Many contractors and freelancers treat their income like a teenager with their first paycheck. Spend what comes in, hope that there’s going to be enough left for taxes, and cross their fingers with hope that everything will fall in place.

Spoiler alert: it doesn’t work like that.

Aside from the fact that this approach is bad, you can't also build a sustainable contractor or freelance career by relying on chance.

And if you look at the earnings of self-employed individuals, be it contractors or freelancers, you’ll realize that you don’t have that much money to be careless with your finances.  

According Zippia, the average national salary of a self-employed person in the U.S. is $84,305 a year or about $40 per hour.

Truth is, managing your own payroll as a self-employed professional can feel like navigating uncharted waters. However, it’s a necessity.

Whether you're a seasoned freelancer or just starting your remote contracting journey, understanding how to handle your income effectively is important if you want to be in the game for long.

Understanding Self-Employed Payroll Basics as a Contractor or Freelancer

Truth is, being self-employed means you're running a business, not funding an expensive hobby. Yet too many of us treat our income badly.

As a self-employed individual, you’re different from traditional employees in terms of taxes, income, and payroll. Here, you're both the employer and employee.

This means you're responsible for managing all aspects of your income. These include invoicing clients, setting aside taxes, filling taxes, and handling payroll and expenses.

Unlike traditional employees who receive regular paychecks with taxes already withheld, you'll need to create a systematic approach to handling your earnings.

Setting Up Your Payment Structure as a Contractor or Freelancer

As a contractor or freelancer, managing your finances effectively is crucial for long-term success. One essential aspect of financial management is setting up a reliable payment structure.

Without a clear and consistent system in place, you may struggle to keep track of payments, invoices, and taxes. Here’s how to go by it:

1. Separate Business and Personal Finances

Create dedicated business checking and savings accounts. This separation goes beyond being professional —it's also essential in helping you run accurate bookkeeping and tax preparations. Consider opening multiple accounts for different purposes:

·      Operating account for day-to-day expenses

·      Tax savings account

·      Business emergency fund

·      Personal salary account

2. Pay yourself a regular "Salary"

Here's where some contractors get it twisted: Thinking irregular income means irregular pay. Wrong.

Even though you're self-employed, paying yourself a regular "salary" helps create financial stability. Some have recommended that the secret is to pay yourself a regular salary based on your lowest-earning month from the past year.

Thing is, this might look like banking money during good months. But it actually helps streamline your income and cushions you in times where earnings are low.

Here’s how you can calculate your base salary:

·      Review your average monthly income from the past6-12 months

·      Subtract estimated taxes and business expenses

·      Sett aside a percentage for savings and investments

·      Determine a realistic monthly amount you can consistently pay yourself

3. Tax Considerations and Planning

One of the biggest challenges for self-employed professionals is managing taxes. Here's how to stay on top of your tax obligations:

1.      Quarterly Estimated Taxes: The IRS expects you to pay taxes quarterly if you'll owe $1,000 or more annually. Set aside approximately 25-30% of your income for taxes, including:

2.      Federal income tax: Self-employment tax (15.3%covering both employer and employee portions of Social Security and Medicare)

3.      State and local taxes where applicable

4. Create a Tax Savings Strategy

As a contractor or freelancer, navigating the complexities of taxation can be overwhelming. With multiple tax obligations and deductions to keep track of, it's easy to miss out on valuable tax savings opportunities. A well-planned tax savings strategy can help minimize your tax liability, maximize your earnings, and reduce financial stress:

·      Automatically transfer a percentage of each payment received into your tax savings account

·      Review and adjust your tax savings rate quarterly based on your income changes

·      Keep detailed records of all business expenses for tax deductions

Essential Resources for Contractor or Freelance Payroll

Effective payroll management requires more than just manual calculations and spreadsheets. To streamline your payroll processes, reduceerrors, and increase efficiency, you need the right tools and software.

1. Accounting Software

Choose a robust accounting platform that can:

·      Track income and expenses

·      Generate professional invoices

·      Monitor payment status

·      Create financial reports

·      Integrate with your bank accounts

2. Time-Tracking Tools

Even if you don't bill hourly, tracking your time helps:

·      Understand project profitability

·      Improve pricing strategies

·      Maintain productivity

·      Document work for clients

Best Practices for Sustainable Income Management

Managing your income effectively as a contractor or freelancer is crucial for long-term financial stability and success. Without a steady stream of income, it's challenging to plan for the future, cover expenses, and achieve your financial goals. Here’s what we recommend doing:

1. Build an Emergency Fund

Set aside 3-6 months of business expenses and personal salary in an easily accessible emergency fund. This buffer helps you:

·      Handle irregular income periods

·      Navigate client payment delays

·      Manage unexpected expenses

·      Maintain stable personal income

2. Plan for Growth and Benefits

As your business grows, so do your financial needs and goals. Planning for growth and benefits enables you to proactively manage your finances, capitalize on new opportunities, and reward yourself for your hard work. Don't forget to plan for:

·      Retirement savings (SEP IRA, Solo 401(k), or traditional IRA)

·      Health insurance premiums

·      Professional development

·      Vacation time and sick days

Tools/Software to Make You’re your Contracting and Freelancing Easier

Unless you love spreadsheets (we’re not judging you though),you'll want some tools to help manage all this. Here are some popular options that we’ll recommend:

Basic Setup: like bookkeeping, accounting, basic salary calculations

Let's start with the basics. To get your payroll management off the ground, you'll need to set up a few essential things like bookkeeping, accounting, and salary calculations. Here are accounting tools that will help:

1. Wave

A free accounting software that's perfect for beginners. It handles invoicing, receipt scanning, and basic accounting. While it's not as feature-rich as paid options, it's more than enough for most freelancers starting out.

2. QuickBooks Self-Employed

The gold standard for self-employed accounting. It's pricier than Wave but offers fantastic features like automatic mileage tracking, receipt capture, and direct integration with TurboTax. Great for tax time!

3. FreshBooks

Known for its super user-friendly interface and excellent time-tracking features. It's especially popular among service-based businesses and creative professionals. The invoicing features are top-notch, and clients love their payment portal.

4. Bonsai

A relatively newer player but gaining popularity fast. It's built specifically for freelancers and includes contracts, proposals, and time tracking alongside standard accounting features. Their automated tax estimates feature is a lifesaver during tax season.

Platforms for Receiving Payments and Handling Payroll for a Remote Contractor or Freelancer

Getting paid as a remote contractor or freelancer can be a bit tricky. Here are the tools to navigate receiving payments from clients and handling your own payroll.

1. Arbonum

We highly recommend Arbnum for managing payments and payroll as a remote contractor or freelancer. It's an all-in-one platform that makes it easy to receive payments, handle taxes, and stay organized. With its user-friendly interface and top-notch support, Arbonum is a game-changer for freelancers and businesses alike

2. Wise

The best for international payments, hands down. Their fees are transparent and usually much lower than bank transfers. Plus, you can hold multiple currencies and get local bank details in several countries.

3. Revolut

Perfect for frequent travelers. Offers great exchange rates, virtual cards for online purchases, and the ability to hold and exchange multiple currencies instantly. Their premium features include travel insurance too.

4. PayPal

Yes, the fees can be painful (around 3-4% for most transactions), but it's still the most widely accepted payment platform globally. Many clients prefer it, and the integration with most accounting software is seamless.

Final Thoughts

Managing your own payroll as a self-employed professional requires dedication and organization. However, it doesn't have to be overwhelming.

By implementing these systems and regularly reviewing your financial health, you can create a sustainable and profitable self-employed career.

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