This article is part of a larger series on Accounting Software.
As a self-employed professional or freelancer, it’s essential that you’re involved in every aspect of your business. This includes managing your books to ensure that you’re profitable and entitled to every possible tax deduction. To help you, we compiled 10 key bookkeeping tips for self-employed professionals and freelancers.
- Separate personal and business accounts.
- Invoice on a regular basis.
- Keep detailed records.
- Track and reimburse business mileage.
- Establish a system that works for you.
- Outsource to an expert if needed.
- Review financial reports.
- Create a system for managing receipts.
- Use time tracking software.
- Pay quarterly estimated taxes.
1. Separate Personal & Business Accounts
Calculating your net income or loss can be tricky if you don’t keep track of which finances are personal and which belong to your business. To avoid any confusion, you should open a separate account for business transactions. Even if you’re only supplementing your main income with freelance work, separating these transactions will show how much money is tied up in your business and, ultimately, make preparing for tax time much easier.
Check our guide to the best bank accounts for self-employed professionals to find out which accounts may be best for your use. We also recommend using a business credit card to separate and identify business expenses easily.
2. Invoice on a Regular Basis
It may seem counter-intuitive, but freelancers often put off sending invoices to their customers. If you don’t send your invoice promptly, you will have to wait longer to receive payment. We suggest invoicing either immediately, upon completing a project or reaching a milestone, or at the end of each month for all work completed within that period. To make it simpler, you can use a separate invoicing software program or the invoicing features that come with your accounting software.
3. Keep Detailed Records
An important factor of bookkeeping for freelancers and self-employed is tracking your day-to-day bookkeeping tasks. Even if you run a relatively small operation, you’re bound to rack up a number of expenses over the tax year. Freelancers can claim all kinds of work-related items, but only if these can be verified by the IRS upon request.
Once you have set up a system, you need to maintain accurate and detailed records for all of your business activities, including
- Payments for expenses including receipts
- Amounts received from customers
- Bank and credit card statements reconciled monthly
- Receipts for equipment purchased
- Inventory purchased and sold
The easiest way to track this information is to use accounting software for freelancers, which automates all of your accounting processes, such as invoicing customers and reconciling your bank accounts.
4. Track & Reimburse Business Mileage
Your business can deduct a standard rate per mile (58.5 cents for Jan.1, 2022, to June 30, 2022, and 62.5 cents for July 1, 2022, to Dec. 31, 2022) for any business mileage you drive using your personal vehicle. Be sure to track the date, miles, and purpose of each business trip.
We recommend writing a check to reimburse yourself for the expense so that the expense flows through your business checking account and won’t inadvertently be overlooked at tax time. Since you’re using the standard mileage rate, the business shouldn’t pay for any actual vehicle expenses, such as gas and repairs.
To track your mileage easily, we suggest using one of our best mileage tracker apps for small businesses.
5. Establish a System That Works for You
More than 60% of business owners do their own bookkeeping, thanks to the prevalence of user-friendly accounting software. However, despite the ability to work more flexible hours, it can still be tricky for freelancers to fit everything into a hectic week. By the time tax season rolls around, you may not be as prepared as you thought you were. To overcome this problem, we suggest establishing a bookkeeping schedule to ensure that every expense and payment has been recorded.
Here are some bookkeeping procedures and a rough idea of the time frames in which they should be processed:
- As soon as a project is finished, prepare and send the invoice to your customer, making sure to include any costs involved, such as goods or contractor fees. Try not to wait for more than a few days to invoice your customer, as it’s vital to keep cash flowing into your business.
- If you have online access, check your bank account every day to monitor the payments received from customers that pay by direct deposit. Make sure to allocate those payments to your customer invoices.
- Once a month, email customer statements to show them what invoices or amounts are outstanding and the payment due date. You can also resend the invoice by itself with a reminder of the due date if the customer is late in paying.
- As soon as you make a purchase with your bank card, keep the receipt and write any important details on it. You can either take a photo and save it to an online filing system or keep it in a physical file. Most small business accounting software allows you to attach an image of the receipt to the transaction within the system.
- At least once a week, enter any credit card purchases in your accounting software. Be sure to enter every charge separately so you can compare the charges to receipts. Entering the credit card charges during the month results in a credit card liability that should then be paid each month. Avoid entering your credit payment as a lump-sum expense as this makes it impossible to tie your accounting records to your credit card receipts.
- As soon as you receive a customer payment by check or cash, receive it against the invoice and deposit it to the bank account.
- Set up bill payments to your suppliers by either writing checks or setting up direct payments online. Pay attention to the due date on the invoice and process payment accordingly.
- Once a month, reconcile your bank account to make sure that all of the transactions on the bank statement match the transactions in your accounting software. Make the necessary adjustment so that the balances match.
6. Outsource to an Expert if Needed
Although you may be tempted to handle all of your company’s bookkeeping duties yourself, it may make more financial sense to hire an expert. Depending on the accounting software you select, the learning curve may be either steep or nonexistent.
You can have someone assist you with installing the software and setting up your company account, including your chart of accounts, customer and vendor lists, and products and services. They can also train you on how to use the software, including how to make changes or troubleshoot errors. Once you recognize how efficiently your financial expert has set up your books, you can determine whether to work with them on a weekly, monthly, or quarterly basis.
Bookkeeping can be a collaborative effort, especially if you prefer to create your own invoices or pay your own bills. A good bookkeeper can customize their services, only handling the tasks that you decide to outsource.
7. Review Financial Reports
Freelancers and self-employed professionals often struggle with visualizing and monitoring cash flow. There are a few simple accounting reports that can help you do so:
- Cash flow statement: This separates your cash flow by operating, investing, and financing activities. Negative cash flow from operations is potentially a serious issue but can sometimes be masked by additional borrowing. You can identify negative cash flow from operations by examining your cash flow statement.
- Accounts receivable (A/R) aging: This shows you how much each customer owes you and whether the debt is current or overdue. This information will help you to determine when to follow up with a customer who is late in paying your invoice and will give you an idea of how much cash you should collect in the near future.
- Accounts payable (A/P) aging: This shows how much you owe each of your vendors and when the bills are due. It helps you to determine future cash flow needs and anticipate cash flow shortages.
8. Create a System for Managing Receipts
It’s important to keep track of your receipts because the IRS requires them for all tax deductions. We recommend selecting an expense or accounting tool that has a mobile app and a feature that allows you to take photos of receipts and upload them to the software. If your accounting software doesn’t have a mobile app, you can download a receipt scanner app instead.
If you prefer to go the old-fashioned route, you can create a file folder for each vendor and place paper receipts there. You can also create a dedicated folder in your email inbox where you forward electronic receipts to be added to your accounting software regularly.
9. Use Time Tracking Software
Even if you mostly work on projects that are fixed price rather than by billable hours, using time tracking software will show you how much time different types of projects take. It’ll also allow you to isolate the time you spend on areas like administrative tasks, business development, and client communication.
The best time tracking software for freelancers lets you visualize time spent so that you can make better bids or see if you’re spending too much effort on unimportant tasks. Ideally, it’ll include online payments, invoicing, reports, and integrations. The more precise the data, the better—you may think that a project is profitable until you take into account the time you have to spend to acquire the business’ needs or the additional client communication.
10. Pay Quarterly Estimated Taxes
One of the most common self-employed errors isn’t saving enough money to pay your tax bills, which includes self-employment taxes. According to our article on important accounting statistics, 27.8 million small businesses filed taxes as sole proprietors in 2019. This is a significant number, which reflects the number of freelancers and self-employed workers that need to make sure they’re compliant with tax requirements.
It’s a good idea to set aside 15% of your net income in a separate account to cover self-employment taxes. This is in addition to the 10% to 25% most freelancers will need to set aside for income taxes. Since your taxes won’t be deducted from your paychecks automatically, you should make quarterly estimated tax payments to avoid an underpayment penalty.
With a total tax rate generally between 25% and 40%, it’s extremely easy and dangerous to fall behind on your quarterly estimated tax payments.
How Bookkeeping for Freelancers & Self-employed Is Unique
Freelancers and self-employed individuals are mostly concerned with tracking their income and expenses to maximize the number of deductions when filing a Schedule C tax return each year. They must ensure that expenses are categorized correctly, bank accounts are reconciled on a monthly basis, and they stay on top of invoicing customers with follow-ups as needed. They must also be able to calculate the quarterly estimated tax payments and issue 1099s for any contractors.
Whether you opt to work with a tax professional or decide to file your income tax return yourself, it’s useful to have a reliable resource for any questions or issues that arise. You can also benefit from an accountant who is available on an as-needed basis, not only during tax time.
Having a strong grasp of the most basic bookkeeping tips for freelancers and self-employed professionals is essential for the success of your business. It’ll also help you to make informed decisions and position your company well for future growth.