Budgeting with Irregular Income: 10 Tips for 1099 Contractors

Cassidy Horton is a finance writer who specializes in banking. She holds an MBA and a bachelor's in public relations from Georgia Southern University and has worked with top finance brands like Forbes Advisor, NerdWallet, and Consumer Affairs. Cassidy first became interested in personal finance after paying off $18,000 in debt within 10 months of graduating college. She later went on to triple her salary in two years by ditching her 8-to-5 to write for a living.

Over the past few years as a full-time freelancer, Cassidy has experienced the highs and lows of budgeting with an irregular income. Today, Cassidy is the founder of Money Hungry Freelancers, a platform dedicated to helping other freelancers build a strong financial foundation. We invited her to share 10 tips for how to manage an irregular income as a freelancer. Take it away, Cassidy!

When you work for yourself as a 1099 contractor, budgeting with irregular income can feel like a rollercoaster you can’t escape. Unlike traditional employees with a steady paycheck, your monthly earnings can fluctuate, making it difficult to plan and stick to a budget. But it’s not impossible.

10 Tips for Managing Irregular Income as a 1099 Contractor

Read on to discover practical ways to budget with irregular income as a 1099 contractor, freelancer, or self-employed person. 

1. Separate Your Bank Accounts

When you’re self-employed, having a separate business bank account is key to managing irregular income. Here’s why. 

• Keeping your personal and business finances separate helps you stay organized. 

• It allows you to track your business income and expenses more easily, making it simpler to calculate profits, file taxes, and create financial reports.

• Keeping your personal and business finances separate can protect you legally if you get sued or face legal trouble.

2. Determine Your Average Income

Knowing your average income can help you decide how much to set aside for business expenses and goals and how much to give yourself as a paycheck. 

To calculate your average income, add up your revenue for the past 12 months and divide it by 12. For example, if your business earned $60,000 in the past 12 months, your average monthly income would be $5,000. 

If you want to play it safe, you can use your lowest earning month as a baseline rather than your average earnings. 

3. Track Your Expenses

Now that you have an estimate of how much your business earns, it’s time to track your expenses. Because you’re self-employed, you’ll have two types of expenses to look at:

• Reviewing your business expenses helps you determine your profit, which is the amount left over after paying for office supplies, equipment, advertising, travel, and other services. 

• Reviewing your personal expenses helps you calculate the amount you need to bring home to cover your living expenses, pay off debt, and fund your big life goals. 

Going back to our previous example, say your business earns around $5,000 a month. After tracking your expenses, you learn that your business has about $3,500 left over each month after bills and taxes. You also know you need about $3,000 to cover your living expenses. This means you have enough to cover your business and personal spending, with some money left over. 

You don’t have to track your spending forever—just long enough to get familiar with your spending habits. If your income falls short of covering all expenses, look for ways to reduce spending and increase income.

4. Pay Yourself a Steady Paycheck

The best way to budget with irregular income is to pay yourself a steady paycheck each month. If your business earns more one month, move the extra income into a “cash cushion” fund and pull from it during slower seasons. This is one of the biggest secrets to smoothing out the rollercoaster ride that comes with irregular income.

5. Create a Monthly Budget With Irregular Income

By now, you may have noticed a common theme. Being an independent contractor means two sets of everything — bank accounts, expenses, and now budgets. 

Think of a budget as a roadmap for how you’ll spend your money. Once you have a baseline for your income and expenses, use a budget to set aside money for those things. You can create a budget using a pencil, a spreadsheet, or an app like You Need a Budget.

Business Budget

Your business budget can be as simple or complex as you want. At the very least, consider adding these essential categories: 

• Your monthly “paycheck” 

• Quarterly estimated taxes

• Regular monthly bills

• One-off bills and larger expenses

• Cash cushion or emergency fund

Personal Budget

Budgeting for personal expenses becomes much easier when you pay yourself a steady paycheck. While business might experience irregular income, you have a steady paycheck to rely on in your personal life. It takes the pressure off, helping you sleep better at night.

There are many different methods you could use for budgeting your personal money. One popular method is the 50/30/20 budgeting rule. It states that:

• 50% of your income should go toward needs (fixed expenses like rent and utilities)

• 30% should go toward wants (discretionary expenses like vacations and entertainment)

• 20% should go toward savings and paying off debt

These are just rough percentages. You can adjust them up or down depending on your goals. The key is to be mindful of your spending and leave enough extra money to reach your goals. 

6. Diversify Income Streams

Diversifying your income is another great way to budget with irregular income. It can help you weather financial storms and provide stability in uncertain times. 

Here are three ideas for adding a new income stream:

• Find new clients: Reach out to your existing network or use social media to find new customers. Offer a referral program to incentivize existing customers to refer new ones.

• Grow your business online: What services would complement your current offerings? If you’re a successful real estate agent, you could create an online course that helps other people break into the industry. 

• Add affiliate marketing to your business: Affiliate marketing is a great way to add another revenue stream to your business. It’s also semi-passive. For example, if you’re a beauty professional, you could set up affiliate marketing and earn a commission by promoting your favorite products online. 

7. Build an Emergency Fund

Every person on this planet needs an emergency fund to protect them from the unknown. But this safety net becomes even more important when you have irregular income. 

For your personal finances, your goal should be to save enough money to cover three to six months' worth of these expenses. Not only does this buffer provide financial security, it also allows you to handle unexpected situations without adding debt or stress to your life.

For your business finances, this might look like setting aside more money during your busy season to help you get through the slower months. 

8. Plan for Taxes

1099 contractors are responsible for filing and paying their own taxes. This is where the quarterly estimated tax payments come in. Put these important tax deadlines on your calendar, but remember, the deadline is the next business day if these dates fall on a weekend or holiday, as they do in the 2024 calendar year:

• Quarter one payments: Due April 15

• Quarter two payments: Due June 15

• Quarter three payments: Due Sept. 15

• Quarter four payments: Due January 15 (January 16, 2024)

You should receive a 1099-NEC form from clients who paid you at least $600 for the year. This form helps the IRS track your earnings and calculate your taxes.

Likewise, if you hire a 1099 contractor and pay them at least $600, you’ll be required to send them a 1099-NEC form. 

Some experts suggest setting aside 25% to 30% of your taxable income for taxes. You'll be responsible for both income tax and self-employment taxes, which include Social Security and Medicare contributions. To estimate these payments, use the IRS Form 1040-ES.

9. Evaluate your Pricing Structure

The beautiful thing about working for yourself is that you’re the boss. This means you can give yourself a pay raise simply by charging more or strategizing ways to work smarter, not harder. 

Ask yourself:

• Are my prices competitive in the market?

• Do they cover my living expenses?

• Am I saving some cash for emergencies?

• Do I feel I’m underpaid, or am I excited about the rates I charge?

• How can I streamline my services to work more efficiently? 

• Can I offer packages instead of hourly rates?

Answering these questions will help you think of different ways to earn more money without working more hours.

10. Protect Yourself With Contracts

The last tip for budgeting with irregular income is to always, always protect yourself with contracts. 

Contracts outline the terms and conditions of a job, including payment, deadlines, and expectations. Having a contract in place ensures you're paid fairly and on time for your work.

When creating or signing a contract, read it carefully and ask questions about anything you don't understand. Make sure the contract includes:

• A clear description of the work to be done

• The payment amount and schedule

• Any deadlines or milestones

• Any expenses that will be reimbursed

• Any intellectual property rights

• Termination clauses

These components will help you avoid misunderstandings and protect yourself from non-payment or other issues.

Have you Found a way to budget with an irregular income?

Irregular income is difficult to budget for because it’s unpredictable. But with Found, you can streamline your business finances from the get-go. 

Found is an all-in-one banking platform for freelancers and self-employed businesses. It has everything you need to manage your business finances, including tools to help you automatically save for taxes, send invoices, track deductions, and more. Try Found out today—it’s free to sign up. 

Found is a financial technology company, and not a bank. Banking services are provided by Piermont Bank, member FDIC. This information is intended to provide, and should not be relied on, for tax advice.