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How to Pay Yourself As an Independent Contractor

As an independent contractor, you are self-employed. That means you're providing services as a business and not as an employee.

There's a lot to unpack with that statement:

  • For one, the money you get paid as an independent contractor for Doordash and others is not your paycheck.
  • Two, if you don't handle that money right, you may not have the money you need for your business expenses. You can also get yourself into some real tax trouble.

How do you avoid those problems?

It starts with thinking like a business owner, not like an employee. As a business owner, your real business income is your profit, not what you were paid for your services. Read on as we discuss:

Most of the content on this site is geared towards independent contractors in the gig economy, especially with food delivery services like Doordash, Uber Eats, Grubhub, Instacart and others, and you may see examples here pointing to that or to rideshare such as for Lyft and Uber drivers.

There are tax implications to how you handle the money you get for your business. However, do not take any of this article as tax advice. You should seek out your own tax expert to help you with questions related to your own business and personal finances.

For example, below this is a podcast episode geared towards delivery contractors.

Give Your Employee a Paycheck

If you've never worked as an independent contractor, that first time you get paid for your services often feels like a paycheck, doesn't it?

If it's a simple side hustle, a very part time way of making a little extra money, you might get by with that. However, if you earn significant income as a 1099 worker, and especially if it becomes a full-time gig, you can have some real problems with that mindset.

The best thing you can do is to change your thinking. Get away from thinking those payments are yours and think of them as your business's money.

Develop a business mindset. Think of what you are doing as a business. The company or companies you contract do. The government does (as you're taxed by default as a sole proprietorship, a form of business).

Now, once you're thinking like you're running a business, how do you pay yourself as an independent contractor? What's the best way to make sure you're still getting the money that you worked so hard for?

My recommendation is to create a process where you give yourself a paycheck. I'll walk through some suggestions in a moment.

Why a paycheck process is important.

There are a number of reasons that giving yourself a paycheck will benefit you.

First, it gives you a better sense of what you are actually making. It helps you think in terms of your profit as your earnings instead of the money coming in. And if you're not thinking of the expenses, you may not be prepared to cover them, especially if you already spent the money by the time you need it.

One problem I see a lot in the gig economy is that delivery and rideshare drivers will see the money they're making and compare it to working a job. Many make the decision to quit their job and go full-time as contractors based on an unrealistic comparison. After car expenses, taxes, and benefits, too many find out they're not making as much as they think they are.

A paycheck process can fix that.

The second thing this does is, it helps you prepare for expenses. It forces you to sit down and evaluate what it really costs to run your business.

Third, it prepares you for taxes. As a contractor, you're on your own to withhold and pay your own taxes. The part of this that throws people off is self-employment tax (our version of FICA payroll taxes). Tax season can come around and if not handled right, you could be in a pickle.

Finally, you get a chance to even the playing field with things like paid time off or benefits.

The Six Step Self-Paycheck Process

If you can develop a paycheck routine with your money, rather than spending what you get as it comes in, this does two things for you: It gives you a true picture of what you are truly making, and it makes sure the necessary things are taken care of.

I'll give you an idea of how I handle things. You can obviously make tweaks based on what works best for you. Examples here come from gig economy work that involves a lot of driving, and usually involves weekly payments. You can obviously adapt based on your own circumstances.

Step 1: Get a separate bank account.

Do not deposit your payments into your personal checking. It's time to get past mixing your personal money with your business.

In fact, you might want to get several bank accounts. Or get an account that lets you create sub-accounts. Many local banks and credit unions are very flexible about this type of thing. If you can get them to do it without any monthly fees or minimums, that's all the better.

I believe that at minimum, you want at least a checking account and two savings accounts. Some accounts have reserves or buckets that you can use. It's probably best that at least one of those savings accounts is completely separate from the checking account, preferably from a different bank.

Full disclosure: The following link is an affiliate link (meaning I can receive a commission).

For a business bank account, I personally use Novo. Novo is a fintech company with their bank sponsor Middlesex Federal Savings, F.A. Two things I love about it: One, it allows up to five reserves. I have reserves for taxes, car expenses, and paid time off. Two, there are no fees. You can check them out with my referral link.

Step 2: Have all payments directed to your new bank account.

Do not touch a penny of that money you get paid for contracting. Think of that bank account as your business's account. That money belongs to your business, not you.

If you are a gig economy worker who has an option to get paid daily, if at all possible avoid that option. Especially if Doordash or Uber Eats is charging you a transaction fee. It's too easy to spend the money early with an early payment option.

Step 3: Determine a pay day.

Choose the day you're going to give yourself a paycheck. Is it going to be weekly? Twice a month? Or monthly. Pick a payday and stick to it.

In the podcast episode linked above, I recommended a weekly payday since the gig economy platforms tended to pay weekly. My personal process as a delivery contractor was to choose Thursdays as pay day, because all the platforms would have paid up by then.

Step 4: Allocate taxes, expenses, and benefits.

You will want to put aside money for two different funds, possibly more.

As Independent Contractors, We Need to Make our Own Deductions

A. We'll start with taxes.

That's the big one you have to take care of. Get that out of your account right away and put it where you won't touch it.

That's why I recommend a savings account that isn't attached to your checking account in any way. Don't make it easy to spend that money by just transferring it back to your checking account.

How much should you save? There's no one answer. I won't try to advise you because that's something you should be asking your own tax professional about. However, I can give a couple of examples of what people do.

I always used to do a quick calculation of my profit. As a delivery driver, most of my expenses were related to driving. So I would deduct 62.5 cents per mile (the standard mileage allowance for the second half of 2022) from what money I received to determine my net income or profit. Then I would save 25% of that (15.3% for self-employment taxes, which cover Social Security and Medicare taxes, and 10% to pay income taxes).

Your numbers are going to vary depending on all the tax things like filing status, personal deductions, etc. Like I said, talk to your tax pro.

Another way a lot of people do it is to use a bookkeeping or expense tracking app that has tax features built in. Personally, I'm a big fan of Hurdlr. I do get a commission if you get the subscription version of the app, however the free version actually works very nicely.

Whatever method you choose to determine what to save, get that money pulled out of your checking account right away and put it somewhere you won't touch it. Once a quarter you can send it in to the IRS. That way at the end of the year, you're ready to pay your personal tax return.

B. Figure out your expenses and put them aside.

What are you going to have to pay out? Do you have set monthly costs? What are the things you'll have to pay for going forward. Take out money for that and set it aside.

Personally, I actually keep the money in the checking account and pay expenses directly out of that. But I have a budget figure of what those expenses are going to be, and subtract that from my earnings in a later step.

Another option is to move budgeted expense money to a different account, and then move money back into checking whenever you need to pay for an expense. I've often thought of doing this myself, as it just keeps that expense money completely separate from other things. Ultimately it's a matter of preference.

How do you plan for variable car expenses?

Illustration of a credit card that has wheels on it, illustrating how future costs pile up with each mile driven.
I often refer to a car as a credit card on wheels, because every mile driven piles up expenses that will have to be paid later, either in the form of future replacements, maintenance, or in loss of value when you sell or trade the car in.

For gig workers like rideshare and delivery, and several other forms of contracting, the cost of driving can be huge.

In that situation, the best option to handle the car expense is to figure how much money it actually costs you to drive per mile. Then each week, multiply that per-mile cost by the business miles you drove.

Example: 35¢ per mile times 500 miles for the week is $175 that gets put into an operations fund.

Don't just figure in gas. You need to anticipate oil changes, maintenance and future repairs. Also keep in mind that more miles makes your car less valuable. I calculated blue book values on a two year old Prius and found it was worth $3730 less when you add 25,000 miles to it, a difference of 15 cents per mile.

I figured my 13 year old SUV costs 35 cents per mile based on:

  • 22.5 cents per mile for gas
  • 2.5 cents per mile depreciation (lost value)
  • 10 cents per mile various wear and tear and maintenance

The extra 12.5 cents per mile for depreication and maintenance gives me a fund that will cover repairs and that will make up for how much less I get when I do sell or trade it in due to the miles I drive.

I don't include insurance or registration, as those are fixed costs you pay regardless of whether you use the car for business.

Fuel purchases, repair and maintenance costs then get paid out of that expense fund. Generally it also builds up money you can use when it's time to replace your current vehicle. Saving by the mile is in my experience the best way to keep a positive cash flow for future car expenses.

C. Give yourself some paid time off

Being self-employed, there's no paid vacation or paid time off. This really creates a problem for a lot of independent contractors, because they don't feel like they can afford to step away.

The recent pandemic is a real illustration of the need to prepare for being unable to earn. If you rely on that money week to week, what happens if you get sick or knocked out of commission?

The best way to account for this is to set aside money every week for a paid time off fund. When you want to take a vacation, you can then withdraw money from that fund to replace the income you would be making otherwise.

Decide on a sum of money you need as take home each week. Decide how many weeks of paid time off you want to give yourself. Divide that by the remaining weeks and you have how much you need to set aside each week.

We have a calculator built into this article that goes into more detail about giving yourself paid time off as an independent contractor.

D. Decide what other benefits you need to give yourself.

Aerial view of three businessmen sitting at a desk with only their for arms visible with sales charts, a clipboard, cell phones and pencils, and a word cloud of terms related to employee benefits, however Self is handwritten and underlined to make it read Self-Employed benefits.

You can also set aside money for other benefits you're giving yourself. Are you funding your own retirement plan? How about health insurance?

Understand that as a sole proprietorship, you can't claim these as business expenses. However, you may be able to take them as personal tax deductions depending on the type of plan you are contributing to and certain other circumstances.

The purpose of taking the money out now is, it gives you a clear picture of what your true “take home” is as an independent contractor. This is especially valuable if you are wanting to compare your true earnings to what you'd be getting with a traditional job.

Step 5: Give Yourself a Paycheck.

Once you've set the money aside for all the things you determined to set aside, it's the amount left that you can transfer over to your checking account. This is essentially your take home pay.

One thing I should point out: this is not payroll. As a sole proprietor or even if you've created a single-member LLC for your independent contractor business, as a small business owner you aren't technically an employee of the business. That means you can't put yourself on payroll.

The exception is if you have incorporated as an S Corporation or C corporation, or created a limited liability company and as an LLC owner you've chosen to be taxed as an s corporation or c corporation.

You can still pay yourself. In accounting terms it's known as an owner's draw. You just distribute the funds to yourself rather than using a payroll service.

You can write yourself an actual check for that amount from your business account to your personal account, or transfer the funds electronically.

What if it's not enough money? Sometimes doing this is a reality check that this really isn't paying what you thought. This could be a wakeup call that makes you decide between either increasing what you earn or finding something different.

Step 6: Use the Set Aside funds only when you need them for their intended purposes.

Each type of account has a purpose. Only use that money for that intended purpose.

Your expense fund should only be used to pay for your expenses. If you used the per-mile set-aside mentioned for covering your car expenses, that money gets used to pay for gas, maintenance and repairs.

I would not take money out of the per-mile expense fund for a car payment. That's because a car payment is not actually an expense. Generally it's like insurance and registration, a payment you have to make regardless of whether you're self-employed.

If however you do feel the need to purchase a separate vehicle for your business, it's probably better to make a separate allocation to cover the payment, or to create a fund for purchasing the vehicle straight out.

Some things you might put money aside weekly but have monthly or quarterly payments. For example, I set aside money weekly for retirement, but my retirement account automatically pulls from that savings account once a month.

Money saved for tax purposes should be sent in to the Internal Revenue Service as quarterly estimated tax payments.

If you've taken out more than you need by the time you file your personal income tax return the next year, you can then transfer the remaining money in a lump sum to your personal bank account as a self-generated tax refund, or keep the funds in your tax savings account for the remaining year.

This can be a real wakeup call.

The amount of money you get from gigs like Doordash, Uber Eats, Instacart, Uber or Lyft or other independent contractor gigs can be misleading.

When you think of it as your actual pay, you think you're making more than you really are.

But when you take out all the things that would normally come out of W-2 employee wages ahead of time, you get a much more real idea of what you're making.

I fully believe that if most gig workers did this, they'd be shocked at how little is left over. It would be a real wakeup call. But it's also a much better way to evaluate if they're really making any money.

Are things like paid time off really necessary? I think the question to ask is, if you were an employee of another company, how would you feel about the boss that didn't give you any vacation or paid sick time?

Don't be that boss who doesn't care for their employee (and since you're self-employed… you're both boss and employee in that situation.

However, if you do these things, you will thank yourself when tax season rolls around. If you follow the per-mile expense allocation idea, you will be glad you did when the big ticket item repairs come around. Give yourself a paycheck and avoid the traps now, and your self-employment status is less likely to haunt you later on.

Could this help someone else? Please share it.

Ron Walter of

About the Author

Ron Walter made the move from business manager at a non-profit to full time gig economy delivery in 2018 to take advantage of the flexibility of self-employment. He applied his thirty years experience managing and owning small businesses to treat his independent contractor role as the business it is.

Realizing his experience could help other drivers, he founded to encourage delivery drivers to be the boss of their own gig economy business.

Ron has been quoted in several national outlets including Business Insider, the New York Times, CNN and Market Watch.

You can read more about Ron's story,, background, and why he believes making the switch from a career as a business manager to delivering as an independent contractor was the best decision he could have made.

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