It’s easy when you’re starting out as an independent contractor to put off those tasks you hate doing. After all, we become self-employed to do the things we love most in life! But leaving your bookkeeping until the last minute is a recipe for disaster!
This blog post will cover the basics of bookkeeping for independent contractors and how to get started. We’ll discuss the tools that can help you stay organized and review the key elements of bookkeeping. That way, you’ll be best prepared when the time comes to make sure you’re ready to submit your taxes or any other legal requirements down the line!
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Understanding the Basics of Bookkeeping
Bookkeeping is an essential part of business management for independent contractors. As a business owner working on a contractual basis, it helps you keep track of your income and expenses. The basics of bookkeeping involve three main steps. These are:
- Record keeping involves recording all relevant financial transactions in an organized manner, such as in a ledger or balance sheet.
- Categorizing requires assigning each transaction to a specific account or category.
- Reporting involves using all the recorded and categorized data to create financial statements and reports that provide valuable insights into your financial performance.
Understanding basic bookkeeper duties early on will help you have greater control and insight into your financial health and help you make better decisions!
Creating a Budget for Expenses
With bookkeeping for independent contractors, creating a budget for expenses is essential. Doing so helps you track your spending and ensures you have enough money to cover your monthly costs. To create a budget, start by itemizing your necessary expenses, such as rent/mortgage, utilities, and insurance.
Subtract these from your monthly income (whether from freelancing, a job, or investments). That way, you’ll have a better idea of how much you can realistically spend on entertainment, eating out, and other items. It’s also a good idea to allocate some of your income towards savings and investments, as these will help you in the long run.
Keeping Track of Employee Income and Expenses
Keeping track of income and expenses is crucial for independent contractors, whether yours or an employee’s (If you have one!). Doing so helps you stay on top of taxes and file accurate returns on time.
To properly track your income and expenses as your own business entity, create a spreadsheet that includes all sources of income and any associated costs. Make sure to include every dollar, such as expenses for materials, travel, advertising, and employee benefits and costs.
Additionally, record all invoices received and payments made. Finally, consider using accounting software to help you streamline the process of tracking business expenses.
Suppose you’re considering building an employer-employee relationship with a client. In that case, it’s a good idea to seek advice from a business professional as the rules may differ. That way, you’ll get reliable advice on the tax implications of an employer-employee relationship for your business.
Managing Cash Flow
Managing cash flow is one of the biggest challenges for anyone with independent contractor status. Cash flow is the money that comes in and out of your business over time. Therefore, it’s important to track income and expenses, so you know how much cash you have available at any time.
Effective cash flow management is critical to staying on top of your finances and avoiding financial difficulty. To help manage your cash flow, track your income, create a budget, and establish a line of credit. This will give you the necessary tools to maintain your financial health.
Keeping a separate bank account for your business expenses is also good practice. It’s not a requirement like other business statuses, but it’ll make bookkeeping easier in the long run!
Tax Planning
As an independent contractor, keeping track of your income and expenses for tax planning is essential. But first, you need to understand the tax implications of your income. For example, that means knowing what deductions you can claim.
It’s also worth understanding how to reduce your tax payments using tax credits. Examples include social security, medical expenses such as Medicare, federal income tax, and unemployment taxes.
To ensure you’re prepared, you should set aside at least 20% of your income for self-employment taxes. Save this money in a separate account or designated fund so you don’t accidentally spend it. You’ll then use it to pay your taxes when the time comes.
Tracking your income and expenses throughout the year will enable you to determine your estimated tax liability regarding tax season. You should consult a qualified tax professional if you need help calculating payroll taxes.
Utilizing Bookkeeping Software for Accounting
For independent contractors, bookkeeping software can be a lifesaver. It frees up a lot of time for balancing the books. It’s also a good idea if you plan on hiring an accountant.
Utilizing bookkeeping software, whether accessed directly or through an accounting service, gives you the ability to have up-to-date insights into your financial situation. It can also help you make better financial decisions in the future. Plus, with various features like automated invoicing, tax calculators, and detailed reports, you can be sure that your bookkeeping is always on point.
Many digital accounting solutions have their own accounting apps. These accounting apps allow you to manage your finances and scan your expense receipts. This makes it a great option for any independent contractors with employees on the books, especially those who work in the field.
Working With a Professional Bookkeeper
If you still find this too much, consider hiring a professional bookkeeper. These are experienced and qualified professionals who are knowledgeable in accounting and financial record keeping.
They can help you manage your business finances and create accurate and detailed financial records of your business transactions. Some will even allow you separate business and personal expense tracking too! Working with a professional bookkeeper is an excellent way to ensure your financial records are accurate, up-to-date, and compliant with tax laws.
Business consulting services, accountants, and professional bookkeeping services can also provide advice and guidance on best practices for managing your finances and preparing for tax season. For example, they’ll be able to see tax deductions you never knew you could claim, such as travel expenses or certain office supplies.
What’s the Difference Between a Bookkeeper and an Accountant?
There is an overlap between the duties of accountants and bookkeepers. Both take care of business finances. However, bookkeeping refers to recording financial data, while accounting refers to the analysis and strategic planning as a result.
Thus, the terms are often used interchangeably, where a bookkeeper may provide accounting advice, while an accountant will also offer bookkeeping as part of their services.
It’s essential to check when hiring a professional which of the two services you’ll be getting and any relevant qualifications they may have. Also, check whether a self-employed accountant or bookkeeper should be classified as an employee for legal purposes.
Related: Booming Bookkeeping Business Review. Is It a Scam?
Start Accounting from Day One
Bookkeeping for independent contractors is a critical component of their success. It can be a daunting task and requires a lot of patience and attention to detail. However, the benefits of accurate bookkeeping for independent contractors far outweigh the costs of mistakes and missed opportunities.
The key to successful bookkeeping is to stay organized, keep accurate records, and consider hiring skilled bookkeepers or accounting services when needed. With the right approach, independent contractors can maximize their success and minimize financial risks.
Related: 25+ Online Jobs from Home Without Investment
Related: 15 Best Side Hustles for Accountants to Make Extra Money
How to Become an Accounting Independent Contractor
Independent contractors can work for themselves and set their own hours, but becoming an independent accounting contractor requires some preparation. However, with a few key steps and dedication, anyone can transition from traditional employment to becoming an independent accounting contractor.
Consider opting for this free training workshop about getting your bookkeeping business started. Or you can review the very detailed overview of what it’s all about, including a great interview with an accounting professional who was stuck and wanted to build her business but didn’t have the confidence yet.