In the mid-1990s, I received $50 for taking photos for a national scrapbooking magazine. To a college kid, that was a lot of money.
I quickly cashed the check and was off to the mall. Thankfully my freelance work was still at hobby status, which according to the United States Internal Revenue Service (IRS), is if you make $400 or less per year with your craft. Fast forward twenty years, and freelance income is my livelihood. Uncle Sam gets a cut, so I can’t pocket each payment. Over the years, I’ve tried different types of pay periods with varying results. Here’s the scoop on each:
When there are months between receiving payments for your work, it only makes sense to pay yourself a little bit each time you get a check in the mail. Just be sure to set aside a portion of each payment for self-employment taxes, which you can calculate with Form 1040-ES. When I was first starting out, I missed this step and paid a hefty fine. Not to mention I previously owed taxes after a nice tax accountant pointed out the all-too-common new small business error.
2. Weekly Payments
As your income increases, and payments are flowing in consistently, it can be tempting to start paying yourself each week. I did this for a while when my side-work was starting to become more profitable than my day job. I thought, “Why wait two weeks when I could have extra spending money now?”
The downside is the tedious documentation that follows. I don’t love bookkeeping, so I dreaded completing the money transfers from my business bank account to my personal bank account and logging this in my accounting software. Call me lazy, but I decided going with a traditional bi-weekly pay cycle would be easier and a better use of my time.
3. Bi-weekly Payroll
Every two weeks I process payroll. Although I’m the only one on the roster, I keep records of every payment in Bookkeeper and on a paper ledger. I can also recall these payments by looking at past bank statements and monthly printed reports from Bookkeeper that I tuck in a binder. My process might seem overly organized, but once you’ve had the hard drive crash and burn on your computer, you start taking extra measures to keep your business records accessible and archived.
I like this pay cycle because it’s what I was used to when I worked for an employer. I’m used to paying bills every few weeks and feel that waiting for a monthly payment would make budgeting more difficult. If something comes up last minute, like an unexpected car repair, I know I’ll have another payment coming in less than two weeks. Waiting four weeks for money that I know is sitting in my business account just seems silly.
4. Monthly Pay Cycle
Despite my thoughts about bi-weekly pay cycles, I’m not strictly against monthly payments. If you do large projects, work for one or two key clients and get paid once a month or once a quarter, monthly payments make total sense. I used this method for a while when I was freelancing part-time and holding down a full-time day job.
To make monthly pay cycles work, map out your monthly expenses (both for the business and personally) and make the transition to this pay cycle when you have enough of a cushion in your business bank account to cover everything. With preparation, it can be done. It would also mean even less data entry in the accounting software and bank transfers, which I consider busy work.
As an independent contractor, base your pay cycle on the flow of your income and due dates for your expenses. When you’re just starting out, sporadic payments and testing out different types of pay periods are common, but as your business thrives, a consistent pay cycle that works for you will emerge.