When you’re a freelancer with a steady paycheck, you may feel like you’re
riding high. But is all that money yours? Likely, no. Read on for
explanations of why not, and what you can do with the money that’s left for
you to play with.

A lot of people look at a freelancer’s hourly or per-project rates and
immediately assume they earn more than their salaried counterparts. This
isn’t necessarily true; but a freelancer with a steady paycheck does tend
to earn more than a salaried person in the same role.

When they predict steady work, many freelancers estimate their annual
income based on their hourly rate multiplied by 2000. That is, 40 hours
per week times 50 weeks in a year. (There are 52 weeks in the year, but
this estimate includes two weeks’ holiday.)

Two thousand times even a modest rate sounds like a lot of money. To an
individual, that may be true; but to a business that has to pay
employee(s), it’s a little less attractive. For example, take a freelancer
who finds a year of steady work at $60 per hour. That’s $120,000 in a
year, yes; but not all of that money goes straight to your (personal)
pocketbook.

That’s three for me, and one for you…

First and foremost, you have to pay Uncle Sam. Sole proprietors pay taxes
once on income; S-corps and businesses under other tax status pay at least
twice: once for the company, 1099; and once again for the individual, W2.
Taxes aren’t taken out of those 1099 checks, either, so it’s up to you to
make sure your business bank account always has money to pay those
five-figure tax bills when they’re due. (Such sticker shock is one reason
to pay taxes on a quarterly, rather than annual basis.)

Don’t starve the business

Once you’ve accounted for corporate taxes, should you pay yourself a W2
check for whatever’s left? Maybe, maybe not. Even a one-person business
has some expenses: legal fees, travel, and entertaining clients are just a
few. Do yourself a favor and leave some money in the business account to
cover those.

Business expenses can go beyond the bare necessities. If your work
requires a computer, budget for new hardware every once in a while.
Consider venues to advertise your business, if it’s of that sort. Make
sure you always have enough cash to cover a last-minute flight to land that
out-of-state (or even out-of-country) client. You have to spend money to
make money, so it’s wise to leave some cash around that you can invest back
into the business.

Saving up for a rainy day

After taxes and business expenses, you could W2 yourself the
remaining money. But you’d do well to leave even more money in the
business account. That 2000 hours a year is based on steady work. You
can’t always guarantee that. Paying yourself a little less money now means
you’ll still have steady W2 paychecks for the dry spells. That keeps your
personal finances in order.

Not to mention, you’ll lose a lot of money in taxes if you pay yourself too
much. Have a chat with your accountant to discuss proper pay structure.
Your accountant’s job is to help you manage your money. If you only
consult with them when taxes are due, you’re burning cash.

Invest in yourself

Last, but not least, be sure to spend some of that money on yourself. Just
because you work for yourself doesn’t mean your “employer” can’t cover the
cost of some much-needed training and certification courses.

You can also have the company spring for industry conventions and other
such events, which are prime opportunities for networking. Remember to
properly reimburse yourself (the individual) for travel and hotel expenses,
including meals and other reasonable per-diems.

Running a business means you have more ways to spend money than in your
salaried life. Be sure to discuss these matters with your accountant, to
get the most out of your hard work.