Financial Planning for Independent Contractors

April 16 2023
independent contractor healthcare

Financial Planning Best Practices and Independent Contractor Healthcare



For independent contractors and small business owners, understanding finances takes on added importance. 

When you run your own business, you’re in charge of your finances. The fiscal ball is in your court. You need to drum up business, generate income, manage your money, allocate resources, and pay for expenses. And as anyone who’s ever filled out their own 1099 form knows, you’ll be on the hook for paying more in taxes when you’re self-employed, too. 

Small businesses often don’t have the same deep pockets as larger corporations, so business planning and money management are key. Everything from cash flow management to risk assessment, tax planning to debt management, trend forecasting to task outsourcing can have an impact on the business. 

Margins may often be tighter too, especially during more turbulent economic times.

But managing finances effectively doesn’t have to be too daunting. Here are some tips and strategies for financial planning for independent contractors and small businesses.



A woman managing money on her computer.
Understanding finances is a key to success for independent contractors and small businesses.



Financial Planning Best Practices



Know and nurture your paying customers



Step one: Know the sources of your income. 

Customers and clients are the lifeblood of any business. It’s crucial to know your audience and nurture them too. Of course, you want to attract new customers to your business. But it’s equally crucial to take care of your current customers. The chance of converting an existing customer is 60-70%, versus 5-20% for a new one

To engage your existing customer base try tactics such as:

  • Providing excellent customer service
  • Staying active on social channels
  • Developing an email mailing list
  • Asking for referrals
  • Offering incentives to customers who bring you in new business


Track your income



You know who your customers are. Are you keeping track of how they pay you? 

Whatever the nature of your customer/client engagements, keeping track of your income is an absolute must. It’s just smart. 

How you track your income is really up to you. You have choices. You can use a spreadsheet on your Google drive, a financial tracking app like Mint or Empower, or an old-school ledger. Productivity tools like Monday or Trello can do the trick.

What’s most important? Choose one you know you’ll use. 

Having a separate business account for your earnings is smart too, but don’t rely on your balance as the sole source of truth. 

As freelancers well know, unfortunately you have to chase up payments sometimes. If that’s the case, you have some recourse. Be polite and courteous, but stay diligent in your communications. Send your clients an email reminder, reminding them of your agreement. Follow up with a phone call if you get no response. You might need to contact the finance department, depending on your client. 

Stay flexible as needed, depending on the client’s situation. But don’t shy away from asking for a specific payment date, and applying a late payment fee to the bill. If it’s a recurring client, consider holding off on future work until you get paid for assignments you’ve completed.



Understand your cash flow



Cash flow is especially critical for small businesses and independent contractors. It’s crucial to know about not just your income, but your upcoming expenses. Those bills have to be paid. 

The last thing you want is for a key service to be temporarily suspended or your bank account to take an unexpected hit when a big bill comes due. 

Plan accordingly. You should have a good understanding of both your accounts receivable and accounts payable. Consider scheduling a set time each week to review your books.

Look for ways to keep your expenses as low as possible, while maintaining the value your business provides. Consider joining professional organizations that offer discounted rates on business needs like office supplies, travel, cell phone plans, and business services.



Save on your independent contractor healthcare cost



One of the biggest expenses for any business, large or small, is independent contractor healthcare. In the United States, healthcare costs are astronomical. 

This is the problem that Clearwater Benefits solves. 

Clearwater is a healthcare vendor that offers a wide variety of high-quality, highly affordable healthcare solutions that are tailored to meet customer needs. Clearwater offers better traditional insurance plans, healthshare solutions and supplemental insurance offerings.

With Clearwater, you get access to high-quality healthcare that fits your budget. And most plans aren’t tied to the strict timelines of Open Enrollment: You can sign up through Clearwater all throughout the year.



Create a budget



To effectively manage cash flow, you need to have a budget. This budget should take into account your dependable income and known expenses, but also set aside funds for unexpected costs and emergencies. Build an emergency fund to cover 3-6 months of your operations in case something problematic comes up.

Budget some extra cash savings to allow you to be more opportunistic. When that awesome prospective client asks for an in-person visit out of the blue, you can dip into that savings account and go win their business.

Having a budget will help you avoid overspending too, which can happen even with the best of intentions. Sometimes you have to entertain a key client, upgrade systems, or go all out at a trade show.

Planning a budget for your business takes some work up front, but it helps you better understand your spending patterns. 

Start by listing all your fixed business expenses, like rent, utilities, office supplies, and repayments on business loans. Add in variables like business travel and expenses for client outings. 

Monitor your expenses to see where you may be leaking money unexpectedly on something like gas or printer ink. 

Keep detailed records, and share them with a tax professional to make sure you’re taking advantage of all your potential deductibles.

Factor in your living expenses too, like groceries and car payments, so you know how much you’ll need to earn and you’re not stuck eating ramen at the end of each month. But make sure to keep business and personal finances separate.



Separate business and personal finances



Mixing personal and financial expenses can have some unpleasant unintended consequences. It can be tricky to track your expenses and income accurately, which can cause trouble at tax time. That trip to the trade show in Las Vegas? Sure, it was for business, but you had some fun too. It’s a little easier to clarify this when the trip was paid for on your business credit card. 

To avoid situations like this, keep your personal and business finances separate. This means having a separate bank account for your business and using a separate credit card for business expenses. It also means avoiding using business funds for personal expenses. Just don’t risk it. What gets paid for in Vegas shouldn’t always be expensed when you’re back from Vegas.



Pay yourself a salary



One tactic for splitting the business and personal expenses? Start to pay yourself a salary, like you would get as a company employee. As an independent contractor or small business owner, you may not have a steady paycheck. But by including a regular salary in your business budget, you’ll make sure you have a steady income.

This will help you to manage your personal finances and not forget to factor payroll into your business, even if you’re the only one cashing those checks.

Establishing a salary can help you keep the pulse of your business, too. Your salary should be based on your budget and the amount of money that your business can afford to pay you. If you’re feeling squeezed, adjust accordingly. Spend less, or earn more.

And don’t forget to allocate for taxes!



Plan for taxes



As 1099 workers know, you won’t get a W2 form from your clients. So you’ll need to allocate parts of your income to the inevitable taxes that will come due.

Taxes can be a significant expense for independent contractors and small businesses. Unlike when working for a traditional employer, 1099 employees are responsible for paying self-employment tax, which covers both the employee AND the employer portions of Social Security and Medicare taxes. This takes up 15.3% of your earnings—and is in addition to your standard income tax, which can be around 20% (though it varies). 

As a rule of thumb, independent contractors should expect to pay about 30% of their income on taxes. Set aside money to cover taxes, and make sure you keep good records of your earnings and income in case the IRS comes knocking. If you have any doubts about your taxes, strongly consider hiring an accountant.



Get professional financial help



Managing the finances of a small business or independent contracting venture can be challenging. So there’s no shame at all in seeking professional help when needed.

In fact, it might be the smartest thing to do for your business.

A trusted accountant can help in many ways. Besides helping you to prepare your taxes, accountants can help you prepare your budget, and also also provide advice on financial planning.

Or you might want to consider a dedicated financial planner who can provide advice on personal and professional investments, and help you to create a retirement plan. They can also help you  manage debt, save for the future, plan for a big expense like a down payment for a house, or college education for your kids. 

A financial planner can also help you consider any business expenses you may consider taking on.



Invest in your business



The right investment can help your business and income grow.  A great business investment can take many forms. You might:

  • Buy new equipment or technology
  • Expand to additional locations
  • Spend on advertising or marketing
  • Hire new employees

But you should be mindful when spending to grow your business and consider the potential return on investment. Your financial planner can help here with things like market forecasting (is this the right time to invest?), prioritizing your resources, and making sure that you can afford the investment. 

Debt can be a useful tool for growing a business of any size. But it can be a significant burden, too. Especially during a time of volatile interest rates. It is important to manage debt carefully and avoid taking on too much.

Before taking on debt, consider the impact it will have on your cash flow. Are your debt payments going to constrict your ability to operate as usual? Will the ROI be worth the interest that you’ll pay?

When shopping around for the best small business loans, do your due diligence. 



Create a business plan for the future



What are the short- and long-term goals for your business? How are you going to grow? 

Invest time in creating a business plan. Include in it your growth objectives for your business, your target market and customer profiles, your marketing strategy, and your financial projections. 

Your plan should include an analysis of your competition and how you will differentiate yourself from them.

Finally, it is important to stay up-to-date on changes in your industry and the economy. This can help you to adapt to changes and take advantage of new opportunities. Never get caught flat-footed in your business. The only thing constant is change. 



Save for retirement



Retirement may seem like it’s a long ways away, but it will be here before you know it. In addition to saving for taxes and emergencies, you have to invest for the future. This can include contributing to a retirement account such as an Individual Retirement Account (IRA) or Health Savings Account Plan. These types of savings accounts offer tax benefits today while helping you save for retirement.

As an independent contractor or small business owner, you may not have access to a 401(k) or other retirement plan through your employer.   And you can’t rely on Social Security to cover your golden years, either. 

As a rule of thumb, aim to save at least 10% to 15% of your income for retirement.

As a small business owner or independent contractor, you have enough on your plate already. Taking some time to plan your finances now can go a long way toward setting you up for future success. 

By following these tips and strategies, you can effectively manage your finances and grow your business. Remember that financial planning is an ongoing process, and you should regularly review and adjust your plan as needed to ensure that you are on track to achieve your goals.

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