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Being a freelancer can be one of the best careers out there. You get to do what you love and get paid while doing it. You’re constantly building, learning and ultimately creating value for your clients.

Of course, with the reward of self-employment comes responsibility. You’re 100% in charge of calculating how much of your income you should be setting aside for taxes, finding decent healthcare insurance  and setting up some sort of retirement plan—all things that are typically managed by an employer in a W-2 job. Just when you feel like you’re getting the hang of it, life happens. You get blindsided by something unexpected, otherwise known as an “Oh, s**t!” This can cause trouble for the even those of us who are relatively well-paid, which is why it’s essential to always have an “Oh, s**t!” fund. Or, for the sake of some of our sensitive readers, it’s a savings cushion also known as a rainy day fund.

You never know when there’s going to be a family emergency, or an injury that keeps you from working, or a dry spell of not being able to find work, or having clients take forever to pay you for your work, or…well, you get the picture. If you don’t have money set aside in a rainy day fund, this can really hit you where it hurts. When you’re self-employed, there’s no recourse through the Department of Labor if a client doesn’t pay and there’s no such thing as drawing on unemployment if you’re suddenly out of work. Which is why you need to save.

Being able to cover rent for a few months can be a lifesaver when working as a full-time freelancer. The last thing you want to do is get caught in a position where you are forced to focus more on making ends meet than you are on delivering the quality of work that your clients expect. The best way to build a buffer of savings is to open a savings account dedicated to your rainy day fund. Even better, consider opening this account at a bank separate from your everyday bank. While it may seem inconvenient to have multiple banks, this is the best way to get your cash out of arm’s reach so you won’t be as tempted to spend it.

The key to having a balanced financial plan is to know exactly how much to allot for specific expenses or savings. Setting aside a lump sum of cash to your rainy day fund whenever you feel like you’re a little ahead adds unnecessary ambiguity to your financial plan. Not to mention you’ll be a lot less likely to actually set enough money aside to solve a problem should one (heaven forbid) arise. The best way to ensure that you’re saving enough is to set aside a small fixed percentage of your income every time you get paid. Furthermore, knowing the exact amount that you need to set aside for your rainy day fund from each paycheck makes managing your finances as a whole a lot more palatable.

If manually separating money for your rainy day fund sounds a little tedious, consider automating the process. With an automated savings account, you no longer have to decide if you want to save. New software makes it easier than ever to automatically pull out a small percentage of cash for your emergency fund every time you get paid so that the money is out of sight and out of mind. Digit is great because the app sees how much you have in your checking account and pulls a small portion out of your account for savings. Painless1099 works a little differently in that it calculates how much you should be saving for taxes before it hits your account based on your tax status and income and then separates a percentage of your income for various savings like your rainy day fund or taxes. This means money you should be saving is separated before you have a chance to spend it, which is a great way to stay out of trouble.

As a quick recap, setting up your rainy day fund can be broken down into three easy steps:

  1. Create a dedicated savings account.
  2. Save a fixed percentage every time you get paid.
  3. Automate the savings process.

Working as a freelancer is one of the most gratifying ways to make a living. You get the opportunity to earn income doing exactly what you want, where you want and how you want. With this flexibility, it’s important to remember that you’re the only person who’s going to make sure that you’re staying on top of things. If you’re financially aware and prepared, you can continue your career for years to come and have peace of mind that you can handle the occasional “Oh, s**t!” moment as you continue doing great work.

Thanks to the folks at Painless 1099 for this awesome guest blog! Painless1099 helps independent contractors save for tax season. Through a smart bank account, Painless1099 automatically withholds taxes based on user information and then deposits what is safe to spend directly to a user’s personal checking account.

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Jonathan Medows, CPA

Jonathan Medows, CPA

Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.

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