How to Give Yourself a Salary As a Freelancer
One topic that comes up a lot in the online space is how to give yourself a salary as a freelancer.
Of course, this usually comes after some complains about the feast or famine cycle.
As someone who has been freelancing full-time for four years now, I admit it’s not easy. I’m still trying to figure out exactly how to give myself a salary as a freelancer.
When you have variable income each month, it can be difficult to figure this stuff out.
With that being said, here are some of the tips I plan to implement in the coming months.
Figure out your personal expenses.
Your personal expenses can provide a good baseline for giving yourself a salary as a freelancer.
For example, I know I’ll likely need $2000 to $2500 a month to cover personal expenses like rent, groceries, insurance, and savings.
This covers the bare minimum of what I need.
Of course, at some point, I’ll want to be able to save more money. This means I’ll need to add that amount to my baseline.
The beauty of being a freelancer is that you can make as much money as you want. So as my business grows I can pay myself more as well.
Figure out your taxes.
It’s not just personal expenses you need to worry about, you also need to account for taxes.
This is where having an accountant comes in handy.
An accountant can help you tax plan for the year so that you know how much money you need to save each month.
For instance, I know I need to save at least $750 for taxes each month. Probably more at this point.
The only reason I know this is because I tax plan and my accountant tells me what to do.
The reason you need an accountant is because each state has different rules.
For instance, I live in Florida where there is no state income tax.
That’s a totally different situation than someone who lives in California or New York where your income is taxed.
I personally set aside money each month in a separate account just for the purpose of keeping the money for taxes separate.
Pay yourself first.
This sounds like a cliché, but it’s true.
Usually, it refers to savings, but when you’re trying to pay yourself a salary as a freelancer it literally refers to paying yourself.
Since I recently moved, this has been a good lesson in paying myself a salary as a freelancer.
In the past, I’d always leave myself for last. I’d give myself some money to save, but never really money to live.
I’d usually throw everything back into the business.
In total transparency, I’ve probably wasted a lot of money because I had money to play with in my business.
Now that I no longer have that option, I’ve decided that I am literally paying myself first at the beginning of each month. This will include my expenses as well as my savings.
You also have the option of paying yourself bi-weekly and emulating a regular paycheck. For example, you can pay yourself on the 1st and on the 15th of each month.
A big issue many people run into as they are trying to pay themselves a salary as a freelancer is they aren’t organized.
For example, they have their finances co-mingled instead of having a separate account for the business and the personal.
This makes it very difficult to actually pay yourself a salary because everything is going in and out of the same account.
It also makes for an accounting a nightmare.
If this is you, the first thing you’ll want to do is set up a different account for the business.
After that, all client payments go into that account. You’ll also pay all your business expenses from that account.
And finally, you’ll transfer your “salary” from the business account to the personal account.
Incorporate your business.
If you haven’t yet done so, you’ll want to incorporate your business.
First, this provides legal protection.
Second, depending on how you incorporate, there could be some tax advantages.
And finally, once you have a separate business entity, the company can pay you a salary.
Stay on top of your invoicing.
As I already mentioned, the beauty of freelancing is you can earn whatever kind of money you want.
The downside of freelancing is that means you need to stay on top of your invoicing.
You won’t be able to pay yourself a salary as a freelancer if you don’t have money coming in.
This looks like making sure you’re invoicing clients and getting paid.
I can’t tell you how many times I speak with business owners who have no idea what their accounts receivables are.
For this reason, I suggest getting some sort of online invoicing and accounting software that helps automate the process.
Never stop hustling.
Another issue I see with people who are trying to pay themselves a salary as a freelancer is that they are always complaining about not having enough money to do so.
After further investigation, I usually come to find out that it’s because they aren’t doing enough prospecting and sales.
If you want to get to a point where you can pay yourself a salary as a freelancer, you must always make sure you’ve got money coming in the door.
This looks like all of the following:
- Keeping your sales pipeline filled.
- Periodically increasing your rates.
- Cold calling.
- Cold emailing.
- Following up consistently.
- Pitching new and older clients.
- Creating multiple streams of income over time.
Basically, don’t make the mistake of assuming that you can rest just because a big client project came in.
The reality is you are never done prospecting and selling because you need something in the works when one project ends.
At some point, you’ll likely have to think about how to pay yourself a salary as a freelancer. This will make everything easier – from accounting to managing your personal finances.