W-2 working people get a paycheck after taxes are taken out. At the end of the year, they get a W-2 which tells them their taxable income. For them, this income is what they officially make. They get to spend or save what is in the paycheck. Their paycheck is what they take home. Some people call this amount what they make. What they know is this amount is usually the amount the amount they can spend. Generally their taxes are already taken care of in withholding.
For the freelancer, life isn’t as simple. What you make is what is paid to you of what you have invoiced as a business. You have to pay your business expenses out of this amount. What you make is also called your gross income or receipts. And what you earn after business expenses is called your net income or your business income.
Another way to phrase this page then is What you gross is not what you net.
Then after you arrive at your net, you must pay both your income taxes and your self-employment taxes.
Why is any of this important? It is important to know what you really earn so that you know how much you can spend on your personal life including your taxes.
If, for instance, you gross $90,000 and think you can spend that $90,000 on your personal life because that’s what you will make, you will be very unhappy and very possible in debt by the time you’ve finished the year and you may even not have paid all of your taxes.
If on the other hand you’ve grossed $90,000 and are aware that you’ve got $25,000 of business expenses, and will be left with $65,000 with which to pay your taxes and personal expenses, you are more likely to be in a better financial situation.
For those of you who understand this concept, you will have an easier time as a freelancer because you will be able to live your life more in balance. Yes, I know your income and your expenses may each vary year by year and that uncertainty can be challenging. But spending in your personal life based on the reality that you can only spend your net on those expenses rather than your gross will allow you to function much more smoothly as a freelancer.