Managing Your Finances When You Freelance or Contract


Freelance or contract jobs usually mean you will face feast or famine. It is inevitable.

Then, you will start to doubt yourself or why you are even trying to launch a freelance or contract business.

Income Reality for Freelancers

Even if you have been freelancing for years, you will have those moments when the leads stop or the phone stops ringing. Perhaps you will feel a little crazy as you start to doubt if you are cut out for contract work.

How do I know? After more than 30 years as an entrepreneur, freelancer, and contract worker, I understand! I have lived it all.

Income ebbs and flows. You can do everything right from the marketing perspective, and, yet, the revenue faucet will suddenly turn off. Just as suddenly though, it tends to turn on again.

For some people, the stress of an unstable income is too much, and they rejoin the workforce as an employee. And that’s the right choice for them.

Perhaps though, you will be like me, and find freelancing is in your blood. You thrive working as an independent contractor. However, it does take some fiscal planning to face those income ebbs and flows.

Get Professional Advice

It’s a very good idea to talk with an accountant, like a CPA (Certified Public Accountant) as you establish your business, and accountants can be extremely helpful later, too. Depending on your business, you may need an attorney, too.

Accountants can guide you through some of the financial (tax) processes, in case you need to collect sales tax (not every business does), and help you establish a good understanding and process for your financial record keeping.

Hiring a good accountant is money very well spent. Do NOT avoid it! Being a freelancer is totally different from being an employee, and you must handle the finances correctly or pay a very large penalty.

If you think you might want to set up a corporation, typically a “subchapter S” corporation, talk with an attorney. Being incorporated has benefits as well as costs. Make an informed decision about incorporating, becoming an LLC, DBA, or some other legal entity by talking with a local attorney who helps small businesses where you will be doing your business.

Separate Business and Personal

Mixing personal and business expenses will make life much more complicated for you. So, don’t do it.

  • Separate your personal finances from your business finances

    Have a credit card (or more than one) that you use ONLY for your business. If your business is a LLC or some other legal entity, also open separate checking and savings accounts for your business.

  • Keep track of your business travel expenses

    Note the mileage, tolls, etc. when you are traveling for your business. You probably don’t need a different car for your business, but you do need to keep business and personal use separate, and document your business use.

  • Keep your office expenses separate

    Note the expenses related specifically to your business like a business computer, business phone, business cards, etc.

  • Keep track of all your other business expenses

    Other expenses like meals, chamber of commerce membership, professional association memberships and meetings, business cards, business website, etc.also need to be tracked.

The good news — you can “write off” most of your business expenses (deduct them from your revenue) in accordance with local laws and regulations. You will typically pay taxes only on the “net revenue.”

The bad news — you need to keep good records of those expenses as well as generating enough revenue to cover them.

Tax authorities can become very cranky if you deduct something that isn’t really a business expense or do something else that doesn’t meet the local requirements. So, pay attention, keep good records, and get professional advice.

How to Plan Your Finances in the Freelancing World

You have many tools available and many considerations.

Getting paid by your clients is much different from being a salaried employee, and you’ll need to make some adjustments. To learn more, read How Do Freelancers Get Paid? A Guide to Rates, Invoices and More.

In general (rules differ by government entity where you live), you will pay taxes on your “net before-tax revenue.” You get to your “net revenue” by subtracting the cost of doing business (your business expenses) from the revenue your business generates.

So, tracking your expenses and revenue is very important for your business. You don’t want to operate “at a loss” very often to run a profitable business, and a positive net income from your business will be the “salary” you pay yourself.

Develop Your Budget

Many people do not use a budget at all. They fly totally by the seat of their pants. Dangerous!

When you are an employee of a company that does not use a budget, the company has a hard time staying fiscally solvent. If you are a freelancer or contract employee, trying to operate without a budget creates chaos.

A budget is a plan for spending money, based on your business’s expenses and revenue. You must cover the “cost of goods sold” so that you don’t lose money on every sale (or if you do lose on every sale, you have a good plan for recovery).

Ideally, you have more revenue than expenses every month, hopefully generating a profit for you. SCORE (Service Corps of Retired Executives), working with the SBA, offers an Excel spreadsheet budget template to help you get started managing your businss budget.

I use multiple tools for budgeting. My main tool is an extensive spreadsheet that I started in 1996 and add a new page each month.

This tool continues to expand. It records revenue and liabilities, so I can tell at a glance how much debt we have and strategize plans to eliminate debt while projecting expenses and revenue.

Learn to Understand Financial Statements

In addition to the spreadsheet, I also use QuickBooks to record each transaction, and generate accurate financial reports for the business.

I also created a QuickBooks “company” for our personal side, too. This enables me to analyze our personal expense categories from multiple perspectives. This tells me if groceries are more this month than last, and how much to plan for utilities.

By developing systems for tracking rather than flying by the seat of your pants, you eliminate stress, and can focus on marketing and on completing your work.

Project Your Expenses

My budgets work very well on a month-to-month basis, but there are personal and business expenses that are due periodically.

By knowing when these expenses are due, you can schedule them into the correct monthly budget and not get blindsided.

I use QuickBooks for this, and add a note for expenses that only come up once a year such as virus protection programs or other infrequent expenses as well as the quarterly tax payments.

Save Each Month to Pay Your Taxes

Since you know your income is not consistent, develop your financial plan, and keep saving on a monthly basis. If you set aside money for taxes and other expenses, you will be ready when the bills arrive.

Taxes will not be withheld from your income because your clients are not paying you as an employee. So, you will be responsible for paying those taxes, and you need to have that money available. The IRS has guidance to help you determine your independent contractor status that is especially helpful when you are starting up.

As a contractor, you mostly likely will need to pay estimated taxes. Work closely with an accountant to determine what you need to estimate, and set up a plan to both save for the taxes and pay them on time.

Pay Your Bills on Time

Your credit rating is critical as a freelancer! You want to save, budget, monitor your budget, and pay everything on time.

Paying on time will enable you to keep your credit rating high. A high credit rating means that, if you have an emergency that goes beyond your savings, you should be able to get a loan or access a line of credit.

Establish a Reserve Savings Account

When you are just starting out, you should enter the contract world with a reserve savings account for the famine times.

Financial experts recommend 3 to 6 months of income set aside in general. This is very difficult for most people, but even having an emergency fund of at least $1000 will help you.

Bottom Line

The better you manage your money as a contractor, the more peaceful you will feel and the better you will be able to continue in the field of freelancing or contracting.

Laws and customs differ by country, state, and city, so take this advice as a starting point and food for thought — general guidance, not legal advice. Then, check with your local government, legal, and accounting professionals for the details on what is legal, acceptable, and best practice where you are.

More About Contracting/Freelancing:

About this author…

Job-Hunt’s Freelancing and Contracting Expert Julie Walraven is a Certified Master Resume Writer and Certified Professional Resume Writer. She is owner of and has been helping people with their job searching since 1983. During that timeframe she has helped job seekers find employment as contractors, and she has acted as a contractor herself for many years, so she brings experience and a depth of knowledge to this topic. Follow Julie on Twitter @JulieWalraven.

Don't forget to share this article with friends!