Managing your finances as a freelancer

Whether you freelance full time or have a side gig in your off hours, it takes some financial know-how to make it work.

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Key takeaways

  • Freelancers sometimes struggle with uneven cash flow.
  • Taxes need to be paid no matter where your income comes from.
  • Take proactive steps to save for retirement
  • Research options available for health insurance

Melanie Lockert started hustling after graduating from a master’s program. She struggled to find a full-time job, so she stayed afloat by babysitting, cleaning houses, and walking dogs.

“I would do whatever I could find on TaskRabbit or Craigslist,” Lockert says.

After she got her graduate degree in 2011, Lockert looked for two years for a full-time job. During that time, in 2013, she started a blog called to chronicle her adventures in debt repayment and the search for meaningful employment. Finally, two years after graduating, she found a job.

It didn’t pay a lot, but she had insurance—and she still had her side hustles to help her chip away at her education debt, which stood at $68,000 by the time she graduated from her graduate program.

But after working for an employer for a while, she realized that she could earn more on her own than she could in the office job—so she struck out on her own permanently.

“It sounds crazy—I was broke and in debt, and it took two full years to find a full-time job, and then I decided to quit,” she says.

She’s in good company. There are more than 53 million freelancers in the United States, according to a 2014 study commissioned by the Freelancers Union. That accounts for about a third of the economy.

Whether you freelance full time or have a side gig in your off hours, it takes some financial know-how to make it work. Here are four important financial matters to plan for:

1. Cash flow

Freelancers sometimes struggle with uneven cash flow. Checks may not arrive when you expect. For people accustomed to having a full-time job where cash is seamlessly deposited into their bank account like clockwork, it can take some getting used to—and some savings to tide you over.

Be sure to pay yourself a salary, Lockert suggests. You may also want to consider keeping your business and personal checking separate. That’s because you will need to keep records to help substantiate business expense deductions such as office supplies. Even if your business is something with extremely low overhead—you may find yourself paying a little extra for mundane things. “I use more electricity now because I work from home, and I drink more coffee at home now. I even use more toilet paper,” Lockert says.

As a self-employed person, you may be able to deduct the cost, or part of the cost, of some of your business expenses—so it may make sense to track them apart from personal expenses. For more information, visit

To stay on top of her finances, Lockhert uses the app from and uses PayPal for financial transactions.

Because freelancers don’t have the luxury of knowing that another paycheck is automatically coming in two weeks, it’s vital to establish an emergency fund and keep paying into it regularly. Retirement savings have to be a high priority as well. It’s easy to let savings slip, but you should treat retirement savings like money you save to cover taxes—it’s something you can’t afford to ignore.

Fidelity’s 50/15/5 saving and spending guidelines suggest that essential expenses should account for no more than 50% of your after-tax income. Essential expenses include housing, groceries, health care, transportation, and debt payments.

Consider saving at least 15% of your pretax income for retirement. That amount would include any retirement savings contribution or match from an employer, where applicable.

Think about saving 5% of your after-tax income for emergencies. The usual suggestion is to save at least enough to cover three to six months’ worth of expenses. Once there, consider continuing to save 5% of take-home pay for unexpected expenses.

As a freelancer, you should also get in the habit of saving money for taxes.

Read Viewpoints on 50/15/5: a saving and spending rule of thumb and How to save for an emergency.

2. Taxes

Taxes need to be paid no matter where your income comes from. But without an employer to manage all the details for you, it can be confusing—and expensive.

“I didn’t really understand how the independent contractor model worked. You get checks and think, ‘Oh great, I can pocket all this money,’” Lockert says.

She ended up owing money to the IRS. “It was a wake-up call,” she says.

The first thing to understand is the self-employment tax. Self-employed people pay up to 15.3% in self-employment taxes—12.4% in Social Security taxes up to certain income limits indexed for inflation ($132,900 in 2019) and 2.9% for Medicare with no income limit. Visit for more information.

The next considerations are federal, and potentially state and local, income taxes. It’s a good idea to save more for taxes than you think you need, Lockert advises. “Each check I get, 20% goes to a separate account called “tax fund.” I save more than 20% now, but 20% is a base,” she says. Combined with the self-employment taxes, she may need to save at least 35.3% of income for taxes.

Quarterly estimated taxes were another unpleasant surprise. “When I first quit my job and started freelancing full time, I was like—‘Really? I have to do this four times a year?’” Lockert says. “It’s really about staying on top of your tax liability throughout the year. The hope is that you’re close to being on target when taxes are due in April,” she says.

Consider consulting a tax adviser regarding your specific situation. Read Viewpoints special report: Take on taxes.

3. Saving for the future

Hustling may be fine when you’re young, but eventually you may want to stop working and take it easy. Without an employer to push you into saving for retirement by automatically enrolling you in a retirement savings plan, you need to take proactive steps to save on your own.

One of the ways to accomplish this is by establishing a tax advantaged retirement account that allows you to make regular contributions. There are a few options for freelancers, including a traditional or Roth IRA. You’re allowed to contribute up to $6,000 a year in 2019. Contributions to a traditional IRA may be deductible for the year the contribution is made.1 Earnings and contributions grow tax deferred until retirement.

Contributions to a Roth IRA won’t get you a tax break today, but you may be able to withdraw contributions and earnings tax free in retirement.2 A Roth IRA may be particularly advantageous for freelancers as you may have the ability to take penalty-free withdrawals of contributions at any time— although you should be careful about using your retirement savings as a piggy bank for short-term needs. That could defeat the whole purpose of saving for retirement. There are special rules on Roth distributions, be sure to check with your tax preparer or the IRS before withdrawing contributions.

Read Viewpoints on Four reasons to contribute to an IRA and Seven things you may not know about IRAs.

In addition, you could set up a retirement account specially designed for independent workers and small businesses that could potentially let you save even more money, like a SEP IRA, a SIMPLE IRA, or a self-employed 401(k). Even if you can’t imagine scraping off 15% of your income for retirement savings at the moment, putting away a little bit now and gradually ramping up to 15% can be extremely worthwhile.

“This is the biggest mistake I made—waiting to start saving for retirement,” says Lockert. “I made a lot of excuses. I was so laser-focused on paying off debt, and then at my job, I never had contribution matches, so I just said, ‘Well, it’s not worth it.’”

“After paying way more taxes than I was expecting, I wanted to know how I could lower my taxes and save more,” she says. This may be a really key point. After paying as much as 35% or more of income in taxes, contributing to a retirement account that offers a tax deduction could be a way to solve two problems at once: a lower tax bill and federal income tax-free growth on contributions.

Read Viewpoints on No 401(k)? How to save for retirement

4. Insurance

Crossing your fingers and hoping for the best isn’t a great strategy when it comes to your health or your finances. On the other hand, buying insurance can be expensive.

Fidelity Labs is researching ways to support independent workers and has found that health insurance is a major issue for freelancers. “The biggest pain point we heard is finding affordable health insurance,” says Kim Langway, head of product at Fidelity Labs.

If you’re eligible, health savings accounts (HSAs) may be part of the solution. As a freelancer, you don’t get a company match for your retirement savings like full-time employees do, so an HSA, could be a good place for you to save for the long term.

“It has to do with the tax advantages of the HSA—it’s an opportunity for freelancers to reduce their taxable income and then draw on the money tax-free3 for qualified medical expenses. If they don’t end up touching the money, it can grow tax-free until distributed,” Langway says. In addition, any money withdrawn to pay for qualified medical expenses will not be taxed. After age 65, you can also take money out of an HSA for any other reason besides medical expenses without incurring a 20% penalty. But in that case the money you take out is subject to income tax, like a traditional IRA.

Read Viewpoints on Fidelity: Three healthy habits for health savings accounts

Disability insurance is another important consideration as well. Employers often include some amount of disability insurance as a perk. But as a freelancer, you need to take steps to protect your income if you can’t work for a short or long period of time.

Enjoying your freedom

Lockert has been working for herself for two years now doing everything from writing content for blogs to running social media and marketing events for small businesses. One of her many jobs these days is coaching people on how they can pick up their own side gigs. She was even able to pay off all the debt from her education by December 2015 through frugal living, budgeting, and just plain working a lot.

Lockert’s advice to aspiring freelancers is for them to focus their time on making money, and to hire specialists for more complex areas where they are not an expert. For instance, she has an accountant now to help unwind tax complexities and find ways to save.

That can free up time for doing the things you want to do. Many people go independent by choice, but end up overworked and unable to enjoy the flexibility that their choice enables, Langway says. “They try to protect themselves by flexing their earnings muscle. We want to make it easier for them to manage their cash flow and savings such that they achieve better work-life balance,” she says.

Managing your financial life can be like a full-time job itself—as an independent worker you have to weigh what’s worth doing and what can be outsourced to experts. Then you’ll have more time to enjoy the freedom and flexibility that comes with being a freelancer.

Next steps to consider

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