True story- being self-employed is amazing and one of the hardest things you can do. While there are benefits of being self-employed, sometimes I think people are glorifying something that is- well- really hard. Especially when it comes to the money stuff- because dealing with your self-employed income is no cake walk.
If you’re thinking of going self-employed I’m behind you 100%! Buuuuuuuuut- I also want to share a few things I wished I knew about self-employed income because True Story: I was a giant financial hot mess when I first started my own business.
I want you to be a financial rockstar when you start yours. So it’s time to get real with 4 things no one tells you about self-employed income:
Taxes are a giant money suck
The first thing you’ll notice when you’re self-employed is that you feel like you’re making A LOT of money. Not only do you get paid directly for your service, you also get paid pure unadulterated money.
In the beginning, you’ll feel like a baller. So much money is coming in! But about a year later you’ll be filing your taxes and go, “Holy shit! I owe $15,000 in taxes?”
When you’re an employee, taxes get automatically taken out of your paycheck, which is why it always feels like not a lot. But, when you’re self-employed, it’s up to you to put money aside for taxes and have the willpower not to spend it.
How much do you need to save for taxes? 30% is a good starting off place. 30 f**king %?! Yes- 30%. And yes, it’s a lot. And yes, it feels unfair. And yes, you have to do it. Which brings us to our next point….
Your rate needs to be way higher than you think it should be
The amount you charge for your services isn’t just for your services. We’ve already established that you need to pay 30% of what you earn in taxes, but you also have to foot the cost of running your business.
That means you’re paying for paper, printer ink, software programs, driving to and from clients, rent, and special supplies for your industry. All that stuff adds up and a big portion of your income is going to pay for it.
A common mistake new self-employed people make is that they set their rate based on their previous employee rate. If they were making $25/hr at their employee job for a similar skill set, they charge $30/hr and think, “Hey! I’m making more money!”
Oh no, my friend.
$10 of that $30/hr is going to taxes. Likely another $5 is going towards operating costs- which means you’ve gone from making $30/hr to $15/hr. *insert the saddest emoji you can find*
A good trick to making sure you’re paid enough to cover your operating costs and taxes is to start with how much your services are worth and ADD to it.
If you want to be paid $30/hr to do the work, then you need to add $5 for operating costs and another 30% for taxes. That means your rate should be $50/hr.
Yup- waaaaaaay more than you thought it should be.
You need buffer money because clients won’t always pay you on time
You’ve made a budget, you’ve hustled to get clients and it all makes sense on paper. So why the hell isn’t there any money when you need to pay bills?!
Because people are laggers and you will not always get paid on time. In fact, you will spend a good portion of your time reminding people that they need to pay you.
Unfortunately, you don’t get paid for chasing people down for money which is why you need to have buffer money in your account.
Buffer money is extra money that your account floats at so when someone is late paying you, you aren’t freaking out about how to pay rent.
Buffer money is your personal zero number. It’s what you don’t let your account fall under and you don’t spend it. Think of it as invisible money.
For example, if your buffer is $1,000 then your account balance should never fall below $1000. If it does, it should be because you are waiting for a payment which will immediately bring the account balance above $1,000.
Building a buffer can take some time. I’m a big fan of intentionally keeping a little bit of money in your account each month to build your buffer. You can build a $1,000 buffer just by keeping $80 in your account for 12 months.
Managing Self-Employed Income Takes Willpower
We’ve talked about the logistics of managing your self-employed income but there is something else you need that only you can develop- willpower.
Being self-employed means there’s no one to do it for you. There’s no one to send you a paycheck, withhold your taxes, or make sure you are paying your office rent on time. All of that is up to you and you need to strengthen your willpower in order to do it.
This isn’t about being good or “bad” with money. It’s about prioritizing, planning, and committing to taking care of yourself and your business.
Even if you can’t add 2 + 2, if you have willpower and are thoughtful about your money, you will succeed!
Need more support for managing your self-employment income?
Check out my FREE 6-day course, Badassify Your Finances. You’ll learn the basics of managing your self-employment income, like how to track income and expenses, organizing your receipts, and weekly and monthly financial tasks or your business.