Published in: Banks | March 5, 2019
4 Things You Need to Start Saving for When You Go Freelance
By: Lyle Daly
Don’t get caught by surprise with the new bills you’ll have as a freelancer.
As exciting as it is to become a freelancer, it’s also a big adjustment. You have more freedom than you did as an employee, but your income probably won’t be as consistent. To make your financial situation even trickier, there will be several new expenses you’ll need to start saving for.
It’s everyone’s least-favorite subject, but you’ll be even less fond of taxes if you end up with a huge bill when April rolls around. And that has happened to many a freelancer who didn’t save enough.
When you freelance, you’re responsible for the following:
- Self-employment tax of 15.3% -- This includes your Social Security and Medicare taxes.
- Income tax -- This will vary depending on your income.
It’s generally recommended to save at least 25% to 30% of your freelance income to cover those taxes. You may need to save more depending on your income, although you’ll also be able to deduct business expenses and lower how much you owe.
There’s one more thing to remember about freelancer taxes -- you need to pay your estimated taxes every quarter if you’ll owe more than $1,000 in taxes for the year (most full-time freelancers will). If you don’t pay your estimated taxes, you’ll owe a penalty.
2. Health insurance
The penalty for not having health insurance has been eliminated as of the 2019 tax year, but it’s still a good idea to be insured. Illnesses and accidents happen, and if you’re uninsured, you could face steep medical bills.
Without an employer plan to sign up for, you’ll be responsible for finding and paying for your own health insurance. There are government subsidies available that can lower what you pay in premiums, depending on your income.
Just keep in mind that you must keep your income up to date with your insurance. If you qualify for a subsidy but your income increases later, you need to let your insurance carrier know so you don’t need to pay anything back later.
The amount you pay for health insurance will also depend in large part on the plan you choose and whether you just want health insurance or if you want to add other types of insurance, such as dental and vision.
3. Time off
You’re probably going to want or even need some time off each year. For one, it’s not healthy to work five days per week, 52 weeks per year without any sort of break. And you definitely don’t want to force yourself to work while you’re sick or while you’re on vacation.
That’s why it’s wise to save some extra money in a “time-off” fund. Ideally, you should aim to save enough that you can take the typical two weeks off per year without stressing about money. High-quality bank accounts are the best place to keep your time-off fund, as you’ll have easy access to your money without paying all sorts of fees.
Americans in general don’t put enough away for retirement. That can be an even more serious problem among freelancers who don’t have employer-sponsored retirement plans that they can use. They don’t have an employer match to boost their retirement contributions, and they can’t simply have that contribution automatically deducted from each paycheck.
Don’t just put your head in the sand when it comes to your retirement, though. There are still plenty of great individual retirement account (IRA) options that you can open as a freelancer. These allow you to get a break on your taxes and grow your nest egg.
After you’ve opened an IRA, set up automatic transfers from your bank account to that retirement account every month to ensure that you’re making regular contributions.
Being financially savvy as a freelancer
Most freelancers enjoy how much flexibility and freedom they have. There’s truly nothing like being able to set your own schedule and work on your terms. At the same time, more freedom usually also means more responsibilities.
As a freelancer, much of your new responsibility will be related to your finances. Make sure you’re putting away money for the expenses above so that you don’t end up with a costly surprise later on.
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