Challenges of a Variable Income

I have lots of creative friends. They are mostly writers, but I also know artists, musicians, editors, jewelers, etc. Many times I hear my creative friends express the dream of being able to do their creative pursuit full time. There is an entire discussion to be had about whether that is the right choice for emotional reasons as well as financial, but that is not the discussion I want to focus on today. Particularly since the “right” answer depends heavily on individual circumstance. What I do want to provide is some information about the realities of living on a variable income, because when most of my friends say they want to do full time creative work, what they mean is that they want to freelance and be their own boss. Freelancing and owning your own small business rarely come with a regular pay check, particularly at first.

The concern that most people have and fret over is that their creative work will not bring in enough to pay the bills. This is the primary problem that people have to face when launching a full time creative career, but what most people don’t wrap their heads around is how a variable income requires different handling and provides challenges even when you are earning enough money. Looking at the particular challenges of a stable, but variable income is something that creative people should consider when deciding whether full time creative work is right for them.

1. You can’t treat a large lump payment as bonus money. Unless you are a freelancer with a long-term, steady assignment, most of your income will come in lumps. They might be small, regular lumps, or giant lumps at irregular intervals. Managing lump payments can be a hard adjustment for a person who is used to budgeting on a steady income. When you have a big chunk of cash sitting in the bank, the temptation to splurge is strong, there is so much money right there. Except that money has to cover bills for six months or a year (or three years, or five years.) If you splurge when the money arrives, then you’re in trouble later. Many creatives temper this by having multiple checking accounts and paying themselves a reasonable “salary” at regular intervals. Or they incorporate as an LLC or S Corp to do the same. This restores the ability to budget on a monthly/ weekly basis. The advent of patronage platforms, such as Patreon, also provide tools to even out the gaps between payments. If you have creative work that earns royalties, then ongoing payments of those royalties can also provide stabilizing payments.

2. Large lumps of money have tax implications. If a large payment comes in December, then at the end of the year it looks like you made a really good living. You will be taxed for all of that money sitting in your account as if it is all profit. The lump of money may even push you into a higher tax bracket. This frequently happens to people who run Kickstarter campaigns where the money arrives in one year but the expenses (printing, manufacturing, shipping) are paid in the next. As far as the IRS is concerned, cash in the bank is profit and should be taxed. This can be offset by changing to a form of accounting called accrual accounting, but once you make that change, you can’t switch back and there is additional paperwork forever. Most creatives just take a tax hit on the years they make a lot, and file a loss on the years when they make less. Unfortunately this often means that the big tax bill lands in the year after the prosperous year and contributes to making that next year into a financially lean one. Boom and bust.

3. Credit and loan application systems are confused by variable income. Most systems use last years tax returns as a predictor for this year’s income, which is not accurate if you’re living the boom and bust cycle seen by many creative folks. Financial institutions also expect to see a bi-weekly or monthly pay stub and use that to calculate monthly income. If your income is variable, it is likely you don’t have any pay stubs. So any time you apply for a loan or credit, you end up having to explain (over and over) where your income comes from, why you don’t have regular pay stubs, and how you are a responsible adult who will be able to pay back the money. You’ll have to dig up additional paperwork and proof of income that folks with a pay stub don’t have to deal with. So make sure you keep documents of your income with invoices and 1099s. You might need proof of income later.

4. United States Healthcare tax credits expect stable income to calculate how much subsidy you get. If you’re going to be a full time creative, you probably won’t have employer-provided health insurance. Right now this means signing up via the independent marketplace. (Who knows what it will mean next year or the year after that, US healthcare is in flux and I’m writing from a US experience base.) Most of the math done to decide if you qualify for a subsidy depends on you having a good estimate of what you’ll make next year and that income being approximately what you made the year before. If you underestimate your income, you may be charged a penalty for taking more credit than you should have. There is no penalty for over-estimating income. Many creatives avoid penalties by never taking a monthly subsidy. Instead they pay out the full premium amount and wait until tax time to get refunded for whatever the subsidy would have been. However this means that in a bust year, when money is tight you have to shell out for those monthly premiums and if your prior year is a boom, you won’t have any medical refund to help pay for those premiums. The refund comes after the year when money was so tight you needed it.

5. Your tax returns affect United States federal grants for higher education. A financial boom year means that you look rich when filling out the FAFSA. It means that during a bust year, when you could really use the financial help, you may not get it because of a prior boom year.

6. Items 2, 4, & 5 serve to exacerbate the boom and bust cycle that often happens in creative work. This means that a big lump payment is cause for trepidation as well as rejoicing. A large payment that isn’t carefully managed can guarantee a complete crashing of finances only a year or two later if the next large payment doesn’t arrive in time to rescue things.

Living on a variable income can be challenging, but if you’re fully aware of all the potential complications and how to buffer them, a variable income can be just as viable for ongoing living as a regular paycheck. For some people the anxieties and uncertainties of irregular pay days are preferable to the anxieties and uncertainties of potential layoffs or having to work with people who are chosen for you rather than whom you choose. Other people do better with that predictable paycheck while pursuing their creative efforts in the hours not claimed by their employers. The challenges listed here are not the only ways that living on a variable income is different than regular income, but they are some important points to consider when deciding if full time creative work is right for you.