Budgeting Tips for the Self-Employed

April 9, 2019

5 minute read

Being self-employed can be liberating. You get to work according to your own schedule on projects that you truly enjoy. The downside of being self-employed, however, is that you are now solely responsible for keeping your business afloat, paying your own taxes, and ensuring that you are paid each month.

Thankfully, there are ways to reduce the anxiety of being self-employed and take control of your finances by establishing a budget that accounts for your irregular income.

1. Triple-Check Your Balance Sheet

How well do you truly know your business expenses? Start by learning where all of your money is coming from and detailing all of your business expenditures, down to the penny.

Use a budget-tracking tool to monitor your spending habits, determine where you can cut back, and ensure that all of your invoices are paid on time. As a self-employed worker, your budget is likely to change from month to month, but by closely monitoring your spending, you can establish average monthly income and expenditure totals.

2. Establish Your Emergency Fund

It doesn’t matter whether you work for a Fortune 500 company or you are self-employed. It is still critical that you set aside at least six months’ worth of living expenses to serve as an emergency fund in case you no longer have income.

Look over your monthly expenses. Setting aside dinners out and trips to the coffee shop, how much money would you need to survive? To figure out your personal emergency fund, add all of the costs of your rent or mortgage, utilities, insurance, food, car, student loans, and other payments you must make each month.

To be even more prepared, you may also want to consider the cost to operate your business. When your business hits a lull, you will still need things such as a high-speed internet connection, subscriptions to online platforms that help you run your business, and office supplies.

Figure out the costs of keeping your business up and running for at least three months and set that aside as a separate emergency fund. This will keep you from tapping into your personal emergency fund if you experience periods of irregular income.

3. Separate Your Business Account from Your Personal Account

Having a separate business bank account provides a veil of security to your personal finances and adds a layer of legitimacy to your business. It is important that you open a business checking account for your non-personal transactions. This will make it even easier come tax season to make sure you are able to take advantage of all the tax write-offs available to you as a self-employed worker.

You may also want to look into  opening a separate savings account  for your emergency fund to reduce the temptation of tapping into it for personal reasons. Look for a savings account that will help you grow your funds grow by providing you with a high interest rate.

4. Start Saving for Tax Season

One of the downsides of being self-employed is that you need to take responsibility for all of your tax contributions. A good rule of thumb is that you should be putting aside 25 to 30 percent of all income.^[i] Whether you set that money aside each month or deduct 30 percent from each payment received is up to you. Whatever you choose, do not put this off until the end of the year!

Self-employed individuals normally need to pay self-employment tax, which covers your Social Security and Medicare contributions, in addition to income tax.^[ii] The easiest way to pay your taxes is to estimate what you will make this year and pay the IRS quarterly.

5. Don’t Forget to Pay Yourself

Now that you have two separate accounts set up, don’t forget to set up direct deposit to your personal checking account for your paychecks. Review your business budget to determine how much you can afford to pay yourself each month after bills, emergency fund deposits, and business savings are put aside.

Do not plan on putting all excess revenue from your business into your personal checking account. Months of high income will help float your business during slower months and will ensure that you continue to get paid at the same rate. Evaluate your income each year to decide whether your business has grown enough to warrant a pay raise.

The Takeaway

Setting up your first business budget can be overwhelming and may require some minor tweaks as you work through your first year of self-employment. Once you have a solid year of accounting for your business under your belt, you will have more free time to focus on your business, and you can spend less time worrying about your finances. At that point, being self-employed will truly be liberating.