How Business Revenue Becomes Personal Income
By Guli Fager, MPH
So you’ve hung out your shingle, gotten some clients, and gotten paid—now what? One of the most popular questions in our webinar series for self-employed professionals is about what to do with the dollars you earn. This article will walk you through how to correctly manage business cash flow.
Briefly:
Deposit Business money (revenue) into an account just for the business
Pay all business expenses out of the business account
Set aside 40% of revenue after business expenses for taxes
Revenue after expenses and taxes = Income
Money In
However you get paid—whether it’s cash, credit cards, insurance company reimbursements, Venmo, Zelle, or checks—money to your business (revenue) needs to go into a separate account just for your business. If your business is structured as a sole proprietor, you can simply open a bank account with your own name that you keep independent from your personal, household funds. If you’re an LLC or other structure you will need to open an account with your business’s articles of incorporation. In this case, checks need to be written to “Business Name, LLC.”
Taxes
Business expenses come out of revenue before it is taxed, so you want to set aside taxes after you have paid all business expenses. A good rule of thumb is to set aside 40% of all revenue after expenses to cover tax payments – FICA, Federal and State/Local. A separate business savings account can be an easy way to keep those tax funds clearly in their own account, and you should have enough to make quarterly tax payments when they are due.
Retirement Savings
Self-employed people have to set up their own retirement savings plans. A simple and popular plan is a “SEP”. To save for retirement, in addition to the 40% you set aside for taxes, you may want to set aside an additional 10-20% of revenue after expenses to cover a SEP or other retirement plan contribution. After you have been in business a year or two, your accountant should be able to give you a more precise savings goal to aim for and our firm can help you set up a SEP retirement plan for yourself.
Income
Business revenue becomes available for personal income after expenses and taxes are paid. You can take as much or as little of the left-over funds as you like—you can set up a recurring transfer for the same amount every month or draw funds from the business account only when needed. Having a consistent amount each month should make it easier for you to budget for your own vacation and sick paid time off.
Whatever your business looks like, we would love to help you figure out how to make it work for your household. You can schedule a free consultation with us anytime.
Frequently Asked Questions About Managing Cash Flow for Self-Employed Professionals
How should self-employed professionals manage business income?
Self-employed professionals should deposit all business revenue into a separate business bank account, pay business expenses directly from that account, and clearly separate business finances from personal finances.
Why is it important to separate business and personal finances?
Keeping business and personal finances separate helps simplify bookkeeping, improve tax reporting, track profitability, and maintain cleaner financial records for your business.
Should freelancers and sole proprietors have a separate bank account?
Yes. Even sole proprietors should maintain a dedicated bank account for business income and expenses to improve organization, budgeting, and tax preparation.
How much should self-employed people save for taxes?
A common rule of thumb is to set aside approximately 40% of business revenue after expenses for taxes, including federal, state, local, and self-employment taxes.
Why do self-employed professionals need to pay quarterly taxes?
Unlike traditional employees, self-employed professionals generally do not have taxes automatically withheld from paychecks, so quarterly estimated tax payments help avoid penalties and large year-end tax bills.
What expenses can self-employed people deduct?
Business expenses that are ordinary and necessary for operating a business may be deductible, including office expenses, software, professional services, equipment, insurance, and business-related travel.
What is considered income for a self-employed business owner?
For many self-employed individuals, income is the money remaining after business expenses and taxes have been paid from total business revenue.
How should self-employed professionals pay themselves?
Business owners may choose to transfer a consistent monthly amount to personal accounts or take distributions as needed, depending on cash flow, budgeting needs, and business structure.
What retirement plans are available for self-employed people?
Common retirement options for self-employed individuals include SEP IRAs, Solo 401(k)s, Traditional IRAs, and Roth IRAs.
What is a SEP IRA?
A SEP IRA, or Simplified Employee Pension IRA, is a retirement savings plan designed for self-employed individuals and small business owners that allows for tax-advantaged retirement contributions.
How much should self-employed people save for retirement?
Many financial professionals recommend saving an additional 10–20% of revenue after expenses toward retirement, though the ideal amount depends on age, income, and long-term financial goals.
How can self-employed professionals improve cash flow management?
Effective cash flow management includes budgeting carefully, tracking expenses regularly, saving for taxes, building emergency reserves, and maintaining consistent income planning.
What type of business account does an LLC need?
An LLC typically needs a business bank account opened using its legal business documents, such as articles of organization or incorporation, and payments should be made directly to the business entity.
Should self-employed people work with an accountant or financial advisor?
Yes. Accountants and financial advisors can help self-employed professionals with tax planning, retirement savings strategies, cash flow management, budgeting, and long-term financial planning.
How much emergency savings should self-employed people have?
Because self-employment income can fluctuate, many self-employed professionals benefit from maintaining larger emergency savings reserves than traditional employees to cover periods of lower income or unexpected expenses.
What are the biggest financial mistakes self-employed professionals make?
Common mistakes include failing to save for taxes, mixing business and personal finances, neglecting retirement savings, inconsistent bookkeeping, and underestimating irregular business expenses.
