Personal Finance for Freelancers (Or How I Got an $8,700 Tax Return)

I was 23 years old when I became a full-time freelance copywriter.

At the time, I only had a basic understanding of credit scores, savings accounts, and personal taxes. I’m a bit embarrassed to admit that I had zero knowledge of things like business write-offs, investing, index funds—or business vs. personal taxes.

Entrepreneurship forces you to think differently about money. And for me, freelancing was a leap straight from the kiddie pool into the deep end.

It was sink or swim.

Before you swan dive after me: I’m not a money expert. This article is not financial advice. I wrote this blog to highlight my personal journey navigating the financial side of running a freelance business. This is how I think about my business and personal income, and how I’ve structured my financial life in a volatile business.

Personal finance is a massive subject that doesn’t receive enough air time in school. For all my teenage years and into my mid-twenties, I was afraid to learn about money because I feared the possibility that I was doing everything wrong. Ignorance is bliss, right?

Fortunately, today personal finance is one of my favorite subjects to read and learn about. I’ve managed to grow my freelance business to six figures, get a mortgage while self-employed, and every month I save and invest a high portion of my income. In other words, I didn’t drown in the deep end. And that movement from fear of finances to deep curiosity has changed my relationship with money—and is the primary reason I’m sharing my story.

So, put on your goggles. Let’s explore the depths of my financial life.

The wake-up call (and my personal finance journey)

I launched my freelance business in 2016. At the time, I went from earning minimum wage at a front desk job to earning the equivalent of minimum wage as a novice freelance writer. A friend (and experienced agency owner) told me early on that I should set aside money from every paycheck for taxes. I ignored their good advice, mostly because I didn’t have enough money to save. Every penny I earned went toward living expenses.

With my friend’s warning top of mind, I was terrified to file my taxes that year. I knew I’d owe something, but I didn’t have a savings account to meet the blow. After a few hours of working through TurboTax, I got lucky. It turns out that I’d overpaid some W-2 tax income at my previous 9-5 job in the first half of the year. When all was said and done, I owed the government less than $100 in taxes. Phew!

Sarabeth and I got engaged around that same time. I knew that my financial ignorance would now impact both of us. Sarabeth made it clear that she didn’t want to be the one managing our finances (and especially not our taxes). The burden to learn was on me.

I knew that I’d been lucky with the tax situation in 2016. I also knew that the next tax season wouldn’t be so easy. I had to make a change.

I bought my first personal finance book a few weeks later. I wish I remembered the name of it. All I know is that I retained very little information. A lot of jargon went over my head. I read and reread passages. Still, I felt my mind had opened an entire world. And while many of the terms didn’t stick, I caught onto a few money basics like mortgages, credit cards, and the importance of retirement accounts.

I didn’t immediately put my new knowledge into practice, except that I became better at putting money away for tax season. But more importantly: opening that first personal finance book began my journey into learning about money: how it’s earned, managed, taxed, spent, and compounded.

Sarabeth joined me in the freelance business. Year over year, we earned more than the one before, which caused me to research personal finance even further so that I knew what to do with extra cash. It was the first time in my life I had extra money to do something with.

I read several more personal finance books. I also began to discover and follow finance bloggers and YouTubers. The FIRE (Financial Independence, Retire Early) movement caught my attention one day. This is a group of people with a shared drive to save and invest hyper-aggressively for the chance to retire years or even decades before their peers.

I resonated with the FIRE movement’s ethos of saving today to earn greater personal independence in the future. It was bloggers in this world that introduced me to terms like dollar-cost averaging. They also finally explained index funds and retirement accounts in a way that I truly understood. We finally opened IRAs at 25 and began investing.

In 2019, I discovered Ramit Sethi’s book, I Will Teach You To Be Rich. That’s when our saving rate, investing rate, and almost everything else about our financial life became serious. Ramit communicated the same information I’d been reading for a few years. But something about this book, or the timing of my reading it, turned Sarabeth and I into people who felt confident and informed about our shared financial life.

That same year we outsourced our taxes for the first time to a CPA. A common phrase among business people is that CPAs will save you more money in tax than they’ll charge you in fees. Now that Sarabeth and I were investing more aggressively (and making a decent living), I thought it was time to bring in the experts.

In December 2019, I researched CPAs and found a local Austin CPA office with stellar online reviews. I sent a quick email inquiring about their services, explaining that I was a freelancer. Within an hour, the owner emailed me back: If you incorporate your business, I can save you over $8,000 in tax this year.

I was sold. That’s when Lewis Commercial Writing changed from an unincorporated sole proprietorship into an S-Corp. And just as the CPA predicted, a few months later Sarabeth and I received a tax refund for 2019 over $8,700. We deposited $8,000 straight into our investments and savings. We treated ourselves using the remaining $700. (Hello, new Bose headphones we still use every day!) We’ve remained with that CPA every year since.

At the start of 2020, Sarabeth and I began to talk seriously about buying a house in Austin. But our excitement was quickly drowned out with fear. The reality of the pandemic hit us fast in March. We were afraid. Could our little copywriting business survive a global pandemic and market downturn? We were about to find out.

We worked longer hours than ever during those first few months, accepting every project and working straight through every weekend to save as much money as we could.

After a few months, we eventually felt confident that our clients weren’t dropping us. Our pandemic fears were still very real, but we realized that SaaS copywriting wasn’t going anywhere. During quarantine, we did our best to save money and prepare financially for a mortgage.

And in August 2021, we purchased a 4-bedroom home in Austin. That’s the latest in our financial journey so far. We’re in the process of saving for a few remodel projects and enjoy the occasional tinkering we do around the house and yard.

How I manage money as a freelancer

Now that I’ve covered some of my financial journey, let’s look at how I manage money in my life and business.

How I earn money

Let’s start with the basics: how does my business make money?

If this is your first time here, I’m a freelance copywriter and ghostwriter. That means I make my living selling writing services to companies, usually in B2B tech.

When I win a new one-time project, I invoice for half of the project value immediately and collect the remainder of the balance once the project is finished. For monthly retainers, I bill for the full balance at the beginning of every month.

I invoice through Quickbooks, which allows clients to pay via credit card or ACH transfer. All my freelance income goes straight into a business—read: not my personal—bank account.

Paying myself through my S-Corp (and how I received an $8,700+ tax return)

Let’s stop for a minute and talk about that $8,700 tax return. What happened there? Why did incorporating my business make such a difference? Understanding that return is critical for understanding how I pay myself as a freelancer. Fair warning: this part gets a little technical. Taxes inevitably come with a lot of jargon, but I’ll try to break this down as simply as I can.

Before becoming an S-Corp, I was an unincorporated sole proprietor. After business expenses, every dollar I earned as a sole proprietor was taxed through two systems: Federal income tax and self-employment tax. When I incorporated the business in 2019, the big change to my taxes occurred in the self-employment category.

Self-employment tax covers Social Security and Medicare. For 9-5 employees (people with W-2 income), a certain amount of tax is withheld from every paycheck to cover these expenses. Employees pay half. And employers pay the other half.

As a self-employed person, you’re both the employer and the employee. That means you pay both halves of your social security and medicare taxes, not just one. As an unincorporated sole proprietor, every dollar I earned (after business expenses) was taxed through this self-employment tax. Here’s where the S-Corp made a big difference.

An S-Corp is what tax folks call a pass-through business. Essentially it means that I pay taxes based on the money that gets passed through my business to me (the business owner) as income. But there are two different ways to be paid through an S-Corp: My W-2 income and my owner’s draw. Let’s break these down:

• W-2 income: I pay myself a predetermined salary through a tool called Gusto. For easy math, let’s say that I expect my freelance business to earn $100,000 next year. I have business expenses and I don’t know which months will be great or which ones will be low, so I don’t want to set a salary for the full $100,000 (or I may overdraft my account). In Gusto, I set myself up as a W-2 employee to my own business. That means giving myself a salary that is less than $100,000. Let’s call my salary $50,000. Every two weeks, just like in a 9-5 job, Gusto pays me a salary. Gusto automatically takes out federal income taxes, medicare taxes, and social security tax on my behalf and sends it to the government.

• Owner’s draw: So, what happens with the other $50,000? Some of that will go to business expenses for the year. Let’s pretend that I have $20,000 in annual business expenses, leaving me $30,000. That money is technically mine as a business owner. If I would like to access it, I can write myself a check for that balance. This is called an “owner’s draw” or “owner’s dividends.” Since this $30,000 is not part of my salary, I do not pay social security tax or medicare tax on the balance. (But I still pay federal income tax.) In other words, our $8,700+ tax return in 2019 was because of this distinction.

When do I pay myself through the owner's draw?

I don’t have a regular payment schedule for my owner’s draw from the business. I’ve read that some entrepreneurs make this a regular monthly, quarterly, or even yearly payment—treating it like a bonus. I’m less scheduled about it, but for me, it usually happens monthly.

My only rule is that I must have a minimum of one month’s worth—two pay periods—of W-2 payments in my business account at all times, so that I never miss my own payroll. Because at the end of the day, even when freelancing becomes sustainable, it’s still a highly variable business. Your best month ever might be followed by two or three unusually low months. Best to prepare for variability.

Quarterly taxes

Unlike W-2 employees who only have to think about taxes every April, business owners must think about them every four months. While my W-2 income is automatically taxed using Gusto, I still owe Federal taxes on my owner’s draw. I pay this in the form of estimated quarterly taxes throughout the year. Fortunately, ever since my tax hiccup in 2016, I’ve been diligent to save a portion of my income for taxes every year.

Every time I write myself an owner’s draw check from the business, I immediately set aside a portion into a designated savings account reserved for taxes. I do it every time, no exceptions—and this has been a huge load off my shoulders. (Many banks let you open additional accounts beyond the basic “Checking” and “Savings” account buckets you get by default. Get one and call it “Taxes.”)

Every business quarter, I send money from my tax account to the government. This process is aptly called quarterly taxes. How do I know how much to pay? The government tells me. Every year after I file my April taxes, I’m given a designated amount to pay on a quarterly basis for the next year. I follow that designation and then the difference is figured out when my taxes are filed each year in April. At that point, I either write a check to the government for owed taxes, or they write me a check (tax return) if I overpaid.

Tracking business expenses

It took me a few months to understand how business tax write-offs work, so I’m going to break it down here for other freelancers.

As a self-employed person (sole proprietor or S-Corp, it doesn’t matter), you are allowed to “write off” expenses that your business takes on. What does that mean?

Essentially, it means that when tax season comes along, you’re paying taxes on all your business income (revenue) minus the costs of running your business. Your money is taxed after business expenses are considered.

I find it helpful to think of this in juxtaposition with a W-2 salaried employee.

Let’s say a W-2 employee and a business owner both wanted a new computer. Both of these individuals earn the same amount, $100,000 per year.

For the W-2 employee, they’re buying the computer with their after-tax income. For easy math, let’s say they’re being taxed at a flat rate of 20%. That means they’re going to pay $20,000 in taxes this year. The employee’s income ($100,000) minus taxes ($20,000) and minus a fancy computer ($2,000) means that they’re left with $78,000 to live on.

Now let’s compare that to the business owner.

The business owner needs a new computer to run their company. They also earn $100,000 per year. Except the business owner can write off their computer as a business expense, meaning the purchase happens pre-tax. Assuming the same 20% tax rate, here’s how the math breaks down: The business owner’s income ($100,000) minus the cost of the fancy computer ($2,000) minus a 20% tax ($19,600) means that they’re left with $78,400.

Essentially, the business owner ends up with $400 extra. That’s effectively how tax write-offs work—and why it’s important to carefully track your expenses as a business owner.

I don’t have many expenses as a freelancer. (Most service businesses don’t, but high margins are a good thing!) But I try to track expenses carefully nonetheless. I do that using Quickbooks.

Saving buckets

Maintaining a high savings rate is key to long-term success in freelancing.

Freelancing is full of surprises. You can go through three months of nonstop writing inquiries, followed by a dry spell when it seems everyone has forgotten your business exists. For those dry spells, having strong savings to live on is critical. It’s not enough to earn good money. I’ve had clients pay me six months late—or not at all. An aggressive savings rate helps you weather all financial seasons.

Every freelancer knows the experience of expanding and contracting demand. Fortunately, I’ve found this becomes less common over time. I believe freelancing gets easier the longer you’re in the game. This is true even with my experience managing money.

Most of my financial scares occurred within the first 18 months of business. One time I was still waiting for a check when the first of the month came along. I had to call my landlord’s office to request a few extra days. Fortunately, they were understanding and I soon brought them the check. Another time I paid rent by pulling money out of a credit card. Several months later, I asked my brother for a loan. If any one of these situations didn’t work out, my only resort might have been to find a 9-5 job. I feel lucky that the money always worked out.

But it’s for that reason that Sarabeth and I are intentional savers. Rather than simply having a single generic savings account, we maintain multiple savings accounts to reflect different life goals.

Most of the time our savings are split between a few buckets that reflect our current personal finance goals. For example, last year we maintained a house fund which we used to save for a down payment and closing costs. Now we’re using the same account to put money away for renovations on that same house.

We also have a bucket for emergency savings. Most of the time (like when we’re not throwing all our extra cash toward a kitchen renovation), we maintain a travel fund that we slowly add to each month.

Our investing philosophy

The highest financial return I’ve received in my life is the freelance business. It grows significantly each year. There are no stocks or other asset classes that I can count on to grow as quickly as my own business. With that said, I do not constantly reinvest my money back into Lewis Commercial Writing. I prefer to take money off the table.

Instead, Sarabeth and I invest most of our money in US stock market index funds. Here’s why:

Yes, freelancing has a great return on investment. The business pays us more every year. But we believe in taking money off the table.

Sarabeth and I max out our Vanguard IRAs every year, mostly in broad market index funds. We also maintain a joint brokerage account, which is also invested primarily in index funds. All of this is aimed at long-term investing: Buy now, hold for a very, very long time. We’re not timing the marketing or getting super fancy with it.

Beyond that, we maintain a few one-off stock and cryptocurrency bets. We do this using money almost like it’s consumer spending, like a sale at Old Navy. (“Hey, Apple is down today. Wanna buy some?”) Individual stocks—and definitely cryptocurrencies—come with a lot more risk than buying index funds. That’s why these riskier bets represent less than 5% of our investment portfolio.

Getting a mortgage as a freelancer

As I’ve mentioned, Sarabeth and I bought a house last year. The process was very different than we expected—in a good way—and I want to explain why.

For years I’ve read that it’s difficult to get a mortgage as a self-employed person. This made me nervous when it came time to reach out to lenders. Would we get approved? Would our approval be enough to purchase a house in Austin?

The reality was that gaining pre-approval for a mortgage was actually pretty straightforward, even for two self-employed folks who’d never been through the process before.

Mortgage companies want to know if you can handle the monthly payments. That’s it. If you have high debt relative to your income, a poor credit history, and only a short earning history in your business, then yes, it will likely be more difficult to receive a mortgage. But that’s not unique to self-employed folks. All of those factors will also make it difficult to buy a home as a W-2 employee.

This isn’t meant to discourage someone who’s in that position. It’s just meant to draw attention to the fact that that situation isn’t unique to freelancers. You can fall into those same categories with a W-2 job and face the same consequences when you sit down to talk to lenders. Lenders want evidence that you can pay back your loan over the long term.

On a brighter note, if you’re a freelancer who's been in business for a couple of years, has good management of your finances, and has money to set aside for a down payment, then home buying doesn’t have to scare you. Obviously, there are things to prepare for, like raising your credit score, saving for the downpayment and closing costs, and being prepared to show the past two years of freelance income.

From my research and experience, these were the most important things we got right to have a smooth mortgage process:

• Good debt to income ratio: A mortgage is the largest debt most people ever take on in their lives. Lenders don’t want to see you drowning in debt before you gain even more debt. So, it’s best to eliminate as much debt as possible from your life before you apply for a mortgage.

• Sufficient savings: We had a decent savings account, which we’d been building for many months by the time we applied for a mortgage. No, we didn’t have the recommended 20%. In fact, it was much lower. For us, we didn’t mind paying private mortgage insurance (PMI) for a while until we renovate a few parts of our house (and gain some sweat equity).

• Proof of consistent freelance income: I’ve been freelancing since 2016. We didn’t need to show income going back that far. If I remember correctly, I think we needed to just show the past two years.

• Good credit scores: Lenders also want to know that you’re good at managing debt. They assess this through your credit score. Sarabeth and I fortunately both had great credit scores, through years of following best practices.

During our house hunt, we went back and forth about how “finished” a house we were looking for. We were moving from an apartment we loved, which had a modern kitchen and amenities. Both of us were tempted to buy a newer house to enjoy the benefits of a move-in ready home.

But we also loved the idea of adding value to a home—and making it our own—through renovation and modernization. In the end, we purchased a house that needed some work. And in the first few months, we had our work cut out for us. We’ve been saving for a full kitchen remodel. We have many projects throughout the house, some finished and some still in the works.

It feels good to own a little slice of Austin.

Managing money with confidence

I go through seasons of tracking financial markets, researching one-off stocks, and learning about public companies. I don’t think these are pointless activities, but they’re far from the best use of my time when it comes to setting myself up for financial success.

The best things we’ve done with our finances have to do with automation: set and forget. When we have our investments and savings on autopilot, we’re more likely to make good long-term decisions. When I’m too caught up in the day-to-day of money management, I tend to look for financial shortcuts—like picking stocks—which inevitably lead to worse returns than just boring old index fund investing. You can trip over dollars trying to find pennies.

Like most things in life, consistency trumps everything. As James Clear puts it:

“Most people need consistency more than they need intensity.

Intensity:

• run a marathon

• write a book in 30 days

• silent meditation retreat

Consistency:

• don't miss a workout for 2 years

• write every week

• daily silence

Intensity makes a good story. Consistency makes progress.”

Experimenting with memecoins or swing trading strategies may be fun, but I’m not betting my future on them. I recommend getting the basics down: growing an emergency fund, paying off debt, maxing out your IRA, putting your money into broad market index funds, and consistently setting aside a portion of your freelance income for taxes.

Once you understand the basics like saving and investing, your foundation is in place. When it happens for you, it can feel miraculous. Sure, you might turn the subject of personal finance into a hobby as I have. But for most people, simply putting a foundation in place is good enough to help you buy, sell, invest, and earn with confidence—so that you can freelance for the long term.

Here’s the real secret to freelance financial success: keep growing your business. As a business owner, I like to remind myself that the best thing I can do for my finances is writing consistently. As long as I set the foundation of my finances in place, the greatest return on my time and attention will likely come from spending time working in or on my business.

When I write articles like this one, perform client work, or create digital products, I’m taking my biggest financial asset—my business—up to the next level. And as the business grows, everything in my financial life gets just a little bit easier.

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