancer, you pay double the FICA (social security) tax rate of a normal employee, for a total FICA tax rate of 15.3%. The new total reflects your federal, state, and local income tax and FICA tax. For this example, I used 33.72% + 7.56% = 41.28%.
   

2. Health insurance: 5%
   Take your total monthly premium and divide it by your monthly income. Let’s say you pay $500/month for individual health insurance: $500 / $10,000 = 0.05 = 5%.
   

3. Retirement: 5%
   This number depends greatly on your retirement strategy, but let’s just say that you want to max out your Roth IRA.

Total percentage of each paycheck you should set aside: 51.28% 😮

Step 4: Set aside the appropriate amount.

Catch is an app that allows you to automatically set aside a pre-designated percentage of your paychecks. If transferring your money to a separate institution makes you nervous, like me, all you have to do is open a separate savings account and transfer the money you need to save for taxes, etc. there whenever you receive a paycheck.

For example, if I receive a $6,000 paycheck for the month of October and calculated in Step 2 that I need to set aside 51.28% of each paycheck, I would transfer 0.5128 x $6,000 = $3,076.80 to my separate savings account. Needless to say, don’t go dipping your cup into this savings account just because you want to go shopping 😉

Step 5: Pay your quarterly estimated taxes.

Now that you’re setting aside money for each paycheck you receive, make sure you’re paying off your financial obligations like paying your health insurance premium, depositing money into your retirement account, and—the kicker—remembering to pay your quarterly estimated taxes! If you’ve never freelanced or owned your own business before, you might be completely unaware that this concept exists. The TL;DR is that you have to pay taxes based on your quarterly profits (which is essentially an estimate for your yearly income) four times throughout the year:

1. April 15

2. June 17

3. September 16

4. January 15

federal quarterly taxes

I highly recommend using an app like QuickBooks Self-Employed to track your income and pay your federal estimated quarterly taxes. QuickBooks will use your marked income to calculate how much you need to pay.

If you don’t want to use an app, simply register at EFTPS.gov and use this calculation to figure out how much you should pay per quarter:

( estimated monthly income* x 12 x federal tax rate** ) / 4 = quarterly estimated taxes

* calculated in Step 1, ** use the calculator in Step 3 and take the sum Federal + FICA + 7.56%

Make your payments by the quarterly dates, and remember—you can always pay early! If you pay late, you will be subject to penalties and fees, so don’t forget.

state quarterly taxes

After you pay your federal taxes, remember that you need to pay your state’s quarterly estimated taxes as well. Method of payment varies state-by-state, but start with Googling “[your state] quarterly estimated tax payment”. Many states have online systems. Use the following calculation to figure out how much you should pay per quarter:

( estimated monthly income* x 12 x state tax rate** ) / 4 = quarterly estimated taxes

* calculated in Step 1, ** use the calculator in Step 3 and use the State rate

* * *

Figuring out your finances might seem daunting, and even with a step-by-step guide like this, I won’t lie, it’s a pain. Set aside a morning, make yourself a hot cup of coffee, and choose your reward (mine was a pumpkin muffin 🎃) for after you’ve completed these 5 steps to getting on top of your finances as a freelancer.