Pay Yourself Like an Employee

By 
on September 13, 2010 in Finance
5
0

When you’re a freelancer, your money comes in spurts. You might get $500 this week, $200 next week, and $1,500 the week after that. Some money comes by check, others direct deposit, and others through PayPal or maybe even wire transfer. And you have to keep up with all of it.

Managing a freelance income is hard enough. If you’re spending money as it comes it, that’s even harder. You have to figure out when you can pay this bill or that. It’s a big deal when clients are even one day late. Chasing payments and organizing bills can easily take the place of the writing that’s necessary to earn money.

I avoid that headache by giving myself a regular, monthly paycheck that is the same amount every month. You still have to send invoices and make sure clients pay on time, but you don’t have to be as anal about it – at least I stopped being so anal once I made the change.

You need at least two accounts for this to work. One account is the account that all your writing income goes into, regardless of the payment method. The other account is the account that your payments go into.

Then, decide what you’ll get paid each month (or week or every two weeks, etc). There are a few ways to make this decision. Remember, you need to get paid the same amount each pay period, unless you get a raise or give yourself a bonus.

You can pay yourself…


Advertisement

Based on how much you need to make ends meet. If your living expenses are $1,500 each month, you might decide to pay yourself $2,000 per month. The extra $500 would go toward things like savings, gas, toiletries, etc.

Based on how much you earn. Since freelance writing income often varies each month, you should take an average of your income for the past 12 months if you choose this method. You can also use a moving average where you take the average for the past three (or 4,5,6+) months. For example, your October pay would be based on the average of your July, August, and September income. Your November pay would be based on the average of your August, September, and October income. This method takes a bit more calculation, but you can set up an Excel spreadsheet formula to do it automatically.

Based on your projected annual income. A lot of freelancers I know project their annual income. If you expect to make $48,000 this year, divide that by 12 and pay yourself $4,000 each month. Or by 26 and pay yourself $1,846 every two weeks. Watch out: if you make less than $48,000 this year, you’ll run into some trouble because you essentially overpaid yourself. You can periodically check to see how you’re trending toward your projected income and adjust your pay if necessary.

Decide How Often You’ll Get Paid

I prefer to get paid monthly because it’s easier for me. Most of my bills are due at the beginning of the month, so once the bills are paid, I know how much spending money I have left.

You can also pay yourself weekly, bi-weekly, on the 1st and 15th, or however else you choose. Just make sure your payments are consistent.

How you pay yourself depends on your bank. You can do transfer or write yourself a check and make the deposit. Be timely as timely with your payments as you would want an employer to be.

What About the Extra Money?

I suggest you pay yourself the same amount every month regardless of what you earn (or the average of at least the past three months’ income). If you pay yourself more during the months you earn more, you could have trouble adjusting your spending during the months you earn less. During those months that your income is greater than your pay, just leave the extra in your “holding” account. As that money accumulates you can use it to even out your payments during the months you earn less than your pay.

If you’re always paying yourself more than you earn, then you’ll either have to increase your freelance earnings or pay yourself less. On the other hand, if you’re earning more than you’re paying yourself, you could give yourself a raise, or just wait until the end of the year and pay yourself a bonus.

**Unless you’ve incorporated your freelance business, you still have to pay taxes on everything you earn versus what you’ve paid yourself.

Do you give yourself regular paychecks? Or do you transfer your money into your spending account as it comes?

Like this? Please share.
TwitterGoogle+FacebookPinterestLinkedInbufferRedditStumbleUponEmail
Short URL: http://3bm.co/oI6Arm
The following two tabs change content below.
LaToya Irby is a full-time freelance writer and a graduate of the University of Alabama. She primarily writes about personal finance, freelancing, and other self-employment topics.

key to writing success
Your key to a more successful writing career:
Join the FREE All Indie Writers community. Register today for access to the writing forums, and be one of the first to gain access to new e-courses, coming soon!


5 Comments

  1. Seymour September 13, 2010 Reply

    This is such a good idea and it had never occurred to me. Thank you!

  2. Christina (@CashCampfire) September 13, 2010 Reply

    Wow, terrific idea! I’m in the process of setting up my business account, so I’ll use that account for all of my earnings and pay myself by sending earnings to my personal account.

    I can’t believe I haven’t thought about this before!

    Christina

  3. Rebecca Garland September 13, 2010 Reply

    I love this idea and I had it all set up once upon a time. I paid myself a set amount once a month and it was so nice and organized. But then I fell off my system by staying a home a year and scrambling to make up some lost income. Then I scrambled again for a long time to make up for my husband’s diminishing income. And now to get back on track, I’d have to earn double in a month what I actually need – half to pay myself for the bills and half to pay the bills that I’m chasing. Double monthly income hasn’t happened just yet. :)

    This is a beautiful way to set up the bills, and I hope to rejoin the ranks soon when I can pull ahead again. It’s far better to start this way than to convert to this method down the road.

  4. Author
    LaToya Irby September 14, 2010 Reply

    Glad you guys like the idea.

    @Rebecca, I almost included a section that talked about converting to paychecks mid-freelance career. Sounds like you already know what it takes to get there… I would start building a reserve in that “holding” account and putting a couple-few hundred dollars in it every month. Then, when the account had enough for one paycheck, I’d make the switch. But like you mentioned, it’s hard when you’re playing catch up. Hope it all works out for you soon.

  5. @vcmcguire September 15, 2010 Reply

    I use a modified version of this method.

    When money comes in from freelance work, I put it into an account I call my Holding Tank. Once a month, I sweep the money out of that account and put it in several different accounts.

    A percentage goes to a special savings account for taxes, a percentage goes to my SEP-IRA for retirement, and the rest goes to a Living Expenses account. I pay myself a monthly salary from the Living Expenses account.

    I might sound really virtuous, but last year I robbed my tax account to buy a new laptop, thinking I was over-saving for taxes. I wasn’t, and regretted the laptop purchase when it was time to pay state, federal and (ouch) city self employment taxes.

Add comment

By using this comment form you agree to the site's Comment Policies.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Current day month ye@r *

CommentLuv badge