Updated on 03.03.08

Financial Planning for Self-Employment: What’s Different?

Trent Hamm

As I move away from the standard paycheck-based income and into a self-employment status, I’ve begun to think seriously about how I need to plan things throughout the month to make sure all of the bills are covered. I’m not worried about paying them – we have plenty of income and a good emergency fund – but I am worried about what sorts of choices will change as a result of my career shift.

What’s Changed?

Before looking at solutions, it’s useful to look at the actual changes that need to be addressed.

Total income goes down, especially at first. I’m walking away from a large income stream, albeit one that eats up a lot of my time. Thus, in the short run, I won’t have as many dollars to throw around. My belief is that with more hours to spend on writing, my income will head northward, but that remains to be seen.

Income goes from regular to irregular. I’ll no longer be receiving a paycheck for an identical amount every two weeks. Instead, I’ll be receiving irregular amounts from a number of different sources on various schedules.

Entirely responsible for my own income tax, Social Security, etc. Out of those payments, I’m basically entirely responsible for taxes. This means I need to have my tax planning done very carefully.

Entirely responsible for my own retirement savings. I no longer have a 401(k)/403(b) plan to rely on, which means I need to look into other avenues for retirement savings.

Preparations and Actions

With those major changes coming down the pike, there are a number of things that I need to do.

Keep more breathing room in the checking account. With pay being irregular and so many of my bill payments set up automatically, I need to make sure that there’s more breathing room than usual in my checking account, as I don’t have the reliability of the regular check being deposited there each pay period. To do this, I set up an alert to let me know if my balance will go below $2,000 at any time, substantially more than even my largest scheduled payment from the account.

Have a larger emergency fund. Again, this is due to the irregular status of the income. Our emergency fund right now is pretty substantial, but I’m focusing very strongly on just rolling every penny I can into it right now. This means that I’m just making minimum payments for now on my student loan debt and instead maximizing the cash in the emergency fund.

Save half of all income for taxes and Social Security. Every time I receive a payment, I pay any tax-deductible expenses that need paying (like taxes, research material, or computer equipment) and then take half of what’s left and sock it away for taxes. Then, when I need to make tax payments, I just pull out this cash and pay away.

Look into self-employment retirement options. I want to devote appropriate time to this, so for now I’m going to wait until I’m in the groove of writing on my own before doing the research. Of course, this research is a top priority (and will likely result in a post or two) once things have settled down. Thankfully, I’ve been socking away money very aggressively into my retirement plans and thus I’m significantly ahead of pace for where I should be at my age.

Work hard. My new choices will require diligence and hard work, especially at first. Any temptation I have to slack off will set an ominous example for the months and years to come. Thus, I’m setting a lot of very strong goals for the first few days, the first week, and the first month, giving me something to work vigorously towards.

Are there any readers out there who are self-employed who might have additional suggestions (both for myself and for the benefit of other readers)?

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  1. James says:

    If you’re leaving more in your checking account, I think Charles Schwab has a pretty good ~4% interest rate for an online account. Might be worth looking at. Keep up the great work with this blog and other writing, and I’m sure you’ll be in even better financial shape before too long.

  2. Lily says:

    This sounds so scary. Good luck!

  3. I’m in a similar boat right now and trying to figure out my finances as a freelancer. It’s rather confusing. I’m taking out 35% of my monthly pay and putting it into a high-interest ING Direct savings account. I’ve yet to figure out how much I’ll owe of estimated tax each quarter, but I need to figure it out soon. I’m considering splurging on a consulting session with a tax planner to get my accounting in order.

  4. miramesa says:

    I have been a freelancer for local newspapers in my area going on 2 years now. What other multiple income streams from writing are you pursuing?

  5. dina says:

    I am a stay-at-home, work-at-home business owner and trust me, being organized is the only way to go. Things (financially and otherwise) can get out of hand fast. My husband has a steady income so as soon as I get a job (irregularly) I write down exactly what I will do with that income. When the check comes, I put it in the bank and immediately transfer the money or write the checks for exactly where I want the money to go. If I am not so careful, the money gets lost as just “extra income” and I really have nothing to show for it.

  6. Good luck! It’ll be interesting to see the evolution of The Simple Dollar now that you’re going into self employment and the irregular income stream.

    I’ve been a Realtor for years and despite what people think about how much money we make we also have a ton of expenses and the income is very erratic. This is especially true now that the market is in a tailspin.

    You really have to watch your pennies and where they go. Setting priorities with your dollars becomes critical.

    I noticed that The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It by Michael Gerber wasn’t on your reading list and I’m not sure if you’ve ever reviewed it (you may have…you read so much)but if you haven’t you may want to give it a shot.

  7. Sara says:

    Keep good tabs on your business related expenses to help ease the tax burden. A spreadsheet with a column for tax category is a good start. Also, keep track of your business mileage.

    Moreover, I believe that if you are paying your own health insurance as a self-employed person, you can deduct that as well. As a writer, you might be able to deduct movies you watch, books you buy or CDs you listen to if you can justify them as research.

    Mostly, I would just recommend a separate business account and a good record of earnings and expenses for the business.

  8. HebsFarm says:

    I second the recommendation to work with a tax person. After DH’s first year of self-employment, we got a shocking tax bill because we didn’t make the estimated quarterly payments. If we had been working with a tax person all along, instead of bringing everything to him at the end of the year, he could have corrected us earlier.
    I can understand working out your own taxes when you’re a regular guy with a family & a mortgage, but when it starts to get more complicated than that, why not put someone else’s expertise to work for you?

  9. savvy says:

    Actually there are a lot of retirement options available to you as a self-employed person. You may want to look into a solo 401(k) and/or SEP-IRA. They work quite similarly to the 401(k) and IRA that you’re familiar with as an employee.

  10. Michael says:

    As said before, I’m on your same boat since January 1st 08.

    I don’t have much advice to give about money, but I must say without you telling me how to build an EF right now I would be clueless, and without money.

    I can tell you two or three things about time: it took me the whole of two months to recreate some sort of routine in my personal work day. And I slacked a lot reducing myself to work on sundays and late in the night.

    So one thing I can say is: don’t slack, but leave yourself one day in the week you don’t do anything. You might feel the urge to get back to work even then, but you must fight it: your head needs rest, and time away from a computer or anything screen related.

    I’m looking forward to your next posts on this subject. I have a feeling they will be VERY interesting!

  11. I encourage you not to wait to look into the self-employment retirement options. Because you have been dollar-cost-averaging your money into your plan at work, I would hate to see you not contribute for a month or two. You never know what the market will do and in the future you might look back and wish that you would have kept your contributions going over that time. Make it a top priority to research the SEP-IRA and Simple IRA and 401k plans.

  12. Fubek says:

    I’m self-employed, too.

    One thing that helped me was setting up completely separate accounts for the business. I put liquidity into the business account that covers about three months of business expenses.

    I pay myself a virtual salary which is enough for my day to day private expenses and savings. That salary is paid regularly every month just like for an employee. At the end of the year, I “rebalance”, that means give myself a fat bonus from whats left in the business account. That way, I have irregular income into my business, but steady income for my private expenses.

    Maybe that helps.

    One more tip: keeps your paperwork always in order. If you don’t, you’ll be ****ed.

  13. Cat-Daddy says:

    I’ve been self-employed as a side business for a while, but now I’m looking into/writing a little about incorporation to grow. Most self-employees are sole proprietorships, but even just becoming a single-owner LLC can have advantages.

    Having legal reference books, like NoLo’s, at hand (even in the local library) helps. People employed at companies don’t have to think of a lot of things, like business insurance, liability, etc etc, that the self-employed do.

    Also, business owners (all self-employed people are technically business owners, as sole proprietors) you’re 3 times more likely to get audited. Keep stuff in order! I’m terrible at this, but GTD & such is helping me get better.

  14. Kim says:

    I have been self-employed since April 07. I also take 50% of my gross as “income”, leaving the remaining in a dedicated business account (Schwab Checking, earning 3+% and then moving excess funds into a brokerage cash fund, earning about 3.74%) until it was time to make my estimated tax payments. So far, this has worked really well. Two points:
    (1) I spent some time and money ($400) with my tax guy in October and he did tax projections for me, so I would know if I needed to make additional payments at year-end. I had calculated my estimated tax payments myself, based on my previous year’s taxes and my projected SE income. The SE income was coming in higher by October (from my original projections in April), so he was able to give me a heads up on an additional $8500 that I would owe come tax time. Based on this projection, I was able to make some last minute moves, that should cut that bill down to $5000 estimated. Moves included: purchasing new computer equipment for the business, which I was previously waiting to do in 2008, delaying billing certain clients to move some income into 2008, proceeding with filing an LLC and incurring some other expenses to offset higher income. We were also able to talk about retirement options, some which had to be done by year-end and others that must be funded by April 15, 2008.
    (2) You have almost 13 months to do nothing on retirement options and still make some decisions that can affect your 2008 tax payments. My logic was that 50% of my gross would be more than sufficient to pay taxes and have money left over to either give myself a big year-end bonus (irresponsible) or sock a huge amount of money into some type of SEP account and thus avoid taxes (responsible). I ended up with enough to do both.
    Good luck. I can’t wait read about your experiences. I am certain they will help me in my own SE path.

  15. tabletoo says:

    I second the recommendation on getting professional tax advice. Be aware that you will probably need to or even want to pay quarterly estimated taxes. Depending on the type of business and local (state, county and city)regulations, you may need some sort of business license and there may be restrictions on what types of businesses you can do out of your home. You may need to pay monthly sales tax or at least to file returns to state/county/city. You may want to incorporate or legally structure your business to limit personal liability in case of disaster. You may need different insurance or a rider on your home policy if you conduct your business out of your home office. You may want to get professional insurance against malpractice suits. And so on.

    Best wishes, I’m looking forward to learning with you.

  16. Amy says:

    I am a CPA who has worked in tax for several years, and I can’t stress enough the importance of meeting with a tax professional. As a self-employed person you will encounter different issues than you faced before. You must make estimated quarterly payments, for both federal and state taxes, or else you could be hit with an underpayment penalty and interest when you file your return next year.

    Even if you just meet with a tax person only once right now, it wil help you get on the right track and save you a lot of headache in the future. They will be able to tell you what documentation you need to maintain throughout the year to be ready for your return next year. It’s much easier to keep track of it now than to try to re-create it after the year is over!

  17. Eric says:


    Since you will have a little more freedom during the day, you may also want to keep an eye out for deals that can be had at places such as the major pharmacy chains and supermarkets. I don’t want to plug any specific site – you can email me if that’s ok – but there are plenty of sites where people work collaboratively to determine where the good deals are and even maintain coupon databases. I find that with a flexible schedule, I can mix in a trip to someplace like CVS and take advantage of some deals to stockpile things with long expiration dates.

  18. Lisa says:

    Sounds like you’ve got it covered, and there’s some great advice in these comments as well. I really envy you. It’s great that you’ve been able to get to this point in your life. You must feel really good!


  19. You should really speak to an accountant the specializes in self-employment and or creative fields. Mine has been a Godsend. My husband and I ended up incorporating ourselves as an S-corp, setting up a business checking account, and a payroll system that automatically deducts X amount from the business and is then direct deposited into our personal checking. This way the appropriate taxes are automatically taken out. It also keeps us on a fixed income with our checking account and plenty of breathing room in our business checking. We also have IRA’s, a savings account attached to our checking in case of emergencies, and a larger savings account with high interest.


  20. Shawn says:

    I am a self-employed carpenter and agree with all your ideas. One important one that I am in the middle of researching is Disability Insurance. Being a single self employed individual can be a bit nerve-wracking. Disability insurance should protect my most valuable asset, my income. I am a very outdoor oriantated individual and can get myself into some pretty sticky situations, so protection in the form of good health, and disability insurance will help me sleep better at night!

  21. This is great, good luck! I’m waiting for the day I’m secure enough in my financial picture and businesses to be able to make the self-employment plunge.

    Best of luck, look forward to seeing how the Simple Dollar evolves with the change.

  22. thehungrydollar.com says:

    I have been researching self-employment as well… do you recommend any books on this topic?

  23. FIRE Finance says:

    Looks like you have covered most of the parts. What about health insurance? Will you be buying private health insurance? If yes, what are the companies you are considering.
    Keep up the success flowing.
    FIRE Finance

  24. Dana says:

    This is really cool. Thanks for writing it, and the comments are useful too. I’m kind of going in the opposite direction as I have not had regular employment in four years and I think that since my basic needs are pretty much covered, I should just go ahead and see what I can make for myself.

    I wonder, for someone who’s short on cash, what is a good tax professional type to consult? Could somebody go to, say, an H&R Block branch that’s open all year (there are some) and talk to them? Are they worth it?

  25. DNA says:

    Innovative Traveler beat me to it, but make sure your accountant has a strong background in self-employment. Strongly recommend the LLC or S-Corp to protect your assets.

    Be prepared for most payments to take 90 days or more, and also expect to have to chase some payments down. I consult on the side mostly with smallish cash-rich biotechs and they still pay at their leisure, so I can’t imagine how long it may take some media and creative companies to pay. Good luck!

  26. I’m not self employed although I hope to be someday! I’ll be interested in any information you learn on the subject especially retirement options!

  27. Peter says:

    I’m self employed too. Two things: first, focus on getting regular income streams so you at least have a minimal regular income, and make the non regular income as high as you can (ie charge a lot if you’re consulting). Second: be careful, adsense income and such can easily plateau for a year or more even if you traffic grows. Good luck!

  28. brief says:

    I’ve been a freelancer all my working life, and one of the things I do to stay sane is keep my monthly dues as low as possible. Anytime there’s a once-a-year payment option, I take it. That way I have more flexibility and don’t need to worry as much when a client pays me a few weeks later than they promised.

    It also means not putting myself on any payment plan, ever. If I want something, I save up for it and only buy it when the money’s there. It’s better to put off the purchase and let the money you’ve amassed sit in the bank than get hit up with late charges because you miss a payment.

  29. acwang says:

    what about health insurance for yourself and your family? Would be interested to know what options are available for self-employed.

    good luck with your new career and hope it works out for you.

  30. Kendra says:

    I also highly recommend seeking a CPA for tax advice. Unfortunately, again this year, I’ve seen quite a few new business owners handed a tax bill that they are unprepared for. Set up quarterly estimate payments (if you pay too much, you get it back…if you don’t pay in and you were supposed to, you’ll get a penalty). Look at the tax benefits of health insurance for self employed people. Keep your business and personal finances separate. Remember if your business needs money you can always give it money from your personal account. If you need money, make sure that you are drawing it correctly for the type of business entity that you set up. Some entities allow you to write yourself a paycheck (with Soc Sec, Medicare, and withholding tax deductions) but some don’t. Make sure that you’re doing it correctly. Good luck to all those who begin new business ventures this year!

  31. Tony says:

    PS: It really is about getting paid.

    Don’t tolerate a bubba.

  32. GalinAZ says:

    Since you were laid off, you should apply for unemployment insurance – you contributed to the fund, that’s what it’s there for. It’ll provide a little bridge of funds until you get your own business going.

    I also recommend keeping a time log. I’ve been doing one for 7 years since I left the corporate world and began consulting. Tracking the hours spent working helps you calculate the real $/Hr and determine if it’s worth the time investment.

  33. escapee says:

    I’d advise *against* paying quarterly if you are fairly disciplined with your finances. Here’s why: you can incorporate into an LLC, which is a pass-through entity (think of it as being a separate person). The LLC pays you just like any employee (your share of the distribution of profits) and you pay taxes on that amount on April 15th like everyone else.

    The reason I advocate this is because if you put the money that you know you will have to pay into an *interest bearing account* YOU make the interest from this rather than the government. I never get an income tax refund- I always have to pay an income tax payment every year. And that is the way it should be.

    Bottom line: If you are getting an income tax refund then someone else is making money off you!

  34. Tall Bill says:

    Trent; As HebsFarm stated above, thing really change when leaving a 9-5. YOu speak of money management, but you might be ready to step into Sub S, or LLC status, etc. Have a meeting with your professional as you make this change. Also, the stress of the commute and 8+ hours of being away from family really keep minds off of normal family chores – i.e: another dirty diaper once again at an inconvient time. Who’s going to recharge YOUR batteries? Will you be maintaining outside contacts for perspective on a regular basis. This screen I’m writing on is not true two way dialogue, something I try and do at least once a week away from home. A meeting over lunch, or even budgeting, meeting at a big name coffee shop who all sell drip & have a counter to adjust it to your satisfaction, works out at less than 1/2 of their normal called out fast paced big profit earners. I’m looking forward to this weeks event. Take Care & Don’t regret any hurdles.

  35. Cathy says:

    I’ve been self-employed for several years and agree with the previous suggestion to schedule an entire day off once a week. I call it Irresponsibility Day. There’s always something you could be doing for your business, so you have to give yourself explicit permission to NOT do it, or you feel never-ending pressure.

    With writing work, errors & omissions can become an issue. Some people get E&O insurance (I think the Writers Union or Society for Technical Communications might have a deal). I incorporated as an LLC for some protection.

  36. Matt says:

    Planning ahead is very smart. You have to assume the worst case scenario and expect there to be some down times. If everything goes well there won’t be, unfortunately you never can tell. Smart move initially only paying your minimums until you have a better understanding of what the new financial landscape will be.

  37. Amber says:

    Some self-employed advice-

    Learn to do your business taxes and accounting yourself instead of hiring someone, not only will you save tons of money, but its also useful to know how and where your money should go, and what things you can write off. I recommend TurboTax for BUsinesses…helped us out a lot this year. :)

  38. DNA says:

    An LLC is still required to submit quarterly tax payments–sadly I know this because I had to pay a small penalty a couple of years ago for underpaying the quarterly payments.

  39. Brian says:

    Trent, have you given any thought to starting another blog and/or book proposal based on your self-employment experiences?

  40. John says:

    Entirely responsible for my own income tax, Social Security, etc. That is the hardest parts to get use to.

  41. tabletoo says:

    I mentioned business licenses earlier but I forgot to say that if you don’t need a license, don’t get one. They are a big hassle mainly because they set you up for undesirable interruptions. They are a public record and all sorts of vultures (i.e. poor hard-working salespeople) will contact you trying to sell you business stuff. And you’ll get lots more junk mail – for credit offers, for office supplies etc. If you do have to get a business license, don’t use your personal phone number or home address. Actually it’s a good idea to get a PO Box and a separate phone line and email anyway for your business or businesses.

  42. Esme says:

    I am going on my third year of self employment but second year of full time self employment. I just got my taxes back from the accountant and was amazed to find I had completely overestimated my taxes by a lot of money. This is because I estimated taxes on all my income but there are so many business deductions that I could take that this wasn’t necessary.

    First off, I would advise setting up a SEP 401(k) and contributing the max both personally ($15,500) and as an employer (there is a calculation based on your income) if at all possible. This is completely tax-free income.

    Also, tax-free are your health insurance premiums. And, of course, all business expenses are deducted off of the gross receipts for your business. My advice would be to keep a detailed account of your expenses and set aside a dedicated office in your house for your business. All house expenses for the percentage of your house dedicated to business can be deducted. This includes cleaning supplies and maintenance, etc.

    I would check out a small business credit card like American Express Simply Business – they give cash back for things like office supplies, cell phone, and gasoline.

    That’s all I can think of for now.

    Good luck!

  43. Jason says:

    I have an irregular income (I’m a Leased to owner taxi driver). One thing that has helped me a lot is the automatic transfers from checking to savings. If I had a regular income I might regularly move a fixed amount, But I found my banking site lets me regularly move a Percentage of my balance to savings. So every week 5% of the balance of my checking moves to savings, that way I will automatically save more when business is good and less when its bad. I really like the autopilot nature since I’m kind of ADD and so when I forget to check up on it for months at a time I find it’s still running smoothly.

  44. Carrie says:

    In our self-employed household, we are meticulous about tracking all expenses, and maintaining thorough records. I highly recommend using some software (we use Quicken Home and Business). If has saved us DAYS of time when it comes to figuring our taxes. We have used a CPA, and have found that to be worthwhile. Doing so has actually saved us money, and even though we have the know how to take care of all of the forms, we really would just rather pay someone to do it. Using an electronic system for record keeping allows a great deal of flexibility, and your accountant will love you for it – much nicer than piles of receipts for them to sort through!

    My other thought regarding self-employment has primarily to do with ones attitude towards work. We have encountered others in my husband’s field of work who have as much opportunity as my husband does, and yet they seem to struggle to achieve the financial goals they have set. Why? They have an “employee mentality,” and struggle to realize the full benefit of governing one’s self. It manifests in a variety of forms – expecting others to pave the way, looking at the paycheck and the work in terms of “what is the minimum I must do to get to the dollar amount I need in order to survive this week,” and then quiting early instead of pushing through to get a more money for just a little bit more effort.

    Schedule efficiently. Once you have a better feel for how You work best, scrutinize your work week and see where you can become a better time manager. Consider that if you choose to have your children at home with you during the day that childcare is a full time job, and it will significantly impact your working from home, especially with young children.

  45. Katie says:

    I’m self-employed for the past 3 years, earning about 1/3 of my DH’s pay. He has enough withheld to cover my taxes, so that part is covered. Now that you no longer have an employer, you no longer have the employer-provided LIFE insurance, do you have enough coverage?!?

  46. Lenore says:

    Living on disability for 3 years, I’ve picked up a few frugal habits. Some you may know, but I’ll focus on what helped me most in making the switch to less disposable income. First and most importantly, CASH is king. You mentioned putting your credit cards away, and that’s a great start. Eventually you may cancel all but one or switch to debit as I did. Seeing money dwindle from a wallet reminds you not to squander it. I give myself $100 cash to carry a week, and when it’s gone, it’s gone. Secondly, dare to be cheap and who cares what the Joneses do or think? Any way I can save money without breaking the law is fair game. I sneak candy into movie theaters and make free lemonade from water, lemons and sweetener at restaurants. My boyfriend was mortified the first time I grabbed empty boxes from the shelves at a bag-it-yourself grocery store, but why pay even a few cents for unneeded bags? Garage sales and Freecycle.com rock, and it’s fine to give secondhand or re-gifts as long as they suit the recipient and look new. Not having to maintain a professional image means you can save money by driving an older car, wearing cheaper clothes, going longer between haircuts, etc. With time to plan, you can tackle many tasks you formerly paid to have done.

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