Employees can essentially trust their employers to handle much of the regular work of bookkeeping for them. Their employer keeps track of their income, withholds wages to pay taxes, and then sends regular reports on all of that.
Freelancers, on the other hand, are on their own. That’s why bookkeeping is one of the most critical parts of freelance work, even if it doesn’t seem like it. It’s the paperwork that lets the work happen and makes sure you get paid. No one else is going to make sure the numbers add up, and your account gets its deposit at the end of the day.
Bookkeeping can be a challenge if it isn’t handled early and properly. Thankfully there are some strategies freelancers can use to have a smooth bookkeeping experience. Finding an effective system and process for managing your accounting can help save time and money, not only for calculating expenses, compiling invoices, and paying quarterly taxes but throughout the year.
While there are many ways to go about bookkeeping for your independent business, freelancers should consider some things first. For example, keeping track of every transaction is crucial, and saving may be very helpful when it’s time to pay taxes. Here’s a quick guide to all of these basic things each freelancer should know about bookkeeping.
Why is Bookkeeping Important for Freelancers?
Bookkeeping allows freelancers to stay organized with their finances. If you keep good financial records and monitor your cash flow, you’ll be able to deal with problems that come up and easily prove your eligibility for any lines of credit you might need.
Keeping track of expenses, income, and invoices will save time when tax season approaches. For freelancers, like for all small businesses, you have regular obligations to pay income taxes quarterly and then file tax returns at the end of the year. Having all of that information accurately recorded and easy to find will make the process easy and efficient.
Bookkeeping is essential for a lot of different reasons. If you don’t get paid properly for your time, there’s no one else who will notice the issue and address it, and you need the records to give you that information and prove it to your customer. Bookkeeping can also help freelancers avoid penalties and have an easier experience finding documentation if audited.
Essential Bookkeeping Tips for Freelancers
These guidelines are the fundamental basis of any freelancer or small company’s bookkeeping. If you aren’t already using these guiding tips, you should implement them as soon as possible to decrease the chance of mistakes and to give your business a solid footing.
While what is best for you will vary depending on the size and type of your freelance business, every business owner should consider what these look like for your own work.
Keep Financial Documents
Don’t get rid of any financial documents. Your company’s records are built on the financial documents you keep, whether you keep them in physical or digital form.
Keeping critical financial statements and records can allow you to examine your finances in several ways, watching for trends and planning more efficiently for the future. Two of the most important documents for freelancers are balance sheets and profit and loss statements. Cash flow statements and invoices are also useful to keep.
Separate Personal and Professional Assets
It may be tempting for freelancers to simply use their personal bank account for business purposes. Still, it can be very useful to separate your business assets from your personal ones, and this is absolutely crucial if your business involves a lot of business expenses.
Opening a business account with your bank solely for professional assets lets you track professional expenses and income without constantly having to sort through both piled together. This will also help immensely during tax season. If all of your company costs are on your business credit card, it becomes simple and easy to claim deductions for those expenses.
Track Your Income
Freelancers should track everything, including their expenses and taxes, but you should track your income most of all. Track how much you are owed and how much you are paid so that you can ensure those numbers match up.
Then your income numbers will help you assess how to proceed with your business in the future, and you’ll have it ready for paying quarterly estimated taxes to the IRS and completing your tax return. You can use bank deposits, software, or spreadsheets to further track your income.
Long-Term Bookkeeping Tips for Freelancers
Now that you have the foundations for your bookkeeping system, you can move on to more detailed pieces of the process. These tips will help you improve your system and process to get the most out of your bookkeeping.
Create an Organized System
Freelance workers should create an organized system to track expenses and income, whether it’s a filing system or a set of spreadsheets on your computer. There needs to be a straightforward process you follow so that nothing falls through the cracks. In case of an audit, you’ll want to save pictures of receipts if at all possible as well.
If you get paid for your time, you need to find an organized and easy way to do time tracking to avoid wasting time or missing out on income.
Improve Your Invoices
You don’t get paid without invoices, so it’s essential to make sure your invoices and invoicing system are efficient and effective.
Your invoices should include your contact information, an invoice number, the issue date, and the due date. Other important things to include are the goods and services provided and the total due for those goods and services.
You should also provide information about how you’ll accept payments (e.g., by check, through your bank, or via PayPal). You want your invoice to contain all the information necessary for the payment to happen. If getting payments on time is an issue, you should also include a clearly stated policy about incentives or penalties for payments before or after the deadline.
An easy way to make this process smoother is to set up invoicing software to put all this information together and send invoices for you. This will help keep you on schedule as well, because if you send out invoices late or at unpredictable times, then that’s the same way they’ll get paid.
Record All Expenses
It’s important to keep track of both income and expenses as a part of your bookkeeping, as both will be essential for your tax returns. Keeping track of all your legitimate business expenses will let you deduct business expenses as a freelancer and reduce your tax liabilities.
You can claim tax deductions for supply costs, as well as rent, travel, and vehicle expenses related to your business. Any professional dues, employee wages, and healthcare premiums may be deductible. If you work from home, you may also be able to deduct many expenses related to your dedicated home office.
Freelancers can also benefit from setting a budget to monitor their spending. A carefully crafted budget gives you a clear framework for planning and assessing your income and expenses over time.
Build Up Savings
Saving money as a freelancer is important in case there are unforeseen expenses or penalties. This is another way budgeting and monitoring your cash flow will help. By planning ahead, you can ensure you have money to spare when you need it.
It’s a healthy standard to save about 30% of your income if your tax bill is higher than expected. Freelancers may want to save money for tax payments early, if possible, to avoid saving more significant amounts later.
Find Accounting Software
For everything from sending invoices and payment processing to recording expenses and receipts, accounting software can help streamline the bookkeeping process and reduce human error.
These software programs will help you collect payment, estimate and file quarterly taxes, track expenses, and more. Software for freelancers like this can also help you plan with financial reports, invoicing, and payroll.
There are all sorts of accounting software programs available for self-employed business owners. Accounting software like Quickbooks Self-Employed usually requires a monthly or yearly subscription, so you should discuss with an accountant to see what kind of program fits your needs best before you commit.
Set Up Tax Payments
Having complete records will make filling out and filing tax returns a breeze, but that still leaves you with estimated quarterly income tax payments throughout the year. You should be planning ahead to make these payments on time and registering with the IRS to make the process smoother.
Estimated taxes are due quarterly, and there may be penalties if you underpay or pay after the deadline. If you owe a small enough amount at the end of the year, or you’ve paid enough income taxes elsewhere, you might be able to avoid these quarterly payments and pay an annual tax.
Calculate your small business taxes ahead of time, so you know what you need to do to keep up with your obligations throughout the year.
Work With a Professional Bookkeeper
You don’t have to be a big business to hire an accountant. Even a freelancer can afford and benefit from working with a professional for your freelance accounting needs. The expert doesn’t have to be your full-time employee to help you improve your system and get your bookkeeping process up and running.
You don’t have to figure it out on your own. For bookkeeping solutions that can address all of your needs, work with the professional bookkeepers at 1800-Accountant.