Retained Earnings for Freelancers

As a freelancer, you juggle more than just projects—you’re also in charge of running a business. Navigating fluctuating income, covering expenses, and planning for growth can feel overwhelming. That’s where retained earnings come into play.  

In simple terms, retained earnings are the portion of your income that stays in your business after paying expenses and taking what you need for personal use. Think of it as your business’s savings account—a safety net and a springboard for growth. 

For freelancers, retained earnings are more than just a financial term; they’re a lifeline. They help you weather slow months, invest in your craft, and prepare for opportunities that come your way. By mastering retained earnings, you lay the foundation for a freelance business that’s resilient and poised for long-term success. 

This article explains the role of retained earnings, offers tips for tracking them, shares strategies for financial stability, and covers key tax considerations. With the right steps, freelancers can build a strong, sustainable business. 

Why are Retained Earnings important for freelancers?

Retained earnings (RE) for a freelancer represent the portion of his income that remains in the business after covering all expenses and withdrawing personal income. Unlike a traditional salary, retained earnings are profits set aside and reinvested into the business to support growth, maintain stability, and prepare for unexpected challenges. For freelancers, this could mean allocating funds for essential tools, marketing efforts, skill development, or creating a financial safety net for slower work periods. 

The concept of retained earnings varies significantly between freelancers and traditional businesses due to differences in structure, financial management, and long-term goals. This table provides a detailed comparison, assuming freelancers operate as sole proprietors or partnerships rather than LLCs. While businesses formally calculate and report retained earnings in financial statements, freelancers handle them informally, focusing on personal development, savings, and tools for business sustainability:

	Freelancers	Businesses
Legal structure	Typically sole proprietorship or partnership, rarely LLC	Commonly LLC or corporation
Management formality	Informal — Retained earnings are tracked personally or through simple systems	Formal — Retained earnings are officially recorded in structured accounting systems
RE formula	Total Income – Expenses -Withdrawals	Beginning retained earnings + Net Income – Dividends Paid
RE tracking	Managed through personal bookkeeping or basic software	Monitored using professional accounting systems and formal financial records
Reporting	Reported on the freelancer’s balance sheet	Officially reported on the corporate balance sheet under the equity section
Taxation	Included in personal income tax filings	Subject to corporate income tax regulations
Purpose	Used for emergency funds, skill development, or stability during slow periods	Reinvested for business growth, expansion, debt reduction, or dividend distribution
Use of Funds	Focused on purchasing tools, marketing, or savings for operational needs	Directed toward business expansion, R&D, or other strategic initiatives
Dividend distribution	Not applicable — earnings are withdrawn as personal income	May be distributed to shareholders as dividends

How to Calculate Retained Earnings

The formula for calculating retained earnings for freelancers over a year is as follows:

Retained Earnings = Total Income − Business Expenses − Personal Withdrawals 

• Personal Withdrawals: Money taken out from your freelance earnings to cover personal living expenses over the year.

Example: 
Let’s say you’re a freelance designer working on branding projects, website designs, and marketing collateral. At the end of the year, your financial details look like this: 

• Total Income: $60,000 (from client projects, freelance platforms, and direct contracts)

• Business Expenses: $18,000 which include:
  • $6,000 for design software (Adobe Creative Cloud, Figma, etc.)
  • $4,000 for marketing campaigns and client outreach
  • $2,000 for stock assets like photos and templates
  • $3,000 for workspace costs (a co-working space subscription)
  • $3,000 for travel to a design conference

• Personal Withdrawals: $25,000 (used to cover rent, groceries, and other living expenses).

Using the formula: 
Retained Earnings = Total Income − Business Expenses − Personal Withdrawals 
Retained Earnings = $60,000 – $18,000 – $25,000 = $17,000 

At the end of the year, you have $17,000 in retained earnings. This amount could be reinvested into upgrading your equipment, enrolling in a professional course, or saved as an emergency fund for slower months. 

Why Are Retained Earnings Important for Freelancers? 

For freelancers, retained earnings serve as a crucial foundation for financial resilience and business growth. By saving a portion of your income, you create a safety net that helps manage unpredictable income cycles, cover emergencies, and invest in opportunities to advance your career. From upgrading equipment to developing new skills or preparing for long-term goals like retirement, retained earnings are key to building a thriving and sustainable freelance business. 

1. Financial Stability 
Freelancers often face fluctuating income, with some months being highly profitable and others quieter. Retained earnings act as a safety net, helping you manage your expenses during slower periods without financial stress. 
Example: As a wedding photographer, July to September are peak months, bringing in $15,000. To stay financially stable during the slower January to March period, you set aside $5,000 in retained earnings to cover expenses. This buffer helps you manage through the off-season with ease. 

2. Emergency Preparedness
Unexpected expenses can arise at any time, such as replacing a broken laptop, repairing a work tool, or dealing with unforeseen personal circumstances. Retained earnings give you the flexibility to handle these emergencies without disrupting your cash flow. 
Example: Suppose you’re a graphic designer and your primary design tool—your laptop—suddenly stops working. If you’ve set aside $2,500 in retained earnings, you can quickly buy a replacement without using credit or delaying projects for clients. This preparedness keeps your business running smoothly. 

3. Business Growth
Retained earnings allow you to reinvest in your business to stay competitive and grow. Whether it’s purchasing better tools, upgrading your skills, or running a marketing campaign to attract new clients, having funds set aside makes growth possible. 
Example: You’re a freelance photographer who has been using a basic camera. With $3,000 in retained earnings, you invest in a high-quality camera and lens. This upgrade allows you to take on higher-paying clients who require professional-grade photography, boosting your income potential. 

4. Upskilling and Professional Development
The freelance market is constantly evolving, and staying competitive often requires learning new skills or upgrading existing ones. Retained earnings can fund courses, certifications, or workshops that help you offer better services to clients. 
Example: As a web developer, you realize many clients are asking for expertise in React.js, but you only have basic knowledge of it. With $1,200 saved in retained earnings, you enroll in an advanced online course and improve your skills. As a result, you can take on projects requiring React.js and charge higher rates.

5. Managing Large Projects 
Freelancers sometimes need upfront resources to handle bigger projects, such as hiring subcontractors, purchasing specific software, or scaling operations temporarily. Retained earnings allow you to take on these opportunities without hesitation. 
Example: You’re a freelance event planner and land a large corporate event contract. To deliver the project successfully, you need to hire an assistant and purchase additional software for managing schedules. With $5,000 in retained earnings, you can fund these costs upfront and deliver a top-quality service, securing repeat business and referrals. 

Tracking Retained Earnings as a Freelancer 

Tracking retained earnings is essential for freelancers to maintain financial stability and plan for the future. While freelancers typically use simpler accounting systems than traditional businesses, a systematic approach can provide clarity and support smarter decisions about reinvestment, savings, and personal withdrawals. 

Here are some tools and methods you may consider: 

#1: Spreadsheet 

Create a simple spreadsheet to record your income, expenses, and withdrawals. Here’s how a freelance makeup artist may use the spreadsheet to track their retained earnings: 

While spreadsheets offer a customizable, flexible, and cost-effective way to track retained earnings, they also have limitations. Manually inputting data can be time-consuming, and human error can lead to inaccuracies. Additionally, spreadsheets may lack advanced features like automatic categorization and financial forecasting. 

#2: Accounting software 

Freelancers can benefit from using accounting software for tracking finance status. These tools generate clear financial reports, making it easier to see how much money remains in the business after covering expenses and personal withdrawals. Here are some popular accouting software among freelancers: 

• Fynlo 
  Fynlo is completely free and designed for freelancers and small businesses. Ideal for those with limited budgets, it provides essential tools such as an invoice generator, income and expense tracking, budgeting, reporting, and invoicing, all in one simple platform. Get started for free today.
  
  
• QuickBooks 
  QuickBooks provides a comprehensive suite of features, including invoicing, expense tracking, and tax preparation. Perfect for growing businesses, it caters to advanced accounting needs, with the “Simple Start” plan beginning at $10.50 per month. 
  
  
• FreshBooks FreshBooks focuses on invoicing, time tracking, expense management, and project tools. Ideal for businesses that prioritize time tracking, it includes this feature in all paid plans. Pricing begins at $19 per month for the Lite version. 
  
  
• Wave Wave offers core features like invoicing, bookkeeping, and receipt scanning, making it a solid choice for those needing basic accounting tools. The starter plan is free, with a PRO plan available at $16 per month.
   

Regular financial tracking helps freelancers maintain financial health and achieve long-term goals. By monitoring income, expenses, and withdrawals, they can gain insights, plan budgets, manage taxes, and make informed decisions. It ensures stability, prevents overspending, and offers a clear view of financial performance. 

Practical Tips for Freelancers

Retained earnings are an essential part of managing your freelance finances effectively. Here are practical tips specifically to help you grow your business, maintain stability, and plan for the future: 

• Budget effectively and avoid over-withdrawing 
  Create a comprehensive budget that allocates income for personal use, business expenses, and retained earnings. Limit personal withdrawals to ensure sufficient funds remain available for business growth and emergencies. 
  For example, set a fixed percentage for personal use, such as 60-70% of your net income, while allocating the rest for reinvestment. This disciplined approach helps you avoid overspending and ensures financial stability. 
  
  
• Allocate savings for Retained Earnings 
  Regularly transfer a portion of your income to a dedicated retained earnings account to ensure consistent contributions and reduce the temptation to spend funds meant for reinvestment. 
  For instance, set aside 15% of your income each month into a “Business Growth Fund” account. This habit helps you stay disciplined and prepared for future business needs. 
  
  

• Regularly review financial health 
  Review your income, expenses, and retained earnings monthly or quarterly using accounting software to generate reports. Regular reviews help you adjust your strategy based on income patterns or business goals. 
  For example, if expenses are higher than expected in one quarter, increase savings during peak months to maintain financial balance. 
  
  

• Plan for Lean Periods 
  Save more during high-income months to cover slower seasons and build an emergency fund with three to six months of expenses. 
  For example, if your peak months are July to September, retain extra earnings to sustain your business during quieter months like January to March. 
  
  

• Invest Strategically 
  Reinvest retained earnings in business upgrades, skill development, or marketing. This helps improve your services and attract more clients. 
  For instance, you could use $2,000 from retained earnings to purchase a new laptop or take a digital marketing course to enhance your offerings. 
  
  

Retained earnings are like a safety net for freelancers. By saving a portion of your income, you can protect yourself from unexpected costs, invest in your business, and reach your financial goals. Whether it’s buying new equipment, taking a course, or saving for a rainy day, retained earnings are your secret weapon to a successful freelance career.