How to Become a Freelancer: 7 Financial Tips to Thrive on Your Own

When you work a traditional 9-to-5, your employer handles a lot of the financial aspects of your job—like issuing paychecks, paying taxes, and depositing money into your retirement account. But when you go freelance, all things financial fall on your shoulders. So the question is: How to become a freelancer and still feel financially secure?

“Finance for freelancers is more than just paying your bills,” says financial educator and coach Andrea Belzer. She explains that you also need to consider what business structure you have, the best money management software for your needs, how often you plan to bill your clients, what business terms you establish, and more.

So how do you navigate finances in a way that helps you thrive as a freelancer? Let’s take a look at seven financial tips to keep in mind as you’re launching, managing, and growing your freelance business:

1. Consider getting help from the start

If you're wondering how to become a freelancer, there are plenty of logistical to-dos you’ll need to take care of, many of which have financial implications. For example, choosing a business structure, opening a business bank account, and establishing payment practices.

When you’re brand new to a freelancing career, all of those tasks may feel overwhelming. In many cases, you might not even be aware of everything that needs to be done—or the financial impact these things can have, particularly if they aren't set up correctly.

Which is why, when you’re just starting out, you might want to consider bringing in outside help. “If you have never been self-employed, get help in making sure you are setting yourself up for success,” Belzer says. 

Depending on your business structure, that could mean different things. For example, if you want to learn more about the different business structures for freelancers—and how those structures can impact your tax liability—you might consider speaking to an accountant or tax attorney. 

If you’re not sure what systems, processes, and/or software you need to effectively manage your business and finances as a freelancer, you might consider hiring a freelance coach. 

Hiring someone to help you set up your business (and finances) can ensure that you’re doing things right from the start. This can save you from costly mistakes down the line, such as not paying enough in taxes or not properly tracking your expenses.

Of course, if you don’t have the cash on hand to hire outside help, that’s OK! While it's helpful, it’s not a necessity; there are plenty of resources online that can guide you in identifying what needs to be done and setting up your business in a financially sound way. And this article will give you a strong idea of how to establish your finances as a freelancer.

2. Be strategic about setting your rates

As a freelancer, your financial success comes down to the rates that you charge clients. So, if you are thinking about how to become a freelancer that thrives financially, it’s important to be strategic. 

How do you set your prices the right way? First, figure out what you need to charge in order to make the money you want (and need).

As a freelancer, you have more expenses and financial responsibilities than you would in a traditional W2 job, like paying for your taxes, medical insurance, and your time off. There’s also work that will need to be done to run and manage your business that’s not billable—and you’ll need to work all of that into your rate.

Let’s say that you want to work 35 hours per week and take home $1750. If you were just thinking about an hourly rate, you might think $1750/35 = $50 per hour. But that’s not taking any of the costs of being a freelancer; if you were to charge $50 per hour, you would generate $1750 in revenue—but you’d have to spend a large portion of that on taxes (which can often run around 30%) and other freelance costs (like insurance and software costs).

You’ll also need to spend at least a few hours each week managing your business, like drafting and sending invoices, writing emails, and reaching out to new clients. Meaning you’ll either have to work more than your target 35 hours or take that administrative time out of your billable hours—for example, 30 hours on client work, 5 hours on business management—which will lower your revenue.

Instead, you’ll want to tally up all of your business costs and your target take-home pay—then use that larger number to determine your rate. So, imagine your business costs are $1000 per month. In that case, you’d add that $1000 to your target take home pay of $1750, for a total of $2750. Then, divide that by 30 (your total number of billable hours, assuming you’ll work 5 hours per week on non-revenue driving tasks). This would give you an hourly rate of about $92.

Once you have your target hourly rate, the next thing you’ll want to do is research your competition. What are other freelancers in your space charging clients—and how does that line up with your rate? Ideally, “you want to be competitive but also earn as much profit as possible,” says Melanie Musson, finance expert with Clearsurance.com. 

Once you’ve settled on an hourly rate, you can use that to drive your pricing strategy. Depending on your industry, you might share your hourly rate with clients—or if you prefer to work by the project, you can estimate how many hours a project will take you and use that to set a project fee. 

If you go the project fee route, just keep in mind that projects often take longer than anticipated, so you should build in a buffer to cover that—and at least add the equivalent of a few hours’ worth of work to your project rate.

3. Track invoicing, payments, and expenses using an accounting software

To become a freelancer that thrives financially, you need to effectively manage the money coming into and out of your business—and that includes invoicing, customer/client payments, and business expenses.

“Set up an invoice system so you can track your freelance work and your payments and make sure your clients are keeping up with their responsibility to pay you,” Musson says.

You can integrate all of these using accounting software like FreshBooks or Quickbooks, which will allow you to send invoices, track client payments, and track and categorize your expenses all from a single platform.

While you can manage your finances manually (for example, using an Excel spreadsheet), accounting software is pretty affordable—and having everything integrated in one place makes managing your finances much easier, making it worth the investment. 

“Can you use Excel? Yes—but one of the custom business software programs will make everything easier at tax time,” Belzer says. “And it will save you time doing bookkeeping and billing. Worth the cost!”

Plus, accounting software gives you access to a variety of reports and data—like cash flow and profit-and-loss statements—which can help you better understand your freelance finances.

Invoicing and payment

To invoice a client, you can draft an invoice in your accounting software. This allows you to better keep track of when payment is due and when your clients send through payment. 

“Set up automatic alerts for each invoice so you know when to take the next step if you’re not paid on time,” Musson says.

Tracking your invoices and payments will give you a better idea of how much money is coming into your business, how quickly your clients settle their invoices (on average), and when payments are late and need to be followed up on—all of which will help ensure you have the cash on hand to cover your business expenses.

Business expenses

Speaking of expenses, “you’ll need to track your business expenses,” Musson says. 

What counts as a business expense? “Anything that you pay that supports your freelance work can be written off on your taxes,” she says. This includes things like accounting software, marketing platform, educational subscriptions—and if you work from home, even part of your housing costs.

You can categorize all of your business expenses directly in your accounting software—which, again, can give you helpful insights into how you’re spending your money (for example, how much you’re spending each month on marketing vs. administrative costs).

The most important thing to know about it is that, in the case of an audit, you need to be able to prove all of your business expenses were actually expenses associated with your freelance business. “It’s critical to keep receipts and track everything you spend,” Musson says.

You can attach those receipts, invoices, and other proof to the corresponding expenses directly in your accounting software; that way, if you were to ever face an audit, you don’t have to scramble to find what receipt goes with which expense—and instead, will have everything organized if and when you need it.

4. Pay your taxes

Once you go freelance, you are responsible for paying your own taxes. Depending on your business structure, there are a few ways you can do this, including:

• Use a payroll service. If you’re going to pay yourself a salary—a common practice for freelancers that have an LLC taxed as an S corp—you can use a third-party payroll service, which will automatically deduct your taxes from your paycheck and send them to the IRS.

• Pay estimated taxes. If you’re not paying yourself via payroll (which many freelancers opt not to do), you’ll need to pay estimated taxes throughout the year—once per quarter (in January, April, June, and September). 

With estimated taxes, you’ll want to pay taxes on your estimated income for the year—which can be challenging when you’re first starting out. “The first year or two will probably be the hardest because it’s hard to estimate what you’ll owe when you’re not sure how much money you’ll make,” Musson says.

If you don’t have a clear picture of what your revenue will be in year one or two, “you can base your estimated taxes on what you earn each quarter,” she says. “Assume you’ll owe about 30% in taxes.”

Once your business is more stable, you’ll likely have a better idea of how much money your freelancing will bring in each year—and can make estimated taxes based on past income.

Some tax best practices to keep in mind as a freelancer include:

• Pay on time. Figuring out your tax liability can feel like a challenge—but don’t put it off. “Getting behind in tax payments is one of the most common business ‘killers’ I see—so from the beginning, make a plan to stay on top of it,” Belzer says. 

• Keep your tax money separate. If you’re concerned about overspending, Belzer recommends that you have a separate savings account to keep your tax payment money. “Add to this each time you get paid by a client,” she adds.

• Use a CPA… It is critically important to pay the correct amount in taxes each quarter/year—and if you’re not 100% sure how to figure that out in the beginning, you may want to consider working with a CPA. “This way, you are sending in the right amount and not incurring a penalty,” Belzer says. 

• …or other tax service. If you can’t or don’t want to hire a CPA, there are other tax services out there that can help you pay your taxes correctly. “Turbo Tax is a good resource for filing tax returns if you are confident enough to handle your own taxes,” Musson says. “It will step you through the process as a freelancer and help you not miss deductions and credits.”

Bonus finance tips to help you thrive as a freelancer

Looking for more strategies on how to take your finances to the next level? Here are some more of the best financial tips for freelancers to keep in mind:

5. Talk to other freelancers 

Figuring out how to make and manage your money as a freelancer can be hard—particularly as you’re getting started out. But talking to other, more seasoned freelancers can help you gain helpful insights into the do’s and don’ts of freelance finance—which can ultimately help you keep more money in your pocket. “Learning from others’ first-hand experiences can save you from making common and costly mistakes,” Musson says.

6. Review your finances regularly

Freelance finance isn’t a one-and-done thing; if you want to be successful, you need to review and manage your finances on an ongoing basis. “Keep tabs on your finances weekly, monthly, and quarterly,” Musson says. “Don’t put things off. If you do, you’ll very likely forget things and become overwhelmed.” 

To ensure that you don’t put off your finances—and prioritize financial management like you would any other type of important project, Belzer's tip is: “Add it to your calendar.” 

7. Reinvest in your business

As the old saying goes, “it takes money to make money.” So, if you want your freelance business to thrive and give you long-term financial stability? You might want to consider reinvesting some of your profits back into the business (for example, spending on marketing to increase your reach and find new clients). “Decide how much of your income you’re going to put back into growing your business,” Musson says. “From advertising to scaling, you can invest in yourself.”

Read this next: 4 Things You Can Do To Make Investing In Yourself A Habit