Bookkeeping Tips for Independent Contractors
Efficiency is everything when you run your firm. You cannot afford to lose any time in your capacity as an independent contractor. You require a teammate or someone to watch your back and double-check your job. That also applies to your bookkeeping! Careful bookkeeping for independent contractors is necessary to maintain the viability of your small firm or to expand it over the long term. A small business must keep records. But when you don’t have the time or expert help, it can be challenging to do it correctly.
As an independent contractor, whether an electrician or a freelancer, your accounting needs will differ. Whatever you choose to do, you are still effectively running a small business, which has several responsibilities and opportunities. Bookkeeping is essential for all of this.
What Distinguishes an Independent Contractor From an Employee
Employees are paid permanently by their company. And a W-2 is used to report their compensation. Whether they work with one larger company or several different clients, contractors operate as independent business owners, and their payments are reported using an IRS Form 1099.
For tax purposes, employees might need to keep track of a few things, but their employers are in charge of keeping the crucial documents. However, accounting for independent contractors is significantly more difficult.
What Accounting Techniques Can a Freelancer Use?
Simply entering each transaction into a contractor bookkeeping spreadsheet can serve as the basis for contractor bookkeeping. All you need to do to keep track of your income and expenses is to make a note of it whenever you get or spend money.
Single-entry bookkeeping is the simplest kind of accounting. And involves recording each transaction in a general ledger, whether on paper or a spreadsheet. It’s adequate for modest enterprises, but you might need to switch to double-entry accounting if your company grows or becomes more complex.
Every transaction in double-entry accounting necessitates two entries in your records. A sale, for instance, would result in two entries: one for the rise in income and one for the decrease in inventory. You might wish to invest in accounting software to assist you to manage your accounts if a simple spreadsheet is no longer sufficient.
The Significance of Tracking Expenses as a Freelancer
The most important part of any independent contractor record-keeping procedure is spending, even if it would seem like money should come first. It’s important to know how much money you make. But it’s equally important to know where and how much of it you spend.
You are more equipped for tax filing and even routine business decisions the more knowledgeable you are about what’s going on in your company.
Some Things an Independent Contractor Should Monitor
One of the things you should track with your independent contractor bookkeeping is expenses. These essential standard bookkeeping words should be at the top of your list of things to remember as an independent contractor. You should be familiar with them.
Keep Track of Your Revenue
It should go without saying, but you should be monitoring your income. What kind of income are you generating and how much? Do some products and services generate significantly more money than others?
Record All Business Costs
Even though this has already been suggested, keep a record of all your business spending. Since the majority of business spending will be tax deductible when it’s time to file, doing this is particularly crucial when it comes to bookkeeping for taxes.
The mainstay of bookkeeping for independent contractors is profit tracking, which you can do if you keep track of your earnings and outlays. How much money do you make after deducting your costs? You may analyze and make plans based on your profit margins over time by tracking your profitability.
Your Tax Payments
Keeping track of tax payments is crucial because they fall under a certain category of expenses. You must, among other things, be aware of where and when your money is moving. You must keep track of these payments as an independent contractor to ensure they occur.
Payroll taxes, which cover self-employment, social security, and Medicare taxes, are what you should be paying. Additionally, you must pay quarterly estimated income taxes for the whole tax year. To ensure that these payments are made on time, keep track of them.
Scheduled or projected expenses that have not yet happened are referred to as accounts payable. You may owe the money, but it hasn’t yet left your bank account. Knowing how much money you owe and how much you have on hand at any given time is necessary for good bookkeeping.
Accounts Receivable Expected payments that have not yet been made are referred to as accounts receivable. Until you receive payment for the purchase, any transactions where you sell a customer something on credit will be recorded in your accounts receivable.
To Sum Up
You’re not required to handle the bookkeeping on your own. Independent contractor bookkeeping can be complicated.
To set up your accounting system and establish a procedure for retaining adequate records, it helps to speak with an accounting expert. Contact Your Part Time Accountant so you don’t have to worry about your bookkeeping!