Navigating your pay stub as a freelancer or 1099 contractor can feel daunting especially when you’re responsible for paying your own taxes or navigating fluctuations in pay.Today, I discuss paycheck management strategies for people who work as freelancers or 1099 contractors as a primary source of income.
From tax-saving strategies to creating a PTO system for yourself, I guide you through essential steps to manage your money effectively as a 1099 contractor. Whether you are new to freelancing or a seasoned contractor, this episode offers valuable insights to optimize your paychecks, prepare for the future, and hit your money goals.
Press play to learn how to navigate the complexities of earning a 1099 income and set yourself up for financial success!
Stay tuned for insights on these topics:
- [03:00] System for saving for taxes
- [04:31] Accounting for expenses
- [05:58] Creating a PTO savings account
- [07:15] Giving yourself a paycheck
- [08:42] Planning for retirement
- [10:03] Consider forming an S-corporation
- [14:30] What to do when your 1099 is a side hustle
Tune into this episode of Money Files to learn how to manage your paycheck as a 1099 contractor.
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Transcript for “Paycheck Series: How to Manage Your Paycheck as a 1099 Contractor”
Intro: Hi and welcome to Money Files. I’m Keina Newell from Wealth Over Now. I work every day with professional women and solopreneurs to help them get out of financial overwhelm and shame so they can experience more flexibility and ease with their finances. Are you ready to gain confidence and learn to manage your finances intentionally? Tune in and grab financial tips that will help you master the way you think about and manage your finances.
Keina: Hello and welcome back to another episode of Money Files. So I am doing a new series about paychecks. And I first want to tackle and dive into freelance income or for those of you who are 1099 contractors and you’re not necessarily like myself, like you aren’t necessarily a business owner, but you get paid from your place of employment as a 1099 contractor. I want to talk about this because there are different ways that 1099 income can look. Sometimes you may see that like taxes are already accounted for, sometimes taxes aren’t accounted for and I want to help you manage your money better, especially we just came out of tax season and I think that is the place where you notice how you earn money when you are a freelancer and you may owe a lot of taxes and maybe you don’t have the money saved for taxes or you are trying to figure out how is it that they are charging me like $15,000 out the gate because I am self-employed.
And so I want to help you develop better systems for your money, but also I want to help you think about your money in a different way. So tax season feels easier so you can start to prepare for what life looks like when you’re 80 years old and just be able to feel really confident about how you are currently earning. So I want to specifically talk to the freelancers where your 1099 income is your main income. So I have a client right now who is a doctor and she does locums and whenever she does locums, she gets additional income that’s not taxed and we are managing her money in a very specific way so that way she’s like saving for taxes, etcetera. Her 1099 income isn’t her main income, so we are being strategic with it. But I want to specifically focus on those of you where your 1099 income is your main income.
Because she has a W2 job and she also has her 1099 income. It’s a different lived experience when it comes to tax season, but it doesn’t make it more or less valuable. I just want to give you the lens in which I’m talking about this through. So first, if you are paid with like a 1099 and there are no taxes taken outta your income, the very first thing I want you to do and always have is I need you to have a system for your taxes. And when I talk about a system for your taxes, I want to make sure that you know how to save for taxes depending on what your expenses are or what you can claim with your expenses. And I would go back and I don’t know how you filed taxes this year, but because we’re not that far removed from April 15, it’s a great opportunity for you to look at when I filed my taxes and my accountant or QuickBooks asked me to report on expenses, what expenses did I report, like were there professional development that I paid for and claim?
Could I get a home office deduction? But really thinking about like what are those expenses? And that’s going to help you also think about what you should save for taxes. But first things first is to be able to save for taxes. So sometimes that looks like basically saving 50% of what you earn as a contractor because, I’ll talk a little bit more about that later. But I would create a system where I’m basically saving 40 to 50% of what I make and I’m setting it aside as like tax money. So if I bring in $10,000 a month as a contractor, I would make sure that I put $5,000 aside just for taxes. And that right there is just making sure that you have a safety net so that when tax time comes that you are not scrambling to find thousands of dollars to be able to pay for taxes.
Step two or the next thing that I want to make sure you have is like actually account for your expenses. So this is where it’d be really great to talk to your tax professional and get really clear on what are the tax advantages and opportunities that you can take to provide you somewhat of a tax shelter. And we want to include those in how we think about like your expenses for the year. So if you’re having to pay for healthcare, you may include that, if you are paying for travel, you may include that if you’re paying for home office supplies or anything like that, that you can actually write off, we want to be able to capture those things or maybe you have licensure because what you do may require a specific skillset and maybe you’re paying that on your own or you’re taking professional development opportunities, whatever that looks like but getting really clear on what your expenses are.
And the reason being is because we want to know, like say for instance your expenses are like $3,000 a year, well we wouldn’t want to be able to set aside that $3,000 for the year so that you actually have that money for those expenses and you’re also going to have a really great record for your accountant to show them, here are my expenses to share and here’s how I want to make sure that I’m itemizing at come tax time. The third piece is also, right now I’m just talking about different ways that we need to be able to think about how you’re saving money that comes from your contractor income. The next way we want to be able to save money is create like a PTO system, A PTO account. And as a contractor, depending on how you earn, so you may be hourly, you may just have one lump sum that’s paid out to you and you can just manage the money however you do.
You want to make sure you have a PTO system. And when I say a PTO system, I’m really thinking about those times when you’re like, hey, I want to be able to take off work for a week. I want to be able to take off work for two weeks, or I just need a sick day or a wellness day. I don’t want you to miss income, I want you to have a consistent experience. And so just having a savings account that is just your PTO account. PTO stands for paid time off. And knowing that I can dip into this account when I need to take time off. So you are becoming your own reserves to make sure that you are able to have the same lifestyle that you do when you are working the same number of hours. So once again, this could look different if you’re paid in a lump sum for your contracting work, but if you are someone who has shifts and you’re paid hourly, some days you work three days a week, some days you work four days a week, whatever that may look like, you want to make sure that you’re thinking about like how do I create a PTO system for myself.
Next is I want you to give yourself a paycheck. So just because you make $10,000 that month as a contractor doesn’t mean that you want to actually pay yourself that entire $10,000, but Keina why, I made $10,000 and I have bills. You’re right, you do. But what’s going to happen if you’re not thinking thoughtfully is that you’re not going to have money for taxes. You’re not going to have money for your expenses and your business when you need to take off work, you are going to miss that income and those months are going to feel really tight or restrictive. And so in a $10,000 month, you may only be paying yourself $4000. But Keina that’s 40% of what I made. Yes, it is, but as I said, like the first thing I wanted you to have is a tax account. $5,000 should be going into taxes, 500 might be going into expenses and another $500 might be going into that PTO account to make sure that you have money for when you need to actually be able to take off work and provide your own vacation time.
So as a contractor, it’s really important to think about your money not just in the way that it comes in, but what are the things, what are the jobs that I need to be able to give it to make sure that I can have this level of freedom so I can make sure that I always feel hot, like I have a surplus of money and I don’t have drama about the money that I am currently making. The next is I also want to make sure you’re paying your future self. And I should have included this sooner because I think your future self is super, super important. And so when I’m talking about your future self as a 1099 employee, you may not have access to a retirement account. And so this is all very specific to the benefits for the employer that you’re working from or how you found this contract work.
And so it’s really cool to be a contractor and maybe you’re making $200,000 a year or $250,000 a year, but what I want is for you at the end of that 200 K year or $250,000 a year is for you to also know that you contributed to your retirement and you were able to pay your future self. And so you may do that through a vehicle like a Roth IRA, you might set up a regular IRA. I’m like at a loss for words right now or there are some other entities in which you can look into. And this is one of those where you’re going to hear my last thing where you may actually be able to position yourself to actually set up your own solo 401k and we’ll talk a little bit more about that in a moment. So after you have made sure like, okay, I’m saving for taxes, I have made sure to account for expenses, I created my own PTO system, I’m paying myself regularly, I’m making sure that I’m paying my future self.
One of the last things that I would tell you to consider depending on where you are in this contractor journey, is actually talking to your CPA about forming an S-corp. So as a business owner, I have an LLC and I’ve actually transitioned over to an S-corp. I’m not the all-knowing one when it comes to S-Corps, but I’ll share with you my lived experience. So at first I was an LLC and I have a lot of expenses that I feel like a 1099 employee may not have, but my expenses definitely helped offset my income in the beginning. But what I made, the year that I made $200,000 is when I switched over to an S-corp. And the reason I switched over to an S-corp is because it allowed me to not have to pay self-employment tax. Self-Employment tax is I feel like minimum out of the gate, like a 15,000 charge.
And so when you’re able to set up an S-corp, it shelters you from that and you can set up an S-corp, especially like in the position you may be in as a 1099 employee. I want to say, as long as you’re making maybe over $50,000 a year and it’s not just a little side hustle for you, but that’s why I’m saying like this is your main hustle, this is the main way that you make money, you might want to consider talking to your CPA about whether setting up an S-corp makes sense. And some of the things that you need to think about when setting up an S-corp is like, can I afford to pay myself monthly through payroll? Can I also afford to pay my accountant to prepare my taxes? So tax preparation generally is higher. I pay a little under $2,000 to get my personal and my business taxes done.
And that’s an added expense, like my business pays for that expense. And so if you were an S-corp that would be one of the things that your S-corp could be responsible for paying and you would then have an expense that’s about, $200 a month, a little bit under $200 a month, that would decrease your tax liability as well, which would be beneficial for you. So with forming an S-corp, I was also able to switch to a solo 401k to make sure that I’m actually contributing to my retirement. So there are just a lot of other benefits that came with that. So as you are navigating your 1099 contractor income, these are just a few of the things that I want you to be paying attention to and a great place to start asking questions not only of yourself but of other people. So I’ve told you to have a couple of conversations with your CPA as it pertains to your expenses and what can I actually make, like keep track of writing off.
And then also if you’ve been doing this for a while and you have your 1099 tax paperwork and you have your paperwork from the last couple of years, just really sitting down with your CPA and having that conversation about like, does it make sense for me to become an S-corp with what’s the process I actually need to walk through and can you actually file that paperwork for me so that way you’re going to be able to get some tax advantages to that. And then also being able to set up a retirement entity that’s going to make sure that you aren’t only reaping the benefits right now of how much you’re making as a 1099 employee, but also later on when you’re set to retire to make sure that you’re taking care of your future self.
So that is what I would recommend when your 1099 income is like your main hustle. If it’s your side hustle, I still want you, like with my client that does locums, I’m still making sure she’s saving for taxes and actually because she is a doctor, there are some expenses that she’s preparing for to actually put under her 1099 umbrella. And that’s like her professional license. Just different things that she’s paying, like those can be considered business expenses for her. And we’re very clear about, like I said, what she’s saving and then she’s giving herself a set amount or a set percentage that whenever she does make that locums money, she’s able to say like, okay, here’s the money that I can actually give myself. So she’s not doing a job that’s $10,000 and taking that whole $10,000 and paying herself. She’s actually making sure that she’s reserving money for taxes and that she’s reserving money for her expenses. So it doesn’t look like a 10,000 earned in 1099 income and then a $10,000 transferred in 1099 income. But she’s being really strategic and those are the things that we’ve set up for her in my five month coaching partnership.
So similar but different. And if you start thinking about like if you’re in the side hustle phase, if you start thinking about managing your money intentionally, what’s going to happen is that if for some reason that side hustle becomes your main hustle, then you are going to already have the basicness like business systems in place to be able to manage money, a fluctuating income and manage your 1099 contractor income flawlessly. And to not be stressed and to not be thinking about, oh my goodness, where’s my next paycheck coming from? I need to go find some work or however you’re creating that income for yourself. So thank you so much for tuning in this week. I feel like I was saying 1099, like 10 million times, but I think it’s something really, really valuable, especially as I start to go into breaking down how different people are paid.
And you may or may not be in this specific situation right now, but it’s nice to have the information if you decide to go that way and to be thinking about how you want to manage your income. And actually as I’m talking to you out loud right now, if you go back in my podcast like Archive, my client Lourdes, she actually was a 1099 employee when we started working together. And so we really made sure that we had very clear systems for her while we were working together so she didn’t feel like she was just running around like a chicken with her head cut off to manage her income. And she was actually a consultant for an educational firm and that’s how she was making money at the time. And so yeah, her money was all over the place, but if you want to also hear about this system being in place for one of my clients, that would be a great episode for you to tune into. So thank you so much for tuning in and I look forward to chatting with you next week.
Outro: Thank you so much for listening to Money Files. If you’re ready to take the next step to reach your financial goals, head to www.wealthovernow.com/appointment and let’s get started.
