• Robert Patin

Top financial stability tips for Contractors


The gig economy is changing the way we work, with more people are performing freelance and contract jobs rather than or in addition to traditional 9-to-5s. The rise of freelancing is not only changing the economy, but also the way we think about personal finance. Pay amounts and frequency vary, taxes become more complicated and personal expenses are tied together with business expenses. For many, it’s worth the joys of freelancing: a flexible schedule, seemingly unlimited growth potential and the chance to do work they love.

Perhaps more than others, freelancers need a lot of discipline to maintain financial stability. Below are four tips on how independent contractors can make smart financial decisions.

Build your savings

When work availability is unpredictable and pay is unreliable, you need to have money to pay the bills until the next commission. Living paycheck to paycheck isn’t an option for contractors, who may wait weeks or months until a client pays. Start small by setting aside a percentage of each payment, and remember to pay yourself every month by transferring money into your savings account.

Plan for retirement

Once you have enough savings that you could survive without pay for 3-6 months, consider opening in a retirement account. An Individual Retirement Account, or IRA, is a wise investment for your future and will earn you more money than keeping your money in your bank account will. Even if you freelance on the side or hope to return to full-time employment and a 401(k), make sure you’re paying for your future.

Set aside money for taxes

Independent contractors aren’t full W-2 employees, and therefore do not have taxes and Social Security removed from their paychecks. The government still wants that money, so when tax season arrives you may be shocked at how much Uncle Sam wants from your hard-earned pay. If you receive Form 1099-MISC from your employer, they have already reported your earnings. If not, you’ll need to self-report.

If you expect to make more than $3,000 a year from freelancing, plan to file quarterly taxes. Set aside 30 percent from each payment to put towards your quarterly pay. If you overpay, you’ll get a refund when you file the following year; if not, you’ll pay the remaining balance.

Separate your business and personal assets

It can be hard to differentiate the professional from the personal when you’re working from your bed on your personal laptop. But separating your business from your personal life is imperative financially, legally and professional. Try to keep things as separate as possible with a designated business email and phone number and workspace.

If you earn most of your income from freelancing, establish a limited liability company (LLC). An LLC protects your personal assets should a client ever sue you. Forming an LLC allows you to establish business accounts at banks, helping you to keep your finances separate. Cost varies by state; there is usually a fee to form an LLC and an annual fee. It also lends professionalism to your business when working with clients.

Even if you aren’t forming an LLC with business accounts, keep your personal and business expenses separate. Establish a checking and savings account where you can pay for expenses and set aside money for quarterly tax payments without confusing it with your emergency fund.

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