When you’re self-employed, you have to learn how to handle your income in a slightly different way compared to a “normal” job. In a “normal” job where you receive a consistent paycheck, everything is basically taken care of for you. They subtract out your taxes, insurance, retirement, etc. and you get to keep what’s left over.
But whether you’re 100% self-employed or you’re just doing some freelancing on the side and making a little extra cash, it’s important to know how to handle your income. So I thought I’d share what works for me and how our system is set up. Sound good? Here are the steps I take…
1. Let Excel do the math – When I receive a check (books sales, speaking fee, etc), I first put the numbers into an Excel spreadsheet that tells me how I need to distribute that money.
2. Subtract out expenses – Are there any expenses directly tied to that check? For me, it typically involves travel expenses that I’m being reimbursed for. Other expenses may include printing, shipping, etc. A lot of freelancers and small-business people skip this step and have no way to pay off their expenses. Sometimes I may get a check and half of it actually needs to go to expenses. It would be tempting to pocket that half, but I have to be diligent in reimbursing myself for expenses.
3. Pay tithe (10%) – As a Christian, I pay a 10% tithe on all my income. I choose to pay it on the gross amount (after direct expenses but before taxes). Obviously, this step would depend on your belief system, but it is something that is important to me.
4. Pay taxes (25%) – Taxes can destroy a small business if you’re not careful. I transfer 25% of the net check to a high-interest online savings account (I use HSBC Direct). Then once a quarter I empty that account into my business checking account and pay my estimated quarterly taxes for the year. I hate doing it, but if you don’t stay on top of this, your end-of-the-year taxes will eat your lunch.
5. Business account (15%) – Any small business or freelancer should be setting aside money out of each check to help fund the business. You should have a separate business checking account from your personal accounts. I use this account to pay my speaking coordinator, marketing expenses, design fees, shipping, etc…anything and everything related to the business.
5a. Printing account – I self-publish my book “Reality Check” so whenever I sell books from my current inventory, I set a little of the profits aside to build up a reserve for the next printing. My initial printing was 2,000 copies which costs several thousand dollars. I know I will be printing more soon (actually in the next month or so), so it’s important to make sure the money is there for the next time around.
6. Personal savings account (50%) – After everything else has been subtracted out, the remaining amount goes in our personal savings account. So as you can see, I get to keep only HALF of the check amount! We try to keep a month’s worth of “salary” (I’ll explain in the next point) within this account, so we’re always essentially a month ahead on our bills. This helps us balance out the ebbs and flows of our income. Sometimes this account is nearly empty (slow season) and sometimes it’s packed (busy time of year). Any time this account has enough in it to cover one month’s salary, we take anything above that and put it in our emergency fund (another HSBC Direct account online that we keep 4 months worth of expenses in) or our Roth IRA.
6a. Pay ourselves a salary – We create a monthly budget for our home and have set up a “salary” for ourselves. So twice a month, we pay ourselves out of the savings account listed above. Again, the point of this is that it helps balance out the highs and lows of our income. It would be tempting to spend more money when you have it, but you have to prepare for those slow seasons when you’re not raking in the cash.
So that’s how we handle our income from the business…any questions?
