The most common money mistake new freelancers make isn't charging too little. It's spending money that belongs to the tax office. Employees have tax taken before they're paid; freelancers get the full amount and settle up later, sometimes months later.
One percentage for every payment
The fix is a habit: every time a client pays, move a fixed percentage into a separate savings account and don't touch it. You only need to work out that percentage once a year.
- Estimate the share of income you spend on deductible business costs.
- Find your average income tax rate for the year, not your top bracket.
- Add self-employment or social contributions, such as US self-employment tax or UK National Insurance.
- Set-aside share = (1 − expenses share) × (income tax rate + contribution rate).
A worked example
A freelancer spends about 15% of income on business costs, expects an average income tax rate of 20%, and pays self-employment contributions of about 14.1% of profit.
Profit share
100% − 15%equals85%
Set-aside rate
85% × (20% + 14.1%)equals28.99%
From this payment
$2,000.00 × 28.99%equals$579.70
So about 29% of every payment goes into the tax account. On $6,000 of monthly income, that is about $1,739 a month, or $5,217 a quarter, which is useful in countries that expect quarterly estimated payments.
Keep VAT and sales tax separate
If you charge VAT or sales tax, that money was never yours. Set aside all of it, in full, before applying your percentage to the rest.
Tip: Round your percentage up by a few points in your first year. A small refund is far easier to handle than a bill you can't pay.
This is a budgeting method, not tax advice. Allowances, thresholds and deductions differ by country, so confirm your real obligation with an accountant or your tax authority.