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  • Writer's pictureMolly @ MM Strategic Advising

For the Self-Employed: How to Manage Your Money

People who are freelancers or run their own businesses get in more trouble with taxes than anyone else - whoopsies! When you have a regular W2 job, you get a steady paycheck and pay your taxes once a year. It's easy! As a self-employed individual, you are balancing your business taxes (even if you, yourself are your business- even one 1099 makes you a solo proprietor!), personal taxes, maybe factoring in a W2 job, calculating self-employment taxes if you are a sole proprietor or single owner LLC, and trying to figure out how much your quarterly payment should be. Oh, you didn't know you should pay taxes quarterly in order to avoid penalty fees? You aren't alone.

So, since we are in tax season, I thought I'd write to you about how to manage your money so that you can feel calm and collected (dare I say...empowered?) when it comes to your finances. Whether you are 23 or 73, I bet there will be at least one good takeaway for you.

This is the ultimate money guide for freelance creatives.

Freelancers! Artists! Entrepreneurs! Have you felt totally stumped trying to google the answer to how to manage your money and somehow still finding it difficult to make things work? So many money resources are geared towards folks in traditional jobs with steady paychecks. As someone whose income will vary over time, you have to do things a bit differently.

1) Set weekly, monthly, and quarterly money dates

Be consistent and prioritize this- seriously. It's easy to put it off, but in order to become empowered and truly understand your finances, you must prioritize time with them. So, get out a calendar and determine a day and time that you will sit down to examine your finances. Nervous? Add in something that brings you pleasure. Maybe it's looking at finances while you enjoy a morning cup of tea or rewarding yourself with a walk afterwards.

2) Pay yourself 1-2x a month

Set up a payroll savings account (preferably a high yield savings account). You are going to use this to pay yourself a regular wage. Figure out your monthly expenses and how much you actually need to pay yourself. Secondly, look at when your bills are due. I recommend setting up a regular schedule- perhaps it's on the first day of the month, every two weeks on Tuesday, or on the 1st and 15th of each month. You are now done with being flush one month only to struggle the next! I recommend putting 30-50% of each payment you get into this account, which should be more than you will actually be withdrawing.

Side note: If you don't know how much you need to earn in a year or how much you can afford to pay yourself after taxes, stay tuned! I'll be covering this in a future blog post!

As a self-employed individual, you don't need to be at the whims of when your customers or clients pay you. The goal is to build this fund to be able to pay you regularly during the slow seasons. You determine your paycheck and your pay schedule. Extra bonus? If you want to eventually become an S-Corp, training your business to provide a salary is the first step.

3) Prioritize your emergency fund

You've heard before that you should have an emergency fund totaling 3-6 months of expenses. And I stand by that...for someone who also has a W2 job.

If you subsist purely on income that you generate yourself, then I recommend getting as close to 12 months in an emergency fund as possible. This could include liquid cash, but also some low risk investments that are easily cashed out.

Why do I recommend 12 months? As freelancers and entrepreneurs, we aren't usually able to collect unemployment and actual income varies ALL the time. One of the biggest disrupters was COVID-19. Need I say more? Pandemics, recessions, wars, natural disasters, inflation...these are all things that we freelancers need to prepare a bit harder for than someone with a secure job (though, perhaps W2 jobs aren't as secure as they once were.)

4) Pay off your (credit card) debt & raise your credit score

As an entrepreneur, your personal credit is often the only thing that lenders have to reference when it comes to taking a chance on you. So, yes, your personal credit score matters a lot as a freelancer and creative entrepreneur! Did you make an extra $35 on a project? Make a one time extra payment to your credit card through the app.

What about the other debt? Honestly it all depends. I talk about credit card debt first because it is the thing that most people struggle with in today's economy and it has a huge impact on your credit worthiness. With consumer debt interest rates around 30%, many of my clients come to me already over their limit with only a small portion of their monthly payment going towards the principal. If your other debt has a low interest, you may be better off investing funds in a low cost index fund.

5) Make a budget for your business- this includes you, my actor friends!

You don't need to spend money to make money. Though you do need to be intentional and make good choices when it comes to the money that you do spend so that it pays off.

As an actor, this might look like having an annual budget of $20K. An example might be:

*Business travel to audition and performance sites

*Agent & Manager Fees (usually 10-25% of your total compensation)

*Supplies such as video cameras and microphones for video auditions

*Union dues

*Promotional expenses such as headshots and website hosting fees

*Continuing education in the form of workshops

*And so on and so forth

Here's the kicker though, not everything that you budget for in your business will be able to written off on your taxes (which we will talk about next). It's important to know what you can and cannot deduct. Everything I just listed is deductible. So, what isn't deductible that you might consider necessary as your job as an actor or model?

*Wardrobe for headshots

*Hair & Make Up unless specifically related to a job and cannot be used in everyday

*Gym membership (dance classes or something for a role could be considered ok if they are considered continuing education!)

*And recently this question has popped up more and more- Cosmetic augmentation or surgery are not deductible. That said, if you are in the adult industry and can prove that your physical appearance is tied to your income, some things might be deductible.

6) Put aside taxes in a separate bank account

Saving for taxes as a self-employed person

Before you do anything else, I want you to open up a high yield savings account RIGHT NOW and commit to putting 17-30% of every job or bit of income into this account. This will ensure that you have enough to pay the tax-man. Why is this number so high? Well, depending on how you structured your business (sole proprietor, single owner LLC, or single-owner S-Corp), you may need to pay self-employment tax in addition to your regular taxes. Most of my clients need to budget for this.

Self Employment Tax

What is self-employment tax? Self employment taxes pay towards your social security and Medicare. In a W2 situation, you pay half of this and the business you work for pays the other half. When it comes to being self employed or for every bit you earn as a contractor, you pay the full set of taxes on this. And no, I don't recommend having a net zero to avoid paying these taxes because when it comes to your later retirement, your social security and Medicare benefits will be less than someone who did regularly pay into the system.

Understand your tax write offs

Write offs are not free money. But you can consider them a coupon or discount code. When you write off certain allowable expenses, you reduce your tax bill but you do not eliminate it. When you are building your business budget it is very important to understand what you can and cannot write off.

For example, if you are a photographer who likes to send clients a welcome gift, you can write off something with your logo on it, as it is considered a promotional expense. You cannot write off a package of local goods that you are giving because you know your client will like it.

Pay your taxes quarterly

As a self employed individual, you must make quarterly estimated tax payments. If you do not, you will be penalized in the form of a fee for any missed payments. The fee is .5% of the amount unpaid each month. This fee is small, but it's not nothing. So, sure, you missed your quarterly taxes and maybe you owe $100 extra dollars at the end of the year. But how else could you have used that $150? It could have been used to pay down credit card debt, invested in a low cost index fund, or simply used to buy gifts for friends and family. Sometimes, tax preparers will simply roll the penalty fee into your taxes so you don't even know that you were paying it in the first place!

The hobby rule

Lastly, in order to claim your business deductions, the IRS must agree that you are a business. I already mentioned that you are automatically a sole proprietor the moment you make your first sale or book your first 1099 contract. But where does it go from there? In order to continue to deduct your business expenses, you must earn a profit three out of five years. The IRS expects your business to cost more in the beginning due to start up costs. After time though, you should be turning a profit. If you don't, the IRS will determine that this is a hobby for you and you will no longer be able to deduct the full amount of your expenses.

Do you have a problem actually turning a profit? That's definitely something I can help with as part of my business coaching services!

7) Save for retirement

Retirement! The thing that is so far off that you can't even imagine it. As a self employed person, you have a few different tax advantaged savings vehicles you could use. The most popular options are a Solo 401K, SEP IRA, Roth IRA, and SIMPLE IRA. Even if you are only contributing $25 from each paycheck, I recommend starting your account now so that you can really benefit from time spent investing.

To demonstrate the power of compound interest, if you start putting away $25 a month at 32, by the age of 62, you will have over $37K at an 8% return rate. Your $9,000 investment has now turned into $37K...just by sitting there. Make that $100/month, and you will have over $154K in your retirement account.

8) Run the reports

Remember those money dates I mentioned at the beginning of this article? We are circling around! During your monthly check in, I want you to run monthly reports for your personal and business finances. At a minimum, this is a time to look at your profit and loss statement for your business and a time to assess your personal income and expenses by reviewing bank balances and card statements. When reviewing my personal accounts, I like to go line by line for 3 months of statements and label each purchase as a need, want, or nice to have. This brings awareness so that I can be more intentional over the next quarter.

Beyond savings: making money

We've spent a lot of time managing expenses here and controlling the money that you do have. But what about making room for more money in your life? Do you know how much you need to meet all of your financial and life goals? Income forecasting is one of my favorite exercises to do with clients. While the formulas we use are a bit more complicated, you can use this basic formula to figure out how much you need on an annual basis.

Annual Personal Expenses + Annual Business Expenses + Savings Goals + Taxes (17-30% of Income-Expenses) = Annual Income Goal

Let's say you are a single owner LLC (not yet S-Corp status) photographer with 27K of annual expenses. Your life costs about 42K including all your fixed and variable expenses, including debt payments. And you bring in about 70K a year in photography-related income which you thought was pretty good! But somehow each year you end up owing taxes and you are getting further and further into credit card debt. How much do you actually need to be making in order to have a flush future?

In this scenario, you owe about 10K in taxes -- but this amount will change as you increase your income. For our calculation, I'm going to use 20K because I know you will owe about that much more at your new income level. You also want to be putting away about 6K towards retirement every year and save an additional 5K per year towards your other savings goals, such as your emergency fund. So, for you, assuming that your expenses do not increase, your annual income calculation might be:

42K+27K+11K+20K=100K annual business income

Did you just do that calculation for yourself and realize you need to raise your prices? Been there! And this is where niching down on who your client is and what your specific strengths are will serve you. Everybody is not your client. Every job is not the right one for you. The right client/job/customer will value your time and expertise and will pay you accordingly.

Setting Financial Goals

As you look at your life, I want you to identify some things that you would like to accomplish. Not because you want to keep up with the Jones' but because it feels right for you. Maybe it's getting married. Maybe it's going on a trip to visit family twice a year. Maybe it's buying presents for family every year.

Your financial goals could be big, 10+ year goals or they could be 1 year goals. Both are equally as important. And once you have those goals set, make a strategy to reach those savings goals. Maybe it's looking at that 25-20% you are saving each month and saying, "ok, half of this is going in an annual travel bucket and half of it is going into my life-happens fund.

Find a mentor

Lastly, when it comes to money management, find your community. Money is such a taboo topic in our society and I'm here to break down all those walls. Money matters and we should be talking about it!

Whether you don't know where to start when it comes to becoming financially healthy or you are ready to level up your finances, working with a pro like me can really help keep you accountable and help clear through the clutter to give you no BS financial advice specific to your situation.

Interested in scheduling a free consultation? Contact me today!


Meet Molly, a Financial Advisor who specializes in working with artists, creative entrepreneurs, and small business owners!

Talking about money is hard. I make it easier.

After 20 years working in, managing, and eventually leading multi-million dollar arts organizations, AND the start-up of my own two successful businesses, I decided my passion was found in helping other creatives not only gain financial control, but thrive in the creative arts.

I want to help YOU have the freedom to live a creative life with a solid financial footing so that you can create your best work.

My goal is to help 300 individuals and creative business owners get solid when it comes to money and building the lives they want.

Will you be one of them?

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