15 Things I've Learned About Managing Money After Being Self-Employed For 3 Years (2024)

Knowing you have to pay self-employment tax is Freelancer 101 — unless, of course, you’re totally oblivious, like I was. Here’s how it works: When you’re a regular employee, your Medicare and Social Security taxes are taken out of your paycheck by your company, who also pays half of these taxes on your behalf. But when you’re self-employed, if a client pays you $250 for a project, you get a $250 check — no taxes are taken out and no one helps you pay them. Painful.

You have to put aside money so you can afford to pay the 15.3% self-employment tax (a tax consisting of Social Security and Medicare taxes) when the time comes.

It's tough, but setting aside money throughout the year is the only way to avoid a large tax expense you can't afford to pay. After not putting aside any money for taxes my first year as a self-employed person (and paying for it come tax season), I now try to set aside 25% of what I earn throughout the year for taxes — even though the self-employment tax rate is 15.3%.

This handy calculator from TaxAct can give you an exact dollar amount of the self-employment tax you’ll owe based on your income.

Yes, you read that right. Rather than ignoring taxes till April, like most Americans, people who are self-employed are thinking about (and paying) taxes every three months. According to the IRS, if you work for yourself and expect to owe $1,000 or more in taxes, you should be paying your income and self-employment tax throughout the year.

You can use Form 1040-ES to figure out your estimated quarterly taxes. Or, just use an accounting program that helps you track your income and deductions to determine your quarterly estimated payments. This is the route I prefer to follow; I use QuickBooks Self-Employed to track and pay my quarterly taxes.

Here’s where that work credit card comes in. When you work for yourself, you’re responsible for buying all the things you need to do your job well. That could mean your computer, desk, filing cabinet, and even that box of paper clips. You can write them off as itemized deductions from your taxable income. Since I’m a writer and editor, I can write off my AP Stylebook subscription, lunches with interviewees, and trips I end up writing about.

All this being said, when it comes time to file your taxes in April, the standard tax deduction may be more than the sum total of these itemized deductions. For 2020, the standard deduction is $12,400 for single people or $24,800 for married people filing jointly. That means, if you're filing your taxes as a single person and the sum of all your expenses for the year — office supplies, work meals, gas, etc. — is less than $12,400, you should take the standard deduction when preparing your taxes.

If you work for yourself, chances are you're working from home, which means you can take a home office deduction. There's one caveat: The space must be used exclusively for conducting business on a regular basis and it must be your principal place of business.

There are two ways to calculate your home office deduction. You can multiply the home office square footage by $5 (for a maximum deduction of up to $1,500). Or, you can calculate the percentage of your home used for business activities.

Check out: 37 Useful Things Under $50 To Help Make Working From Home Better In 2021

Starting in 2018, the IRS started offering business owners (aka, "owners of sole proprietorships") a 20% tax break. This means you can deduct up to 20% of your qualified business income —so, if you earned $15,000 in 2020 (after writing off business expenses) you could get a $3,000 deduction.

This may sound confusing, and maybe a bit overwhelming, but reaching out to a professional can help you clarify any questions and find other ways to save money on your business.

Unlike a regular job, where paychecks roll in like clockwork, when you're self-employed, getting paid for your work is dependent on you. You have to keep track of and send invoices for all the work you do.

I found that having a universal invoicing template saves time —you just have to drop in the project details, payment, and update the person or company you're invoicing. Or, if you use Quickbooks, you can take advantage of their invoicing system.

This is a big expense (and a major pain). Now that I'm no longer on a company-sponsored health insurance plan, I have select and pay for my own health insurance.

The good news is that most self-employed people can deduct health insurance premiums they paid from their taxable income.

When you’re self-employed there is no company-sponsored 401(k) program or contribution match from your employer — you’re on your own. There are a few ways to put aside money so you don’t end up broke when you're 70, but I opted to set up a Roth IRA — a retirement account where you deposit and grow your after-tax money and make tax-free withdrawals. I set up automatic transfers to make my retirement contributions feel less painful (and to make sure I don’t forget to do them).

Check out: The 10 Most-Googled Questions About 401(k) Plans, Answered By Financial Experts

Unlike a full-time salaried job, where you get paid a fixed amount no matter how busy you happen to be, when you work for yourself, your income is dependent on the amount of work you have, which is almost never stable. Some days, I only have to work a few hours; other days, I work 10–12 hours. While I have some clients who provide me with steady work, I’d say half of my clients are seasonal — meaning I’ll have nothing for a couple of months and then a ton of work.

This ebb and flow can feel great when you have time to go on a (almost) work-free trip. But in order to avoid feeling completely stressed about money, you need to have some financial cushion — and if possible, some stable work that keeps you afloat during those quiet times.

This is one of my favorite things about working for myself. You don’t have to log 40 hours a week or work 8-to-5; your only requirement is to get your work done. If you can focus and work efficiently, you can get your tasks done quickly. And the quicker you can do your work, the more money you can make (and the more time you have to yourself).

If I’m getting paid $300 to write an article, I can either dawdle and take my time or I can sit down, focus on the task at hand, and get it done. If I do the former, it might take me all day, bringing down my “hourly rate” and my ability to do any other work that day. But if I can work quickly and efficiently, I might be able to get the assignment done in a few hours, giving me the rest of the day to either do more work (and make more money) or do something I enjoy.