The Best Way To Budget For Taxes When You Are Self-Employed
Oh, the infamous tax season!
For some, it's a time to celebrate the possibility of having a little extra in your bank account to save spend at your leisure, but for the self-employed, dealing with taxes can be a bit of a headache. Unless you're a stickler for paying your taxes monthly or even quarterly, you may have gotten hit with the possibility of emptying out your life savings (because of course you should have some!) in effort to keep the IRS from hunting you down.
I'm often asked about how to stick to a budget and save for taxes as a person who's self-employed. For many entrepreneurs, there is no guarantee that each month will yield the same profit as the one before. So what do you do when your paycheck fluctuates just as much as the stock market?
As a self-employed sista myself, I know just how hard it is to budget and save with sporadic income. The first year of self-employment was rocky for me on the money front too, so you're not alone. I'm happy to tell you budgeting while self-employed is much easier now that I have a system in place.
Here are the tips I recommend to help you budget while self-employed.
1. Add Up Your Basic Needs
The basic needs include food, shelter and anything that keeps you alive. Drinks with your girlfriends or Friday night takeout are not basics. They do have a place in your budget, just not here. Add up all of the bare essentials and it'll give you how much income you need to make from your business (after business expenses like taxes) to maintain your life.
2. Use Percentages to Budget
People that get a regular check can allocate a certain amount of money to each line item of their budget. That doesn't work for us self-employed folk because our income is variable. Use percentages instead, here's the breakdown I use:
- 40%: Expenses - Both essential and nonessential expenses.
- 30%: Taxes - As advised by my accountant due to business expenses. Remember, every tax situation is different. You need to speak with a tax advisor first before choosing your own tax percentage. This all depends on your tax bracket and how much you spend on business expenses. Make sure you're setting aside a percentage of your income each time you get paid to avoid a future tax bill you can't afford.
- 15%: Retirement & Investments - It's critical that you set aside money for your future self, especially since you don't have a job sponsored retirement plan.
- 10%: Give - Donating and giving back. I believe to whom much is given, much is required. I've also found that giving activates abundance is all areas of my life, but this is a personal choice, so do what you feel is right.
- 5%: Travel - Leisure - Traveling is important to me, so I give it its own budget category. Decide what category is important to you. Then each time you get paid (big payment or small), allocate your income based on the percentages you choose.
3. Keep Multiple Accounts
Keep your money separate. It's easier to keep track of your funds this way. Setup and label a few online bank accounts for taxes, bills, everyday spending and savings goals. (You can find online accounts with no fees at MagnifyMoney). Divvy the money up into each account when you get paid.
The account for spending can be your regular checking account. Your bill money should be in an account you can't touch, same with your savings and tax money.
4. Pay Your Quarterly Taxes
I've been asked about saving for taxes specifically, so I'm touching on it a little more in this section. Each fiscal quarter self-employed workers are supposed to make estimated quarterly tax payments to the IRS. I'm going to be honest with you, it's easy for solopreneurs to spend money that trickles in and put off saving for taxes entirely. This never ends well. Believe me. I didn't stay on top of quarterly tax payments my first year as an entrepreneur. Then when tax season rolled around, I had to scramble for money to pay my tax bill. To say it was stressful is an understatement.
Now I consider quarterly tax payments a godsend. You can't spend tax money if it's already sent to Uncle Sam. Commit to the percentages we talked about above. Pay your taxes in smaller installments to avoid a huge tax bill later. You'll be thankful you did.
5. Stockpile Excess Cash
Moving on to the perils of feast and famine. Money won't come in for weeks and then a $10,000 check will appear mail; that's the life of an entrepreneur. My business is the busiest during summer months, so I work hard during that time to stockpile cash in a business savings account. This way, I don't have to panic during the winter when the checks slow down. Instead, I use the money from my savings account to pay myself. If you have a peak season make sure you're putting in work and saving large windfall payments that come in.
6. Give Yourself a Paycheck
You may wonder where your income disappears to each month right now and that's okay. Get serious about dispersing your income from each client into your budget categories like we discussed, and cut back on nonessentials so you can start saving more. Your ultimate goal is to get to the point where you can pay yourself a “regular" paycheck. Once you have enough cash in your business account to give yourself wiggle room, pay yourself a weekly or biweekly check from the savings. This way you're no longer at the mercy of irregular checks from clients.
In closing, Sista girl… It's a challenge to budget in the traditional sense when you're self-employed, but it can be done. Good luck!
Have more money questions? Ask below! I'm here to help you to live richer.
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ItGirl 100 Honors Black Women Who Create Culture & Put On For Their Cities
As they say, create the change you want to see in this world, besties. That’s why xoNecole linked up with Hyundai for the inaugural ItGirl 100 List, a celebration of 100 Genzennial women who aren’t afraid to pull up their own seats to the table. Across regions and industries, these women embody the essence of discovering self-value through purpose, honey! They're fierce, they’re ultra-creative, and we know they make their cities proud.
VIEW THE FULL ITGIRL 100 LIST HERE.
Don’t forget to also check out the ItGirl Directory, featuring 50 Black-woman-owned marketing and branding agencies, photographers and videographers, publicists, and more.
THE ITGIRL MEMO
I. An ItGirl puts on for her city and masters her self-worth through purpose.
II. An ItGirl celebrates all the things that make her unique.
III. An ItGirl empowers others to become the best versions of themselves.
IV. An ItGirl leads by example, inspiring others through her actions and integrity.
V. An ItGirl paves the way for authenticity and diversity in all aspects of life.
VI. An ItGirl uses the power of her voice to advocate for positive change in the world.
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Rihanna Talks Shedding Expectations And Finding Balance As A Mother
Since becoming a mother in 2022, Rihanna has defined parenthood by her terms and hopes to pass that sense of autonomy on to her children.
For Vogue China’s April cover story, Rihanna shared her perspective on raising her two sons with A$AP Rocky, and how she hopes to preserve her children’s uniqueness, devoid of societal expectations.
"The most beautiful thing...is that [children] come into the world with their own individuality and sincerity, without any logic or conformity,” she told the publication. “Which usually makes you feel that you must fit into a certain group."
The “Work” artist, known for her trendsetting style and captivating persona, expressed her desire to support children in fully embracing their individuality and encouraging them to be whoever they want to be. "It's really beautiful to see and I want to continue to help them navigate that and make sure that they know they can be whoever they want to be,” she says.
She continues, “They should embrace it completely, because it's beautiful, and it's unique. I love them just that way."
From shattering music charts to shaking up the beauty industry, Rihanna has forged a path that has since created the “dream” life we see today. One that she says has made her parents proud of.
“I’m living my dream,” she continued. “My parents were very proud of that because they just wanted me to be happy and successful. So, I think the key thing is to find some kind of balance. Yes, balance is important. Do this and you get the best of both worlds. You can write your own life the way you want, and it will be beautiful. Sometimes, you just need to let go of everyone’s expectations and start living your own story.”
Rihanna, who shares sons, RZA, 23 months, and Riot, 8 months, with rapper A$AP Rocky, recently shared her vision for expanding her family in the future in Interview Magazine.
When stylist Mel Ottenberg asked about the number of additional children she hoped to have, Rihanna replied, "As many as God wants me to have.”
"I don't know what God wants, but I would go for more than two. I would try for my girl,” she adds. “But of course, if it's another boy, it's another boy."
Featured image by Neil MockfordWireImage