How to manage finances as a freelancer: Money tips for the self-employed

Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, “freelance” means flexibility, meaningful tasks, and better work-life balance.

Who doesn’t want to create their own hours, love what they do, and work from wherever they want? Freelancing can provide all of that—but that freedom can quickly vanish if you don’t know how to manage finances as a freelancer.

“A lot of the time, you don’t know about these expenses until you are in the trenches,” says Alyssa Goulet, a freelance copywriter. “And that can wreak havoc on your financial situation.”

Some workers may choose to work in a freelance capacity hoping to increase their savings and their feelings of self-sufficiency. But for all its virtues, the cost of going freelance can carry some serious sticker shock.

Most people who freelance for the first time don’t realize that everything—from taxes to business software to retirement planning—is on them. Learning how to manage your finances as a freelancer early on will help set you up for success.  

The key to budgeting as a freelancer is to plan for five expenses: taxes, business expenses such as your workspace and tools, health insurance, retirement savings, and general business costs. 

1. Taxes for freelancers and the self-employed

First things first: Don’t try to be a hero. When determining how to budget and manage your taxes as a freelancer, you’ll want to consult a financial advisor or tax professional for guidance. A tax expert can help you determine what makes sense for your personal and professional situation and provide financial advice to help you build your freelance business.

For instance, just like regular employees, freelancers owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed by an organization, you and your employer each pay half of these taxes on your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these taxes yourself, the IRS says. And if you think you’ll owe more than $1,000 in taxes for a given year, you may need to pay quarterly taxes.

That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really,” says Susan Lee, CFP^®, a tax preparer and founder of a website that provides tax information for freelancers. “You think about the take-home pay. With freelance, everything is take-home pay.” 

Estimating what you’ll owe

Once you determine how often you’ll need to file taxes, Lee recommends doing a “dummy return,” which is an estimation of your annual self-employment income and expenses. You can come up with this number by looking at past assignments, industry standards, and future projections for your work—which Goulet also finds valuable.

Then, use that number to refine your estimate. “I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”

Budgeting for what you’ll owe

After you estimate your income, you can determine how much money to set aside for your tax payments. Lee recommends saving around 25% of your income to pay your income tax and a self-employment tax (which funds your Medicare and Social Security). Once you subtract your business expenses from your freelance income, however, you may not need to pay that entire amount, according to Lee.

2. Business expenses for freelancers: Get a handle on two big deductions

For freelancers, tax deductions can yield big savings—if you know where to look for them. From the mileage you log between appointments to supplies for your home office to fees for coworking spaces, many freelance business expenses may be deductible, according to Lee.

The costs of freelancing vary from person to person. Some freelancers are happy to work from their kitchen tables, while others require a sophisticated (read: expensive) setup. Your freelance expenses will also change as you add new tools to your business arsenal.

Here are two budget categories you’ll need to account for as a freelancer:

Renting or furnishing your workspace

Joining a coworking space can help you establish the camaraderie you might miss when working at home alone. Yet these workspaces may charge membership dues, ranging from $20 for a day pass to hundreds of dollars per month for a dedicated desk or private office—something to consider when you’re calculating the cost of freelancing.

Coworking spaces may be all the rage, but you can still rent a traditional office space for several hundred dollars a month or more. However, this fee usually doesn’t include networking events or other membership perks like food and drink.

If you want to avoid office rent or dues but don’t want the kitchen table to pull double duty as your workspace, you might convert another room in your home into an office. When planning a home office on a budget, all it takes is a little creativity and know-how to create a functional, productive workspace.

Amy Hardison, a freelance copywriter and content strategist, retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer, and a squishy mat to stand on so my feet don’t hurt,” Hardison says.

Going digital: freelancing business tools

There are a range of digital tools, including business and accounting software, that can assist with the majority of your business functions. These digital tools for freelancers can save you valuable time, which you can then invest back into growing and marketing your business.

The right business software can also help you avoid financial lapses as you grapple with how to manage finances as a freelancer. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using invoicing software became a no-brainer.

“I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them, and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”

You might use digital business and software tools to help manage scheduling, web hosting, accounting, audio/video conferences, and other business operations. When you’re determining how to budget as a freelancer, remember that the costs for these services depend largely on your needs. 

For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, though you can find reputable platforms that cost as little as $5 per month.

3. Health insurance for freelancers: Harness an inevitable cost

Saving for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to manage finances as a freelancer. In 2024, the average monthly premium under the Affordable Care Act (ACA)—for those who do not receive discounts due to qualifying income—was $469 for a 40-year-old individual and $1,491 for families of four, according to Forbes.

“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP^®, a financial advisor at a wealth management firm.

4. Retirement savings for the self-employed: Learn to “set it and forget it”

Part of learning how to budget as a freelancer is thinking long-term, which includes estimating retirement expenses. That may seem daunting when you’re navigating new business expenses, but saving for retirement is a big part of budgeting when you’re self-employed, Gunter says.

“It’s kind of the miracle of compound interest,” Gunter says. “The sooner we can get it invested, the sooner we can get it saving.”

His freelance money management tip? Set aside whatever you would have contributed to an employer’s 401(k) plan and put it on autopilot. One way to do this might be to set up an automatic transfer from your primary checking account to your savings or retirement account.

“So, if you would have put in 3% [of your income] each month, commit to saving that 3% on your own,” Gunter says. The Discover^® IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (Traditional IRA CD) dollars from your income now.

5. General business expenses: Update your rates to cover them

With time, you’ll likely find that one of the best financial tips for freelancers is to build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says.

She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working these costs into your rates is essential to sustainable money management—and building a thriving freelance career.

Your expenses will change over time, so reevaluate the rates you charge annually. It’s also wise to do quarterly and yearly check-ins to assess your income and costs and see if there are any processes you can automate to save time and money.

Knowing how to manage finances as a freelancer is the key to a successful career 

When you understand how to manage finances as a freelancer—effectively accounting for the costs of being self-employed—you can build the foundation of a long (and, with luck, lucrative) freelance career. From planning for taxes to saving for retirement, smart money management can provide you with much-needed financial stability and peace of mind if and when you decide to strike out on your own.  

“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”

Working as a freelancer has its benefits, but it also means your pay can fluctuate from month to month. If you want to be even more prepared for freelance money management, then find out how to make a budget when you have an irregular income.

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The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. Please consult your tax advisor with respect to information contained in this article and how it relates to you.