How to Pay Yourself As a Freelancer

How to Pay Yourself As a Freelancer

When you’re first starting out as a freelancer, you might find yourself dealing with a little bit of imposter syndrome. Feeling like you’re play-acting at being a business person. That’s totally normal! And one of the first symptoms of this imposter syndrome shows up in feeling conflicted about paying yourself. 

If there’s a key lesson to learn as a new freelancer, it’s this: your freelance business is a real business. According to Brian Meiggs, Founder of My Millennial Guide, “Something freelancers tend to forget or overlook is the fact that they're running a business.” And that’s the first step in paying yourself as a freelancer. Simply recognize that your business is a true, legitimate business and you have to treat it as such.

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Treat It Like a Business

Shifting your language and beliefs around your business can be a great first step towards paying yourself as a freelancer. 

“The best way to manage your finances as a freelancer is to look at yourself as an actual business with employees,” says Chris Misterek, Founder of Self-Made Web Designer. “So, if you’re a solo freelancer, your employee is yourself.”

It can feel odd at first but thinking of yourself as two separate identities, you the business owner and you the employee of the business, but it can be a helpful first step in legitimizing your business in your mind. As an employee who works at your company, your time and expertise are valuable and you should be compensated accordingly.

And, you're not alone. The SBA estimates that over 20 million small businesses in the U.S. have fewer than 20 employees. Many of those are single-employee businesses, just like yours.

United States Employment by Business Size

Source

It can take some time to grow your salary and budget, but from day one, start thinking of yourself as an employee who gets a salary, even if it’s only a couple hundred or thousand dollars a month. As your business grows, you can increase your salary and business spending. Andrew Latham, Managing Editor at SuperMoney, says, “I recommend freelancers set themselves up as a real business. That means paying yourself a salary, having a marketing and expenses budget and setting up a company retirement plan.”

Each month, you'll want to cover any outgoing expenses, set aside money for taxes, put a little into savings and the rest can make up your salary.

Create an LLC

As a freelancer, one of your biggest assets is your business and brand. To protect your business and continue paying yourself, it’s important that you set up an LLC. 

“Having an LLC is particularly important if there is a possibility your work could result in personal legal liability or if you (or your spouse) have substantial assets, such as a home or other businesses,” says Latham. “If you don't, creditors could claim your company is not a separate entity, which would make you personally liable for business debts and lawsuits.”

An LLC is one of the most popular business structures for small businesses because they’re easy to set up and maintain and they provide legal protection. Incfile offers a $0 LLC + state fee, meaning all you'll need to pay is your state fee, which can range from $40 to a couple hundred dollars.

Get Separate Bank Accounts

A critical step in building your freelance business is to get a separate bank account for your business. This means you’ll have one bank account for your business and one for your personal use. “It not only saves you from an accounting nightmare, but it also ensures you're able to plan for growth and keep track of your finances,” says Meiggs.

And, according to Latham, “Once you have a business account, make sure all your business's income goes into that account and use it to pay for your business expenses.” You want to keep your business and personal income and expenses completely separate. This makes it easier to pay your taxes at the end of the year and keeps the IRS happy.

Set Up a Transfer for Your Salary

To treat your business like a real business, pay yourself a salary every two weeks or once a month, just like a W-2 employee would at a large corporation.

And, paying yourself as a freelancer is simple. Just initiate a transfer. By transferring money from your business account to your personal account, you’ve paid yourself.

While it can be difficult early on in your career as a freelancer, it’s important to pay yourself first. Latham recommends you “give yourself a monthly salary to make sure you get paid first. If your company does not have a regular income, give yourself a percentage of every invoice. Paying yourself first will help simplify your budget and streamline your finances.”

How to Figure Out Your Salary

If you’re not sure how to figure out your salary as a freelancer, that’s totally ok. There’s some math you can do.

Here’s how Misterek puts it:

“Take an average of the total amount you’ve made for a given period of time and subtract the cost of doing business like any subscriptions you pay for or website hosting. That’s the number you have to play around with when you pay your employee. But be careful here; you shouldn’t pay your employee 100 percent of your net income as a business. You need to be putting aside a percentage of that for slow seasons or plans to grow your business.”

Here’s an example:

  • Your business makes $5K per month.
  • You decide to pay yourself 80 percent or $4K each month.
  • Anything left over goes into the business savings, even if you make over $10K in a month.

Why put money into savings? “You might have a slow month in the future and only make $2K,” says Misterek. “But, because you’ve been putting aside whenever you have extra, you can still pay your employee $4K every month. This is a way to keep your income consistent as a freelancer and be able to plan for the future.”

Putting money into a savings account is also a great way to start saving for your quarterly and end-of-year taxes. Before paying your salary, you should remove the percentage you expect to pay in taxes.

Build Up Savings for Slow Months

One of the most important parts of paying yourself as a freelancer is building up your savings. “Freelancing comes with plenty of freedom and flexibility, but it has its share of limitations,” says Meiggs. “One of them is going through periods of little to no work. It’s advisable to plan ahead by having savings in place to cushion you during these times. An ideal amount would be three to six months' worth of expenses in savings.”

And, even if you never have to dip into your savings to pay your salary, those savings can come in handy at the end of the year. You can give yourself an owner distribution or pay yourself (as an employee) a bonus. Or, you can put that extra money into long-term savings and retirement accounts.

Latham suggests, “in some cases, it makes sense to become an S Corporation or limited liability corporation and set up a 401(k) plan. In the case of solopreneurs, I recommend setting up a SEP IRA and maxing it out every year you can. In 2021, you can save up to 25 percent of your income in a SEP IRA (up to a max of $58,000). If it's a good year and you still have money to save, max out your Roth IRA ($6,000 contribution limit in 2021).”

Putting money into savings for slow months and saving money for retirement all set you up to be a successful freelancer who pays themselves every month. 

Create and Track Invoices

As a new freelancer, it’s important to put on the trappings of business, such as sending invoices to receive payment for your work. 

“Ideally, you must be offering invoices to all of your clients, no matter how big or small is the rendered service/amount,” says Tim Clarke, Director of Sales and Marketing at SEOblog.com.

“Invoicing is the best way to request payment and track the services you have done with your client. It also determines how much you earn in a month and can instantly track your income.”

When you track your invoices, you know how much money you made in a month. This will help you to determine just how much you can pay yourself as a freelancer. And, it’s ok to start off small. You can always give yourself a raise later. The most important part is paying yourself.

Track Expenses and Finances

If you want to be able to pay yourself as a freelancer, then it’s critical to know what’s going on with your finances. The best way to know what’s going on with your finances is to track your expenses. 

“Knowing how much you are earning versus what you are spending will give you a better idea of preparing for the crests and difficulties in your career graph,” says Clarke. “It would help if you composed a spreadsheet to track your freelancing income and prepare yourself beforehand for the challenging and slow times of the year. It would help to monitor your income and obligations, compare your income versus your expenses and then design a budget accordingly.”

And, you can even have all of your business’s financial information in one place by using accounting software. Accounting and payroll software can help you track your income and expenses, send invoices and collect money and can even help you to save money for your business. A few to try include:

When you’re a freelancer and business owner, one of the most important things you can do for yourself and your business is to pay yourself. Your time as an employee of your business and your expertise are valuable and you deserve to be paid.

The best part? At the end of the month or year, if you’ve got extra money, you get to choose what to do with. As Misterek says, “You can give yourself a raise or decide to invest it back into the business. It might be time to hire another employee or do some paid marketing to attract new clients.” As long as you pay yourself first when your business has extra cash, the world is your oyster and you get to choose how to spend that money.

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