For most people transitioning into full-time freelance writing or freelance writing on the side for awhile, there will undoubtedly be a period of time that you’re managing two kinds of income: income from freelance writing and income from a regular job. Or if you’re a writer who’s married to or cohabitating with someone who earns a regular income, the two of you may also face the challenge of managing two types of income.
Freelance writing income alone can be tough to manage because it can be highly irregular. Couple that with income from a regular job and it’s natural to be confused on which set of numbers to work with or how to combine the two.
Separate the money in your budget.
I’m a huge proponent of budgets, not necessarily a strict “you-can-spend-this-but-not-that” kind of budget, but more of a plan, like “This is the money I expect to receive and this is how I plan to spend it.”
Put both incomes in your budget, but list them incomes separately. For example, you can label one “Day-time job income” or “Spouse income” and the other “Freelance income.” You can total them later, but separating the income sources can keep you from getting confused about where the money is coming from and which is “guaranteed.”
You can further break down your income based on what you’ve already received and what you expect to receive. Try to plan your spending around what you have actually received, especially if it’s freelance writing income.
Live on only the regular income.
If you can pay your living expenses out of just the regular income, you’re doing well. Then, you can use your writing income for other goals, paying off debt, saying for vacation, deposited in the retirement account, etc. Of course, to maintain this, you have to be careful not to increase your cost of living as your writing income increases.
There’s nothing wrong with living off both incomes. Many people start freelancing on the side because their regular income isn’t enough to pay all the bills. Again, try to base your spending around what you’ve already earned.
Pay your writing income to yourself in regular increments.
Rather than placing your writing income directly into circulation, put it in a separate account and “pay” yourself a regular amount on a regular period of time. For example, you may earn $500, $250, and $150 from writing gigs. Rather than place it in your checking account immediately, you could leave it in a savings account, then transfer, say $700 to your checking account on your regular payday.
Don’t forget about taxes.
People who are fully self-employed need to pay estimated taxes on writing income since income taxes aren’t withheld. However, if you have regular pay from an employer, you (or your spouse) can adjust your tax withholding from your regular income to compensate for the additional tax liability. If you withhold enough, you won’t have to pay estimated taxes.
Your accountant can help you figure out if enough money is being withheld to cover your tax liability on the freelance writing income.
You can figure it out yourself, but it will be a little complex. First, calculate your annual estimated tax for your freelance writing income. Then, divide it by the number of pay periods at your job, e.g. 12 if you receive monthly paychecks. Complete a new W-4 with the number of exemptions, but also complete the line that asks if you’d like to have an additional amount withheld from each paycheck.
Managing two types of income requires some additional planning and organization, but it’s doable. Put the numbers on paper, in a spreadsheet, or even on a calendar so you can see them. Knowing what’s coming in and when will help you manage your money better.