How to Manage Your Budget as a Contractor


Having advanced technical knowledge for your job is a given when you are a contractor, but are you up to speed with your finances? One of the most crucial aspects of being a freelance contractor or owning a construction company is understanding your business’s financial health. 

Being a contractor or a freelancer is an extraordinary way to earn an income because of the independence it allows and the ability to earn full-time pay for part-time work. The work is most profitable when you master handling the two most prominent elements of being a contractor: time and money. 

You must always be vigilant with your budget and finances, particularly as a freelancer or business owner, especially with its unique industry complexities. In this guide, we will tackle how you can manage your budget as a contractor and prepare for income variabilities. 

Separate Business and Personal Accounts

Make it easier to manage your finances as a contractor by separating your business account from your personal account. Doing this is crucial, especially if you are a freelancer. Draw a clear distinction between the two so you do not cross the line when using your finances, and you can better track how much you pay yourself. 

Keeping business and personal expenses distinct will also allow you to track your business performance more accurately. Doing this includes opening a separate business bank account, maintaining different online accounts for your business, and using a business credit card for business expenses. 

Consider getting the services of a licensed accountant to ensure your records are perfect, and you can get every business write-off available to you. The benefits of getting an accountant become especially critical when filing taxes each year.

Create a Budget

Budgets are a must for independent contractors, and creating an effective budget helps you manage your cash flow. It allows you to know about your business’s financial position, so you are more flexible, and your plans are realistic.

1. Categorize Your Expenses Diligently

Identify the expense categories your business uses most often and choose the proper classifications depending on your industry. When you categorize your expenses diligently, you avoid audits and penalties and lower your taxes. It also results in better budgets and a healthy cash flow. 

At the beginning of the month, take note of how much you will earn and how much your expenses will be. Then, plot how you will allocate your expected expenses. Then, have a category for surplus income and allocate it accordingly. You may need to invest in new tools or want to expand your business capacity by making another large investment. A budget will help you ensure you are allocating funds back into your business each month. Remember, you are in charge of paying yourself! So don’t forget to take some money from the surplus and transfer it into your personal account. 

At the end of the said month, find out if the expenses you planned were, in fact, what you purchased. Refer to this data to help determine your budget for the next month. It is beneficial for your budget but also in helping you assess which of them can be written off your taxable income when tax time comes.

2. Allocate Money for Taxes 

Putting aside money for taxes is vital since you may need to pay estimated taxes quarterly. Expect to put aside 20% to 30% of your taxable yearly income to cover tax payments. 

In the US, independent contractors must pay federal, state, and local income tax and a self-employment tax (or Social Security and Medicare taxes). The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). 

If your income exceeds the IRS threshold, you may also be subject to an additional Medicare tax of 0.9%, depending on your filing status.

3. Track All Your Expenses

Understanding your costs is essential for informed business decisions. To do that, you must track all your expenses. Maintaining good records is crucial when preparing your financial statements and tax returns.  

Monitor and keep track of your business expense information and receipts. Maintain a physical folder to file and record paper receipts. Label them to help categorize them in your books later on. Scan, digitize, and store them in a dedicated folder on your computer. 

Recording all costs and business expenses carefully and filing them accordingly will help you calculate your estimated taxes. It allows you to see your income and expenses more clearly, too. 

Create Reports Using an Accounting Tool like QuickBooks

Tracking expenses using software helps you schedule them into the correct monthly budget. Many contractors use accounting software like QuickBooks to manage and track costs and monitor financial health. 

For example, QuickBooks will help you to manage payroll and inventory, invoice customers, pay bills, and produce reports. It is also helpful in scheduling infrequent expenses and quarterly tax payments. 

Any quality accounting software will allow you to automate your business records and track every expense through accurate recordkeeping. The goal is to help you simplify the process of monitoring and organizing business expenses. 

Take Advantage of Tax Breaks

Independent contractors can reduce tax bills by claiming write-offs on their self-employment income. Save receipts and deduct all business-related costs that you pay throughout the year. 

These include home office deductions, cell phone bills, and business insurance. Even costs such as small equipment and supplies, business use of your vehicle, business travel, training, and classes, etc., can be written off. 

You can also lower your taxes by taking advantage of a solo 401(k), an individual retirement account (IRA), or a simplified employee pension (SEP) IRA. Likewise, you can deduct the premiums or contributions of your health insurance policy or health savings account (HSA).

Set Aside a Contingency Fund

A contingency fund is critical for remaining prepared for any unforeseen events or emergencies a business can encounter, such as when equipment breaks down, needs replacing, or natural disasters strike. 

Start by identifying the risks in your business that have a greater likelihood of happening and are high in severity. Allocate 10% to 15% of your total budget for these contingencies. 

Additional financing will inevitably be required when plans change – your job is ensuring business operations are affected as little as possible. 


As a contractor, you enjoy the numerous benefits that accompany your autonomy. But you must keep track of your finances and know your budget, including unexpected expenses and taxes.

With the help of these methods, managing your money is more straightforward, and you become more effective as an independent contractor in growing and expanding your business. 

Knowing how to manage your budget will go a long way to preserving your peace of mind and maintaining your momentum as you grow in the contracting field. 

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Dr. Enoch Omololu

Dr. Enoch Omololu is the Founder of the popular Canadian finance website, Savvy New Canadians. Dr. Omololu is both a personal finance expert and a trained veterinarian. He holds a master’s degree in finance and investment management from the University of Aberdeen Business School and has completed several courses and certificates in finance, including the Canadian Securities Course. Over 15 million readers have learned about all things personal finance through his website. 

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