10 Self-Employed Money Mistakes That Will Get You Burned (2024)

You know what’s not fair?

That as self-employed people we never got a chance to learn about money, yet we are constantly expected to do everything perfectly. So we do our best. We go online and research all the things, Frankenstein a system together, and then feel really bad when things don’t work out.

That’s not fair my sweet care bears!

Because most of the money mistakes that self-employed folks make are super common. And these money mistakes aren’t happening because we suck at money- they’re happening because no one ever told us what to do.

And what’s even more unfair is that some of these money mistakes can really burn us in our business. Which is why I wrote this post.

You see, I’m fed up with this myth that self-employed people should never make a money mistake.

In this myth, every self-employed rockstar was magically bestowed ALL the financial knowledge by Franz the magical narwhal who lives in the self-employment sea. And every time we have a question, Franz appears in a burst of rainbow confetti and candy to answer all our money questions.

#Nothappening.

So, I’m stepping in for Franz and sharing with your the top 10 money mistakes to avoid in your business:

Mixing personal and business expenses

There’s an obvious way this happens, and then there is a not so obvious way.

Let’s start with the obvious- having one bank and credit card account for your whole life. This is, for lack of a better word, wrong. Look, I know that minimalism is a thing these days but one thing you CANNOT be minimalistic about in your finances are your bank accounts.

If you are self-employed you MUST open separate accounts for your business. Notice how I said accounts, because it’s not just checking accounts we’re talking about. It’s any account you use financially within your business- which includes savings and credit card accounts.

The less obvious way this happens is by having personal and business purchases mixed into one transaction. Maybe you already have a business checking account that you use for purchases. Then you go to Costco to get ink and, whaddayaknow, you’re out of eggs- so you throw that in too. STOP. Get one of those little divider thingies and separate those purchases.

I know it takes more time, and everyone in line at Costco hates you for holding up the show, but here’s a question- would you rather have strangers at Costco mad at you or the IRS?

I wrote a whole post on how separating your business and personal expenses saves you money, but the most important takeaway is this: the IRS expects you to separate your business and personal expenses and accounts. And you SO do not want to be in the middle of a tax discrepancy and dealing with mixed-use accounts.

Quick Fix: Open a separate checking, savings, and credit card (optional) account for your business. Use it for ALL your business purchases. Even when it’s inconvenient.

One thing you CANNOT be minimalistic about are your bank accounts- open a separate business accountClick To Tweet

Not breaking down your income streams

In my 8 years as a professional bookkeeper, I’ve never met a business that couldn’t break down their income streams. Yet, I meet businesses all the time who just call their income “Sales” or “Services”. Don’t do this!

First of all, it’s a disservice to all the hard work you’ve put into doing your bookkeeping. Why bother tracking everything if you can’t even glean some helpful information from it?

Secondly, when you break down your income streams into more than just one catch-all category you will learn valuable information about your business. It’s like being able to ask Magic 8 Ball about your business with the benefit of knowing the answer is actually correct.

What can you learn about your business from breaking down your income streams?

Not tracking your accounts receivables (what people owe you)

Let’s play a game of would you rather. Would you rather:

A) Have money hidden all over your house to never be found again because you forgot where you put it

B) Have money in one safe place in your house, where you know exactly where it is and can access it at any time

Having a proper invoicing and payment tracking system is like Option B. It enables to track everyone who owes you money and how much. It’s like keeping a spotlight on what you have coming in with a bulb that never burns out.

Yet, so many self-employed people neglect to track their client payments and, instead, send their invoice, cross their fingers and hope they’re going to get paid. The result- payments get forgotten about until it’s too late and money gets lost.

A proper accounts receivable system (which is a fancy way of saying a system that tracks who owes you money) will help you get paid on all your invoices faster and with less effort.

Quick fix: Read this article I wrote on how to set up a killer invoicing system. Then make a simple tracking sheet on a piece of paper. Every time you send an invoice, write it down on the paper. When you get paid, cross it out. Every week, check for unpaid invoices and send out reminders.

Not having a business budget

A business budget is the first step to really understanding your cash flow and how money moves in and out of your business. The process of creating a business budget will force you to take a look at your earning and spending patterns, set financial goals, and then hold yourself accountable to staying on track.

Do you remember in Charlotte’s Web and when the rat, Templeton, goes to the county fair and gorges on trash while singing “A Fair is a Veritable Smorgasbord-Orgasbord”? Well, that’s a business without a budget- a smorgasbord of spending that, when left, unchecked, can result in a very bad stomach ache.

People seem to think that making a personal budget is way easier than making a business budget- which is weird because the opposite is actually true. Business budgets are far easier to make because most businesses don’t have a lot of variable expenses. Businesses tend to operate using the same tools month to month, which means it’s easier to figure out what you’re spending your money on and when.

If the thought of making a budget is so not your jam, try to think of budgeting as goal setting. All you are doing when you make a budget is setting your financial goals for the month or the year and then checking in on a regular basis to see if you’ve reached the goal.

Quick fix: Make a basic business budget by going through 1 month of your business statements and dropping every single recurring expense into a spreadsheet. Then, calculate your variable expenses (the expenses that change month to month) and add those to your spreadsheet too. Finally, add in your income based on your average monthly income. Check out this post for a step by step guide to making a business budget.

Missing deductions because you don’t understand them

Every time I do a new business consult the person walks away with extra cash in their pocket. Okay, well not literally, but one thing that always happens is the person discovers a deduction they didn’t know they could take, which saves them major dollars.

Every single deduction you take saves you money at tax time- which is why it’s crucial you fully understand your deductions.

Using credit cards to supplement cash flow

I’m not anti-credit card use. Personally, I use a credit card in my own business when I’m waiting for payments for large projects to come in. Being self-employed means that sometimes our cash flow gets stuck and I think credit cards are a terrific tool for those times.

Credit cards are NOT a supplement for cash flow, though. If you don’t know if the money is coming in, don’t spend it. Even if you have a credit card.

There’s an important point in here about knowing what’s coming in. This isn’t a projection or a hope- this is the time you have billed for and now are waiting for payment for a customer who has paid you before.

When I use my credit card while I wait for a payment, I only spend what I KNOW I will be receiving (and don’t need for my personal finances). That means, as soon as I get to 70% of what’s coming in, I stop spending. Why 70%? Because 30% of what comes in needs to be allocated to taxes. As soon as my payment comes in, I pay my credit card (and often I pre-schedule the payment so I don’t use that money for anything else).

Where people get burned is that they believe they will get work without actually securing or billing for it. Then they spend spend spend on their credit card and are surprised when they cannot pay their bill in full.

Often, people neglect to consider what else they will need that payment for, like their personal finances or recurring business expenses. When the money comes in, they are forced to allocate it elsewhere without taking care of their credit card bill.

Quick fix: If you are someone who naturally overspends on your credit card- cancel it now. Seriously, you will be so much happier without debt hanging over your head. If you can control your credit card spending, only spend money on your credit card if you are SURE you can pay it off.

If you naturally overspend on your credit card- cancel it now. You'll be much happier without the debtClick To Tweet

Not saving monthly for taxes

I’m going to go ahead and say what we’re all thinking- self-employment taxes suck and it’s a bummer to have to put that much money aside for them. It’s true. Now that we’re all on the same page about that, here’s the thing- you MUST save for your self-employment taxes every month.

Why? Because I’ve seen way too many small business owners get burned at tax time with giant tax bills.

When you’re self-employed your taxes are expensive because you are paying for everything yourself- that include social security, Medicare, your income tax AND the taxes that a regular employer pays when they run payroll. Unlike a traditional employee, who shares a portion of their taxes with their employer and pays their taxes through small deductions from their paycheck, self-employed people get their tax bill all at once.

And unless your business is operating at a loss, or you have a lot of personal credits, it’s usually a whopper.

Saving for your taxes monthly, and paying your quarterly estimated taxes, makes the whopper tax bill less horrible AND less surprising. You are essentially recreating the process of a traditional employee paycheck, where money is automatically set aside for taxes. The trick to recreating this process is to actually set the money aside and NOT touch it.

I repeat- the money you set aside for taxes should not be spent under any circ*mstance. Consider it in a holding cell until it’s time to play your quarterly and annual tax bill.

Quick fix: If you have a CPA, send them a quick email and ask what percentage you should be saving for your taxes. They will be able to give you a number based on your business and personal deductions. If you don’t have a CPA start by saving 25-30% of your net income. At the end of each month, calculate your net income and transfer that amount to a dedicated savings account just for taxes.

Drawing money out whenever it comes in

The process looks like this:

You get paid for your rad product or service (daily, every other day, weekly, whatever)

 You immediately transfer that entire payment to your personal account

 You bask in the glory of your new found dollars and spend spend spend on all the things

 You wonder where all your money has gone and why you can’t afford to pay your bills or save for your taxes

Drawing money out whenever it comes in is one of the most hurtful things you can do for your business and personal finances.

On the business end, it doesn’t leave your business any money for its own expenses, to reinvest in its own growth, or to save for taxes. Instead, you leave your business in a position of financial stagnation. On the personal end, you have seemingly endless cash flow, which means your personal spending skyrockets and your savings plummets.

Intentionality is the key to paying yourself as an owner of your business. Your owner pay should be based on your goals for both your business and personal finances and take into account your fixed expenses and tax responsibilities.

Quick fix: Stop drawing money out of your account whenever you get paid. Read this article on how to pay yourself and start developing an owner pay schedule. It doesn’t have to be perfect- you can adjust it as you learn more about your financial needs, but getting started is the first step.

Intentionality is the key to paying yourself as an owner of your business. Click To Tweet

Waiting until the end of year to start your record keeping

This one is a real bummer for everyone involved because when you do finally get around to your record keeping it’s a giant mess of receipts, crumpled up bank statements, and hours of playing the “what did I buy that for” game.

Here’s a hint- don’t wait until the end of the year (or for some people April) to start your business record keeping. You will undoubtedly be rushing, or so over it from having so much to do, that you will miss valuable deductions. You’ll wind up paying more in taxes and not getting an accurate sense of your financial picture.

One thing that holds people back from starting their record keeping is wanting to find the perfect accounting system. Most people want to start immediately in a digital accounting system and wait to get going until they have the time to learn the software.

Quick fix: Just start. Don’t wait for perfection or the most high tech option. Start with what is most simple and user-friendly. If you’re feeling really stuck about how to track your income and expenses, my FREE email course has two lessons dedicated to income and expense tracking and includes spreadsheets and templates for you to use.

Not setting financial goals and milestones

Your business, like many other parts of your life, benefit from goal setting. Often we set goals like, “I want to have 5,000 email subscribers in the next 6 months” or “I want to write 2 blog posts a week.”

But what about your financial goals for your business? How much do you want to earn in the next quarter? How about the next year? The next 3 years?

How will you measure your financial success? Is it in dollars? Growth percentage? Products sold?

What milestones signify that you are on the right track? How will you know that you’ve reached your goals?

Okay, so I know there are a lot of questions, but often finances get left out of goal setting or are vague like, “I want to make more money” or “I want to get better at finances.” When setting financial goals, it’s important to be specific about how much and how long.

Specific financial goals in your business help keep your business evolving. Remember how I talked about financial stagnation earlier? Setting financial goals and milestones hold you accountable to busting out of that stagnation.

Quick fix: Start by answering the list of questions above. After you’ve answered those questions, make a list of your financial goals and milestones and put them up in your office. Check in with your goals and milestones at least once a week.