Don’t Forget to Pay Your Future Self
Starting a small business or earning income through freelance or contract work can be incredibly rewarding. You get the freedom to choose your work, build something of your own, and potentially increase your income over time.
But that freedom also comes with a new responsibility: managing your own finances.
When you’re self-employed, there isn’t an HR department enrolling you in a retirement plan or withholding taxes from each paycheck. It’s up to you to create systems that help both your business and your personal finances succeed.
Here are a few areas to focus on.
Keep Your Business and Personal Finances Separate
One of the best things you can do early on is separate your business finances from your personal ones.
Consider opening a dedicated business checking account and using a separate card for business expenses. This makes it much easier to track income, monitor expenses, prepare for tax season, and understand whether your business is actually making money.
It also saves you from digging through months of bank statements trying to remember whether that online purchase was office supplies or groceries.
Plan for Taxes Before They’re Due
Unlike traditional employees, self-employed individuals usually don’t have taxes automatically withheld from their income. That means tax season can come with an unpleasant surprise if you haven’t been setting money aside throughout the year.
A good habit is to move a percentage of every payment you receive into a separate savings account designated for taxes. While the exact amount depends on your income and tax situation, many self-employed workers use somewhere between 20% and 30% as a starting point until they have a better estimate.
If your income is consistent enough, you may also need to make quarterly estimated tax payments to avoid penalties. Estimated payments can be made directly to the IRS incrementally throughout the year based on your real earnings.
The deadlines for estimated payments are as follows:
- April 15 for income earned January 1 to March 31
- June 15 for income earned April 1 to May 31
- September 15 for income earned June 1 to August 31
- January 15 of the following year for income earned September 1 to December 31
For additional information on paying as you go, avoiding penalties, and whether to pay as an “individual” or “business”, visit this page.
Build Business Savings, Too
Income from self-employment can be unpredictable. Some months are busy, while others are slower than expected.
Having a business emergency fund can help smooth out those fluctuations. This money can cover recurring business expenses, replace broken equipment, or help you navigate slower seasons without relying on credit cards.
Think of it as giving your business some breathing room.
Retirement Doesn’t Have to Wait
When you’re focused on growing a business, retirement can feel like something you’ll worry about “once things take off.”
The challenge is that time is one of your greatest investing advantages.
The earlier you begin saving—even in small amounts—the more opportunity your investments have to grow over the years through compound earnings.
Fortunately, self-employed individuals have several retirement account options that can offer meaningful tax benefits.
Roth or Traditional IRA
If you’re just getting started, an IRA is often the simplest place to begin.
- A Roth IRA is funded with after-tax dollars, but qualified withdrawals in retirement are tax-free.
- A Traditional IRA may provide a tax deduction today, with taxes paid when you withdraw the money in retirement.
Many people choose between the two based on whether they expect to be in a higher or lower tax bracket later in life.
SIMPLE IRA
If you own a small business with employees, a SIMPLE IRA (Savings Incentive Match Plan for Employees) can be a practical retirement plan to consider. Both you and your employees can contribute to the account through payroll deductions, and as the employer, you’re generally required to make either matching or nonelective contributions.
While contribution limits are lower than those of a Solo 401(k) or SEP IRA, a SIMPLE IRA is often easier and less expensive to administer, making it a good fit for many small businesses looking to offer a retirement benefit without the complexity of larger employer-sponsored plans.
SEP IRA
A SEP IRA (Simplified Employee Pension) is designed specifically for self-employed individuals and small business owners.
It allows for much higher contribution limits than a Traditional or Roth IRA, making it a popular option for freelancers, consultants, and sole proprietors who want to save more during profitable years.
One thing to keep in mind is that if you have eligible employees, you’ll generally need to contribute for them as well.
Solo 401(k)
If you’re self-employed with no employees (other than possibly your spouse), a Solo 401(k) can be an excellent choice.
It allows you to contribute both as the employee and the employer, often resulting in some of the highest possible retirement contributions available to self-employed workers.
Some plans also include a Roth contribution option, giving you additional flexibility depending on your tax strategy.
For a deeper dive on the strengths & weaknesses for each of these, read our blog on Self-Employed Retirement Accounts.
Don’t Forget About Insurance
Your business may be your largest income-producing asset.
Depending on your profession, it may be worth looking into liability insurance, disability insurance, or other coverage that protects both your business and your ability to earn an income if something unexpected happens.
The right coverage depends on your situation, but it’s worth considering before you find yourself needing it.
Build a System, Not Just a Business
One of the biggest adjustments when becoming self-employed is realizing that no one else is managing your financial future.
Creating simple habits—saving for taxes, contributing to retirement, separating accounts, and regularly reviewing your cash flow—can make running a business much less stressful.
Remember, building a successful business isn’t just about increasing your revenue. It’s also about creating financial stability for yourself both today and decades down the road.
Your business works hard for you. Make sure it’s also helping support the future version of you.
