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Financial management differences between freelancers and traditional employees

Six areas of financial management to consider as a freelancer

Flexibility is one of the top reasons individuals choose to become freelancers – 42 percent of freelancers named schedule flexibility as a motivator for freelancing, while 51 percent say no amount of money would get them to take a traditional job.

That ability to be your own boss also means that as a freelancer, you’re responsible for several additional elements of your finances. Familiarize yourself with these six areas of financial management for freelancers.

Cash flow

The inconsistent nature of freelance work can create cash flow problems, particularly if you’re used to budgeting around a regular paycheck. Keep these rules of thumb for cash flow management top of mind:

  • Consider separating personal and business accounts. This will allow for an easier picture of your freelancing income and expenses.
  • Prioritize savings. Having a sizeable savings cushion can help smooth over any cash flow dips. Aim to have six months’ worth of expenses in your savings.

Payment tracking

Where applicable, plan to outline a payment agreement upfront with each individual client. Determine whether you will accept cash, check, electronic transfer, and/or via an intermediary. The electronic transfer is often easiest, as it streamlines the payments process, reduces the risks associated with physical checks and cash, and will be easiest to refer to at tax time.


Where traditional employees file an employer-provided W-2 for their taxes, freelancers are responsible for their own taxes. Freelancers may file 1099s, which are provided by clients by Jan. 31. In cases where you don’t receive a 1099, accurate recordkeeping is essential. Keep track of income throughout the year so you can accurately report income to the IRS without client records.

The same rules apply if you have a traditional full-time job and work independently on the side – you’re required to report any earnings above $400.

Also, familiarize yourself with the deductions you are eligible for, which may include deductions for mileage, travel, and professional development. Additional tax considerations include:

  • Self-employment taxes, which are owed if a freelance business generates more than $400 of annual revenue. You can check the most recent rates at the IRS website. Alternatively, subcontractors within another organization must exceed 200 transactions and earn more than $20,000 to require a 1099 from that organization.
  • Quarterly estimated taxes, or taxes due on income that has not already had taxes taken out (which they typically haven’t if you tend to be paid by individuals). These taxes are due April 15, June 15, Sept. 15, and Jan. 15.

Medical benefits

Since freelancers don’t have a pre-selected health plan from an employer, you’ll have to choose a plan on your own, as under the Affordable Care Act, there is a penalty for not having health insurance.

You can explore your options through your state’s health insurance marketplace, or by searching for private insurance plans. You may also look into whether you could be covered by a spouse’s health insurance plan.

Factors to consider in a health care plan include plan and network types (e.g. HMO, PPO, POS, EPO), total costs, and where a plan falls in medical coverage levels.

Retirement planning

Without a retirement plan from an employer, freelancers need to select their own retirement plan. Common options include a Simplified Employee Pension Plan (SEP-IRA), Savings Incentive Match Plan for Employees (SIMPLE IRA), individual 401(k)s, and Solo Defined Benefit plans (Solo-DB). When selecting your plan, consider:

  • How much you’d like to contribute on an annual basis
  • Your target retirement date
  • The amount you will receive from Social Security – and when it makes sense to retire according to that income, as benefits increase the longer you remain in the workforce

Saving for retirement is a complex process, and the right plan differs from person to person. So take steps to educate yourself on the various options, and refer to the guidance of a financial advisor.


Since lenders typically need verification of stable employment, the unpredictability of freelance cash flow can create difficulties building and getting credit. To build credit as a freelancer:

  • Know that establishing your freelance business can add a level of legitimacy to your business.
  • Keep meticulous records. This is another area where separate bank accounts and tax records come in handy.

When building your credit score, it’s helpful to know what lenders are looking for.

Being aware of these financial management considerations for freelancers upfront will ensure financial stability down the line.

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