Bookkeeping for Independent Contractors: Everything You Need to Know

Each year, all employee taxable income is proven on a W-2 form and filed to the IRS. Many new independent contractors will begin by handling their own bookkeeping. Being accountable for your books might help you save money while beginning your firm because cash flow bookkeeping for independent contractors can be limited in the early stages. It will also be easier for you to see your income and expenses as an independent contractor if your bookkeeping is transparent. You can decide wisely on how to expand your business thanks to the transparency of the financials.

Bundle includes the cost for only one state and one federal tax filing. Each additional TurboTax Self-Employed federal tax filing is $119.99 and state tax filing is $44.99. Each additional TurboTax Live Self-Employed federal tax filing is $199.99 and includes live on screen tax advice from a CPA or EA, and state tax filing is $44.99.

Best for Professional-Looking Invoices: FreshBooks

Turn your receipts into data and deductibles with our expense reports that include IRS-accepted receipt images. This will separate your business transactions from your personal expenses. Independent contractors may sometimes seem like another employee, but they are a completely different business entity than the businesses they perform work for. As a general rule, independent contractors should save anywhere from percent of their income for tax purposes. Paying taxes and having accurate snapshots of what you are estimated to pay in taxes helps a lot. Paying in your estimated taxes every month or quarter will help you avoid unexpected tax liability.

• You should also check to see if your state has any specific requirements to make a service contract legal and binding to ensure your agreement is in accordance.
• Import expenses directly from your bank account and effortlessly sort business from personal.
• This is an information form for filing to send non-salary income numbers to the IRS.
• Founded many years ago, FreshBooks started as an accounting service for freelance professionals like lawyers, accountants, contractors, and consultants.
• That’s why we’ve created a free set of 32 accounting and bookkeeping workflow templates to help you standardize your workflows.

If you’re self-employed, you’re not required to hire a bookkeeper or an accountant. However, hiring a professional is highly recommended when it comes to filing your taxes and making your tax payments. Submitting late or incorrect amount of tax payments can result in penalties and fines. If you are not diligent in separating your personal and business bank accounts, you might get paid directly to your personal account.

The complete guide to filing self-employment taxes

You risk receiving payment directly to your personal account if you are not careful to keep your personal and company bank accounts separate. The simplicity of invoicing accounting software will make this easy to accomplish. You may invoice your customers and keep track of overdue invoices with accounting software. You should open a separate bank account for your independent contractor firm.

Putting your estimated tax payments in each month or every three months will help you avoid a tax bill that isn’t expected. The downside is that your employers won’t contribute to your 401(k), workers’ compensation, bonuses, unemployment taxes, payroll taxes, or health insurance (K). The Occupational Safety & Health Act (OSHA), the Fair Labor Standards Act (FLSA), and Title VII of the Civil Rights Act are just a few of the employee benefits you would forego. If you and your team struggle to keep track of multiple promised delivery dates, it’s time to implement a workflow management tool.

A 10-Step Checklist for Starting a Bookkeeping Business

Proper bookkeeping provides clarity and accuracy in your financial records, allowing you to make informed decisions and grow your business. Regular review of your books and monitoring of cash flow are important practices to stay on top of your bookkeeping efforts. Reconciling bank accounts https://www.bookstime.com/ is critical in staying on top of your bookkeeping. This involves comparing the transactions recorded in your bookkeeping system with the transactions recorded by your bank. Reconciling your bank accounts regularly can help ensure that your financial records are accurate and up-to-date.

Each check has a portion withheld to pay for unemployed benefits, social security, Medicare, and tax obligations. All employee taxable income is documented on a W-2 form and reported to the IRS each year. As mentioned before, most of the popular bookkeeping and accounting software on the market has built-in features for maintaining records built in, which makes this process much easier. The best accounting software for independent contractors can increase your efficiency, save you money, protect your privacy, and come with various features that make it easy to work. Having a clear picture of their financial figures will help any independent contractor understand their business better.

That means every transaction that brings money in and each transaction that goes out of the business account(s). No matter how successful you feel as an independent contractor right now, it would help if you looked to the future. If you do not file your profit and expenses, you are putting yourself at risk of being audited by the IRS. You might ask yourself if you can afford to hire a professional before making your decision. However, the question you should be considering is whether you can afford to forgo seeking professional assistance with such crucial information.

• Independent contractors, also known as freelancers or self-employed workers, expend their funds to provide a service.
• There are a ton of great free and paid options that make it much easier to handle bookkeeping for independent contractors.
• This may include creating a filing system for receipts, invoices, and other financial documents and maintaining a system for recording transactions consistently and accurately.
• Paying in your estimated taxes every month or quarter will help you avoid unexpected tax liability.
• You can stuff your receipts into one of our Magic Envelopes (prepaid postage within the US).

It’s possible that your friend’s bookkeeping is done differently from yours. The most crucial thing is to establish and maintain a financial tracking system that works for you. You have a lot more freedom as an independent contractor than most other types of workers have.