How much money do you want to make? No, really. As a freelancer, your income isn’t at the mercy of a corporate pay scale. For me, two of the most liberating parts of starting my own business were the uncapped earning potential and the ability to forecast my income in a realistic way.
You can — and should — crunch the numbers each year to make sure your passion is generating the freelance income you want and need to offset expenses and support your lifestyle. To do that, you’ll need to determine your annual gross profits and take-home pay by carefully analyzing your predictable expenses, tax responsibilities and the unexpected liabilities that may come up.
Taking Stock: Planning Your Business Journey
Let’s take a look at the business journey of a fictional freelancer, Patty the Photographer. After receiving many compliments on her photography work, she’s decided to go all in. She quit her 9-to-5 office job and committed to making her weekend side gig her career. She’s trying, at a minimum, to replace the income she earned from her past employer.
In her first year, Patty assumed her calendar would quickly fill up with appointments, thanks to the positive talk amongst her friends and family members. She took a wait-and-see approach, but didn’t meet her income needs, and things were tight. As she aims higher in her second year as an entrepreneur, she’s becoming more strategic about her business and setting goals. She wants to take home $60,000 annually, but she isn’t sure how many gigs to book to hit that goal — especially when startup expenses are involved.
The Cost of Doing Business: Understanding Your Expenses
Most entrepreneurs have some supplies in place at the start, but that doesn’t mean they won’t need more to grow and prosper. Let’s take a closer look at some of the various expenses freelancers need to consider.
Everyday Equipment and Services
Patty’s been in business for almost two years and already has a well-stocked camera bag and home office. But her gear is old, and she needs to upgrade to more reliable systems and add a few extra camera bodies to the mix as back-ups. She’s also hoping to expand her current outdoor and on-location photography offerings to include studio-style backdrops and lighting.
These expenses are part of Patty’s cost of doing business. She’s set an annual budget of $10,000 for new supplies, ranging from photo editing software and lenses to cloth backdrops and seminars to hone her craft. She came up with this estimate after making a detailed list of what she needs to run her business (based on advice from her mentors and ample research into her new industry).
Patty also spoke with her tax preparer to learn how these expenses can become deductions on her annual tax return and how to depreciate the costs of high-ticket items over a period of time to benefit her business. Together, they’re monitoring changes to the tax law so when April 15 comes around, there are no financial surprises.
As Patty started to take on more consistent work, she discovered that photographing weddings solo is tough. So she decided to hire her budding photographer niece to help carry gear and set up lighting on weekends. Do you need to hire someone on contract to assist occasionally, too? Add it to your budget.
Some businesses have ongoing expenses that directly relate to the products or services they offer. Painters buy paint. Landscapers buy grass seed. Make a list of items you use each month and what it costs to keep them in your inventory. It takes time to learn how much to have on hand, but you’ll become familiar with the number as you get into the weeds of running your business.
Patty, like many of us, started her business in her home. She does her photo shoots around town, using nature as her backdrop. But she wants to get into studio work, so she rented space at a co-op downtown. That monthly rent is now part of her expenses. Do you need to get out of the house to do your job, too? Would a co-working environment boost your productivity? If so, add this cost to your budget.
A Cut for the Government: Paying Taxes
The largest expenses that come with any business are often tax-related. As a sole proprietor, you have to share part of your income with the government by paying self-employment taxes, which can be calculated using the Form 1040 SE.
Depending on the type of business you run, you may also need to collect and remit local city or state retail sales tax. For example, Patty has to do this for the tangible framed prints she sells.
Tax laws change every year. It’s best to set up an appointment with a tax professional who handles small businesses so you can learn exactly how much money you should set aside on a regular basis.
Let’s Get Paid: Discovering Your Paycheck
Sadly, some solopreneurs never make it to this stage. They underestimate their expenses and the value of their work, so their meager income only allows them to break even. They work for free with the hopes of someday earning a paycheck, but the cycle continues.
The goal of every freelancer is to move beyond this stagnant plateau and start profiting from their products or services. Some indys set a monthly or bi-weekly payment amount and stick to it, even when they bring in more revenue. This routine makes it easier to save overages that can offset both planned and unplanned expenses.
Others ebb and flow. When sales are skyrocketing, so is their income. The more they generate, the more they take home, while keeping a minimum buffer in the bank to take care of routine expenses.
Since we’ve learned a lot about Patty’s business plans, let’s break down her estimated monthly expenses and income to see if she can make that $60,000 per year.
Patty’s estimate shows that she will bring in about $10,000 per month through her photography business. This translates to approximately $120,000 per year, which falls into the 28 percent tax bracket (based on the 2017 IRS Tax Tables). She’ll pay roughly $33,600 to the government if she doesn’t claim any tax deductions that would reduce her pre-tax income.
After her expenses and self-employment taxes, Patty will earn enough to pay herself the $60,000 salary she wants and needs, with a little wiggle room.
Keep in mind that financial forecasts assume everything will go as planned. But freelance income isn’t guaranteed. What if Patty falls and breaks her wrist and is unable to take pictures for eight weeks? Or what if a wedding cancels last minute and she can’t fill that weekend with another paying customer? Things happen, so it’s best to plan ahead.
Curve Ball: Expenses and Liabilities That Impact Freelance Income
Be proactive and establish some savings that can cover your downtime during planned and unexpected time off. When I first started out, my goal was to have enough overage after each pay period to cover a month’s worth of payroll and expenses. This has been plenty to cover the emergencies and unexpected expenses I’ve encountered, including an unplanned surgery and vacation time.
Patty could easily create this financial buffer by scheduling a few more appointments each month, raising her prices once she’s established, trimming her expenses or taking on fewer lower-paying projects so she can focus on the services that generate the biggest return on investment.
This little nest egg can also be helpful if:
- You ever need to hire a specialist (like a lawyer or an accountant)
- You want to add a one-time large expense to your annual budget
- You just want the confidence to take time off and know you can still pay the bills
As a best practice, business owners should evaluate their income and expenses at least once each year. Every fall, I review the profitability of my business and make plans for the upcoming year. This often involves tightening up my expenses, brainstorming new, profitable income streams and being realistic about how many hours I can work to generate the income I want to earn — while staying healthy to avoid burnout.
Each dollar you earn isn’t yours to keep, but with some proactive planning, you can earn the income you want. Have you taken a close look at your freelance income lately? Seeing your expenses and income laid out in black-and-white can be an eye-opening, motivating experience that puts you on the path to success.