Managing Your Finances as a Freelancer: A Comprehensive Guide

Freelancing can be a lovely and comfortable way to work —  you choose the place, hours, and projects that really get you going. But let’s be real, the financial side of it can be tricky. There’s no one to manage your taxes, income, and expenses once you become self-employed. In this guide, we’ll go through practical tips to make your freelance career financially stable. Taxes and other specific details can vary significantly from one country to another. This article will focus on the United States and the United Kingdom. If you are from another country, we recommend checking the official websites of relevant tax and financial institutions for specific information. Let’s get started!

Register your business 

First and foremost, make it official and decide how your freelance business is structured legally. Freelancing is not about being free from responsibility, and choosing the right business structure is the first step. There are two options: sole proprietorship and limited liability company (LLC) in the US. In the UK, it’s a private limited company (Ltd). A sole proprietorship is the simplest, with one owner responsible for everything. An LLC is more complex and expensive with multiple owners and some legal protection. Let’s compare the two to see which one is best for your business.

Sole proprietorship

LLC or Ltd.

From my experience, being a sole proprietor was the easiest and most flexible option. I could focus on building my skills, building a client base, and understanding my value in the creative industry without having to deal with all the paperwork. The downside is that you are personally liable for everything, and as your business grows, it can feel risky. Once income is consistent, I think it’s worth consulting with a financial advisor or accountant to consider switching to a more protected legal structure.

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Many freelancers choose sole proprietorship to test the waters, as it is easier to get started and more cost-effective. But the final choice is all yours, of course. 

Create a separate business bank account

One of the key things to managing your finances as a freelancer is to have your business bank account and your personal bank account separate. According to a survey, 23% of small business owners have admitted to mixing personal and business expenses at some point in time. While it’s not required to separate the two, it’s highly recommended for several reasons:

• Financial and legal liability. If your business structure doesn’t have personal liability, separating your bank accounts can help protect your assets in the event of lawsuits or other financial issues.
• Taxes. It makes accounting easier and ensures you pay the right amount of taxes, avoiding penalties.
• Credibility. It is much more professional and trustworthy for clients if you send invoices from a business bank account. You can learn more about freelancers’ payment options in our complete guide. 
• Management. It helps you track your cash flow better and make informed financial decisions for future growth.

Here are some useful budgeting and accounting apps that can help you with invoicing, managing payments, and tracking your income and expenses:

• QuickBooks
• Quicken 
• FreshBooks
• GoodBudget

For the first year or two, I made the mistake of mixing personal and business income which made it hard to track my finances and prepare for taxes. I eventually opened a separate business bank account and started using simple budgeting tools like Notion templates to manage my cash flow.

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Pay yourself a salary

One of the downsides of being a freelancer is the irregular income. Even if you have a steady stream of projects each month, there’s still the possibility that they may vary in size or you may lose a client. Plus, your income isn’t entirely yours as it includes taxes and business expenses. To ensure a steady monthly freelance income, you can pay yourself a certain amount each month, just like your employer would pay you on a regular job.

To do it correctly, you should first determine your minimum monthly income and your average monthly personal expenses. You can learn more useful tips on how to keep track of both your income and expenses in our complete 4-step guide to budgeting tips. Let's say you are self-employed in the United States and your average monthly income is $4,000; 15.3% of this income would be used for self-employment taxes, leaving you with $3,400. If your average monthly personal expenses are $2,800, you could set up an automatic transfer from your business account to your personal account of this amount. This would allow you to keep $600 per month for business expenses and savings. 

Note that if you’re an LLC or Ltd. director, paying yourself a salary is one of the few ways you can take money out of your business bank account. And it may be taxable depending on the amount. In the UK, the first £12,570 in a year is tax-free. But if your income exceeds it, you'll pay up to 45% depending on the total amount. In the US, if you’re a single-member LLC owner, you’ll be subject to self-employment tax of 15.3%.

Pay taxes on time

Speaking of taxes, as a freelancer, you will not have them automatically deducted from your earnings. Instead, you will need to manage your tax payments yourself. This includes both an annual return and quarterly taxes. In the United States, you are required to report and pay taxes on your income if it exceeds $400 per year. This tax covers Social Security and Medicare and is calculated at 15.3%. Those individuals who expect to earn $1,000 or more annually are required to make payments each quarter on the following dates: April 15th, June 15th, September 15th, and January 15th. You’ll also need to file a federal income tax return by April 15. This is done to ensure that you don't underpay or overpay your taxes through quarterly payments. Apart from the standard 1040 income tax form, you’ll need to report your business income and expenses with the Schedule C form. 

As you can see, this form includes information about expenses, as some business-related expenses can be subtracted from your total taxable income.

In the UK, you don't need to pay taxes quarterly. Instead, the HMRC (Her Majesty's Revenue and Customs) asks you to make two upfront payments towards your next year's tax bill if your annual income exceeds £1,000 by January 31 or July 31 of the current year. This amount will be deducted from your annual tax return. You can submit your Self Assessment tax return online by January 31 and subtract some of your business expenses as well.  

Have an emergency fund 

When you're a freelancer, the cash flow can be unpredictable, and unexpected expenses can occur when you least expect them.

An emergency fund is your buffer in these situations. It can help cover unpredictable expenses or simply get you through slower months. If your average monthly income is limited, try to save money during months when your income is higher. According to a survey conducted by Bankrate, almost ⅓ of US citizens admitted to using their emergency funds in 2024.

In the UK, only 33% of self-employed people have an emergency fund, which can be a cause of significant stress. What if your laptop breaks down, or a client decides not to work with you anymore? Ideally, the emergency fund should cover at least three months' worth of your essential living expenses, but of course, the more, the better. 

With irregular income, consistency in saving is key. I break my income into fixed percentages: 50% for needs, 20% for savings/emergency, 10% for business expenses, and the rest for personal use or reinvestment. It helps to create a sense of stability even when payments come in at random times. I try to keep at least 3-6 months of living expenses in my emergency fund. During slow months or unexpected client delays, that fund has helped me stay calm and focused.

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Save for retirement 

As a freelancer, you are responsible for your financial future and stability. It may seem like a long time from now, but if you don't have an employer-sponsored retirement plan, you will need to take responsibility and create a savings account or choose a retirement plan. Your self-employment taxes may not cover all of your retirement needs. Statistics show that in the US, taxes only cover approximately 40% of them.

As you can see, the number of self-employed people in the UK saving for retirement has been decreasing in the past years. And it isn’t a very good sign. According to officials from the IFS (Institute for Fiscal Studies), if this trend continues, many self-employed people may not be able to enjoy a comfortable retirement.  

You can use retirement options, such as a Solo 401(k) and SEP in the US or SIPP and NEST in the UK, or you can create an individual savings account and make regular contributions of 10-15% of your income. You can also consider investing in bonds or stocks to not only save but also grow your money. 

As a freelancer, you have great freedom, but with that comes great responsibility as a business owner. Make everything official by setting up a separate business bank account and paying yourself a salary. Stay on top of your taxes, save for emergencies, and consider planning for retirement to create stability and thrive in the long run.