Bookkeeping for Independent Contractors: 6 Tips to Keep in Mind

When you're in business for yourself, efficiency is everything. As an independent contractor, you can't afford to waste any time. You need someone else to share the load or to look over your shoulder and check your work. That goes for your bookkeeping as well!

Careful bookkeeping for independent contractors is essential to keep your small business healthy or sustainably grow your business. Record keeping for a small business is necessary, but it can be hard to get it right when you don't have the time or professional assistance. 

Your accounting needs will vary as an independent contractor, whether an electrician, a rideshare driver, or a freelancer. But whatever you do, you're effectively functioning as a small business owner, which gives you certain obligations and opportunities, and bookkeeping is crucial for all of it.

What are the Differences Between an Independent Contractor and an Employee

First things first: What is a contractor, and how do their needs differ from W-2 employees? 

Employees work on a permanent basis for wages from their employer, and their salary is reported with a W-2. Contractors function as independent business owners, whether they contract with one larger business or multiple clients, and their payments are reported with an IRS Form 1099. 

Employees may need to keep track of some things for tax preparation, but their employers are responsible for the essential records. Accounting for independent contractors, however, is a lot more complicated. 

What Accounting Methods Can an Independent Contractor Use?

Independent contractor bookkeeping can be as simple as recording each transaction in a contractor bookkeeping spreadsheet. Tracking income and expenses is the core of bookkeeping, so all you have to do is make a note of it every time you spend or receive money. 

Logging every transaction in a general ledger, whether on paper or in a spreadsheet, is called single-entry bookkeeping and is the most basic method of accounting. It's sufficient for smaller operations, but if your business gets a little bigger or more complex, you may need to move to double-entry bookkeeping. 

In double-entry bookkeeping, every transaction requires you to make two entries in your records. For example, when you make a sale, you would make one entry for the increase in revenue and one for the decrease in inventory. A single spreadsheet is no longer enough, and you may want to invest in accounting software to help you manage your books.    

Importance of Tracking Expenses as an Independent Contractor

While it may seem like income is the first thing you want to follow with your independent contractor record-keeping process, expenses are the key. It's good to know how much money you're making, but it's also crucial to understand how much you're spending and where.

The more informed you are about what’s happening in your business, the better prepared you are for tax filing and even for everyday business decisions. Independent contractor expense tracking is necessary for a lot of essential accounting purposes: 

• Preparing and filing tax returns 
• Maximizing tax deductions 
• Producing financial statements for investors
• More informed long-term planning 
• Managing cash flow 

6 Examples of What to Keep Track of as an Independent Contractor

Expenses are just one of the things you should be keeping track of with your independent contractor bookkeeping. Here are the critical standard bookkeeping terms you should be familiar with, and they should be your top priorities on the list of what to keep track of as an independent contractor. 

Revenue

It should go without saying, but you certainly want to be keeping track of your revenue. How much money are you bringing in, and how? Do certain goods and services bring in much more revenue than others?   

Business Expenses

While this has been mentioned already, keep track of all your business expenses. Doing so is especially important when it comes to bookkeeping for taxes since most business expenses will be tax deductible when it comes time to file. 

Profit

If you track your revenue and expenses, you can now start monitoring your profit which is the bread and butter of bookkeeping for independent contractors. How much money are you making once you factor out your expenses? Tracking profitability lets you monitor and plan based on your profit margins over time. 

Tax Payments 

Tax payments are a specific category of expenses, and keeping track of them is essential. For one thing, you need to know where your money is going and when. As an independent contractor, you also need to track these payments to make sure they happen. 

You should be paying payroll taxes, which include social security, medicare, and self-employment taxes. You also need to be paying quarterly estimated income taxes throughout the year. Keep track of these payments so you can be sure these payments happen on time. 

Accounts Payable

Accounts payable refers to scheduled or planned expenses that have not yet occurred. Perhaps you owe the money, but the money has yet to leave your bank account. Good bookkeeping requires knowing how much money you owe and how much you have on hand at any given time. 

Accounts Receivable

Accounts receivable refers to expected payments that still need to be completed. If you sell goods or services to a client on credit, those transactions will be identified in accounts receivable until you receive the cash for that purchase. 

Work With Our Certified Bookkeepers so You Can Focus on Your Business

You don’t have to manage the bookkeeping all by yourself. Bookkeeping for independent contractors can be challenging and complex. It helps to consult with an accounting professional to help you set up your accounting system and establish a process for maintaining appropriate records. Making it up as you go is a recipe for disaster. Invest in bookkeeping services on the front end and help your freelance hustle to be efficient and thorough with its records right from the start. Find out what 1-800Accountant can do to guide and improve your bookkeeping.