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After transitioning to freelance work, one of the biggest questions I faced is “How and when do I pay myself?” In the beginning, I was making meager amounts, and it seemed like a waste of time to try and withhold taxes and pay myself with $100 or less in my account. Not only did it feel like I wasn’t making enough money for a paycheck, but I also felt completely overwhelmed.
Suddenly, I was faced with needing to set aside money for taxes, figure out how much I should save, how much, if any, I should reinvest in growing my freelance business, how much I should invest for retirement, etc. All of the things that were previously out of sight, out of mind, when I worked for a company.
I’ll cover retirement investing and savings another time, but for today, I’m sharing the questions I asked myself to develop my payment schedule and the straightforward process I follow. I hope this helps new freelancers understand how simple it is to pay yourself as a freelancer.
This article will cover how I think about paying myself, which includes setting aside money for taxes. For information on taxes for freelancers, please consult a tax professional.
How do freelancers get paid?
There are several billing situations that a freelancer may find themselves in. I use a combination of these and see upsides and downsides to each. As you grow as a freelancer you’ll probably find yourself naturally expanding into each of these realms.
- A site brokers the relationship: This is mostly what I do. I use freelance sites like Upwork, Fiverr, and Rover to act as the go-between in making sure a client sets aside sufficient funds for the task I’m completing and turns those funds over when the job is approved. This is by far the easiest way to manage payments, but it can cost you up to 20% of your earnings for the trouble, depending on which site you use. I recommend this option for freelancers who are just starting and might be less familiar with client relationship management.
- You work for a company that invoices the clients: This is a relationship with an agency that hires you to work on behalf of their clients. Typically, they will create a contract and agree to pay you as jobs are completed. This relationship is generally pretty reliable as the larger agencies have a cushion to pay you even if clients are late.
- You invoice the client directly: Here is where freelancers really need to speak up for themselves and make sure clients are paying. In this situation, you invoice the client directly by tracking your time, generating, and sending your own invoice. It’s likely your contract states the payment terms (due on receipt, net 30, etc.) to which your client should abide. If clients are habitually late with payments or have missed a payment entirely, it may be time to look at the contract’s possible termination.
How I decided on a payment schedule
Now that you know the ways to receive payments, it’s important to decide how you plan to pay yourself as a freelancer. Here are the four questions I asked before I developed my payment schedule.
- Do I want to keep business accounts separate from personal? This was a resounding yes for me. I feel like it would be an unnecessary burden to try and unweave the tangled mess of business transactions mixed with personal in a shared account. I decided to set up a business account through the same bank I use for my personal account and transfer funds as I receive a paycheck, aka pay myself.
- How frequently should I pay myself? Since freelance might not be as lucrative when you’re starting, it may be necessary to consider a longer payment interval. I decided on a monthly payment schedule early on, and that worked well for many months. It allowed me to build up enough funds and give them time to clear while also making sure I could meet the payments due on monthly bills. Now that I’m making a bit more every month, I’ve transitioned to an every other week payment schedule. It’s been nice to have money coming into my personal account more frequently and to feel like I’m getting a steady paycheck again.
- How much money do I want to keep for taxes? Since I was more afraid to save too little for taxes than too much, I decided to hold 40% of my business account earnings. I figured the worst-case scenario is that I end up giving myself a larger refund next year once I pay taxes. (I highly recommend that you consult with a tax professional to determine what’s best for you to hold.)
- Where will I log my transactions for future reference? I love a good spreadsheet, so this was an easy decision. Other people might feel more comfortable keeping a physical log of transactions in a notebook or use an online tool specifically designed for this task.
My payment process
Once I came up with my answers to these questions, the rest was relatively simple to develop. My process looks like this. At the end of each month, I:
- Transfer funds from various accounts (Upwork, Fiverr, Rover, Paypal, Venmo, etc.) on the same day and give them 1-3 business days to clear. This gives me a chunk of all earnings from the prior two weeks in a nice lump sum I can work with. The total amount in my account after all deposits have been made is added to Column B in my spreadsheet.
- Take the total amount in my business account and subtract the total amount that I’ve held back for taxes throughout all my payments. In my spreadsheet below, I use the amount highlighted in blue in Column D, which changes each time I add a new entry.
- Multiply the remainder in Column C by .4 and add value to Column D (since I’m paying myself 60% and holding back 40% for taxes)
- The formula in my spreadsheet will automatically subtract the amount in Column D from the amount in Column C to populate my paycheck amount in Column E.
- Transfer the amount in Column E to my personal account.
- Update my spreadsheet with the date of my transfer and status.
Don’t forget to check out personal finance tips for freelancers for other personal finance insights.
I’ll create a more detailed blog post after doing taxes this year to lend more insight into that side of things. But I hope this proves helpful as a rough outline of how to think about paying yourself as a new freelancer doing it for the first time!
Do you have other questions about paychecks when you’re starting a career in freelance? I’d love to create content around anything that would be helpful, so please drop me a comment to let me know!