Insights & News

November 2016
Business Owners

How to Manage Living Self-Employment Income

Many of us have unpredictable or inconsistent incomes. Unfortunately, the bills come whether we have been paid yet or not. If we have not planned carefully, when a big expense occurs we may get caught short. And two other pitfalls may trip us up if we are self-employed. First, there is typically no tax or FICA withholding on self-employment income, so often a portion of the money we have in hand is not technically ours. If we aren’t careful we can get caught shorthanded come tax time and end up owing penalties on top of the tax bill. In addition, those who are self-employed are required to pay both the employer and employee part of FICA (Social Security and Medicare) on our wages and Schedule C (self-employment) income. Typically, employees pay 1.45% of their wages or Schedule C income to Medicare and 6.2% to Social Security on up to $118,500 in income. Self-employed individuals pay double this since they pay both the employer and employee portion.

To begin with, set up three separate bank accounts. The first should be your business account. This is the account into which all your business income should be deposited and from which all your business expenses should be paid. Then set up a personal checking account. This is the account from which all your personal expenses should be paid. Finally, set up a personal savings account. This will be the place to accumulate funds for quarterly taxes and large annual expenses.
To smooth out the monthly finances, estimate your average monthly income by taking last year’s net income (your business income minus your business expenses, your taxes and FICA) and then dividing by 12. Next, figure out your basic personal monthly and annual expenses. Some helpful online tools are listed below to help with this. You can also use applications such as quicken or to track expenses.

Now pay yourself two checks each month from your business income. The first should be enough to cover your basic personal monthly expenses. Deposit this check into your personal checking account. The second check is for income tax, FICA and one twelfth of your estimated annual expenses, and should be deposited in your personal savings account. When it is time to pay estimated taxes or a big bill, the corresponding amount can be transferred to your personal checking to pay the bill. Use the same bank for all three accounts so you can simply transfer the funds electronically each month. Any funds left over in the business account should remain there for the next month when income might be lower. Ideally, any excess built up in this account can be used to establish a reserve that you can eventually invest for retirement or other long-term goals.

As you become more comfortable with your annual income estimates, you can build more discretionary items into your monthly “paycheck” amount and add an additional amount to be invested each month from your business income.

For more resources check out the sites below or for an expense worksheet you can email me at

  • irregular-income-heres-how-to-budget/2/#415028d54fa0.

Lyn Dippel, JD, CFP®, president of FAI Wealth Management, provides financial planning and investment management for transitions such as retirement, career changes, sale of a business, relocation and inheritance.


This article was originally published on HerMind 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FAI Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from FAI Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. FAI Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of FAI Wealth Management's current written disclosure statement discussing our advisory services and fees is available for review upon request.

Sign Up for FAI Insights & News

and get it delivered to your inbox!