You have the freedom to select the projects you feel will best serve your professional needs when you work independently. Additionally, it implies that you are in charge of handling duties that an employer would typically handle for you, such as funding your own retirement plan, buying office supplies, and paying self-employment taxes. But aside from bookkeeping, you wouldn’t give up your freelance work for anything.
Contact our services if you’re a contractor in need of back-office assistance. We offer fundamental bookkeeping services to independent contractors, such as managing accounts payable and receivable, reporting, financial planning, and business consulting.
The law considers you to be a business even though you are an independent contractor. Taxes must be paid, and maintaining your bookkeeping is a requirement for any business. You probably chose to work for yourself to escape the routine workday or because you have a specialty that makes you valuable to employers. You might not have understood, though, how crucial it is that, as an independent contractor, you maintain your bookkeeping and accounting. The term “employee” refers to people who perform standard 9–5 jobs for a business. A portion of the employee’s pay will be deducted by the employer, who will then report it.
Each check has a portion withheld to pay for any unpaid taxes, social security, Medicare, and unemployment benefits. Every year, a W-2 form is used to document and submit to the IRS all taxable income from employees. All employees of a company must adhere to this. The situation is different when a business employs an independent contractor. Contractors are responsible for making their own tax payments and do not rely on businesses to do so for them. While all of this may seem intimidating, with the right assistance, you will be managing your taxes and bookkeeping like a pro in no time!
Differences Between Independent Contractors and Employees
In essence, you are not an employee of the company you are working for as an independent contractor. Regular pay, withholding of taxes from that pay, and the creation of a schedule by the employer are all benefits of employment.
Employees are the opposite of independent contractors. You will be paid for the tasks you complete, be in charge of your own tax preparation, and be able to choose the hours you want to work.
You have a great deal more freedom as an independent contractor than most other types of workers do. You are your own boss, responsible for choosing your own schedule and paying your own taxes.
How Can Independent Contractors Be Successful?
Choose an accounting technique:
When independent contractors file their first tax returns as a business, they have two main accounting options to choose from.
- The most straightforward tax return type is cash basis. When you receive income, it records it, and when you pay bills, it records those as well.
- By using an accrual basis, your costs and cash flow will be tracked as you earn it rather than when you receive it. Since you must account for the money after the work is complete, this can be more complicated. However, it is well known to provide a business with more information about their outlook for the future.
When deciding which accounting method will work best for your independent contracting business, it is recommended that you consult a CPA for guidance.
How to File Taxes as an Independent Contractor
The IRS requires self-employment taxes from independent contractors. To put it simply, you will currently pay Medicare 2.9% and Social Security 15.3%–12.4%. A Schedule SE must be filed to make payment.
Your individual income tax return Form 1040 will include a Schedule SE as one of its schedules. The total of your self-employment income or loss should be determined using the Schedule C form of Form 1040’s line 31 before filling out your SE.
They must file and send you a copy of Form 1099-MISC whenever you finish more than $600 worth of work for a client. This is a form that should be filled out and submitted to the IRS if you have non-salary income. You should follow up with your client if they fail to send you a Form 1099-MISC.
It’s important to remember that independent contractors must set aside money to cover their own contributions to social security, Medicare, and self-employment taxes.
Bookkeepers’ Roles in Accounting:
A crucial function of the bookkeeper is to maintain records. To ensure that all bills are paid on time, transactions are correctly recorded, payrolls are processed on schedule, and taxes are filed properly, a bookkeeper’s primary responsibility is to oversee these tasks.
However, from company to company, the role can vary greatly. In other words, outsourcing bookkeeping services oversees documenting regular financial transactions and keeping precise ledgers. Along with keeping track of office expenses, maintaining records, and paying vendor invoices, they are also responsible for these tasks.
Four basic steps comprise bookkeeping. These four actions are:
- Paperwork such as an invoice, a receipt, and a credit note are involved when a transaction occurs. It is necessary to store the original document in a location that makes it simple to locate it when needed.
- Writing down the initial journal entries that debit and credit the specific accounts is step two. The “original books of entry” contain a record of the specifics from the original paperwork. These documents are known as cash books, sales books, purchase books, and petty cash books.
- Recording transactions in ledger accounts is step three. The original entry’s information is transferred from the books to the ledger along with its details. The business operations’ total credit and debit are recorded.
- Making room for entries at the end of each accounting period. The ledger is used to create a set of final accounts at the end of each fiscal year. The final accounts contain a trading account, a balance sheet, and a profit and loss account.
Various types of bookkeeping systems
A bookkeeping system can be of two types:
- Each transaction is recorded in a journal as a single entry under the single-entry system, which is a straightforward method of bookkeeping. A journal of outgoing and incoming cash is maintained as part of this cash-based bookkeeping process.
- Every business transaction is recorded using the “double entry system,” which is a method of bookkeeping in which each credit or debit is made to at least two different accounts. In the double entry system, it is necessary for the debits and credits to balance each other out.
Be sure to keep up with your bookkeeping and accounting:
For all independent contractors, it’s critical to stay on top of the accounting and bookkeeping procedures used in your company. You can plan and make informed decisions for the future by creating financial reports using proper bookkeeping.
As an independent contractor, it’s crucial to keep track of the money you deposit and withdraw from your account.
Regardless of how big or small your business is, you must keep track of every expense. If there is an audit, you won’t be able to support your costs if you don’t have the necessary records.
An independent contractor can keep track of their earnings and outgoings in a variety of ways. It’s possible that your method and your friend’s approach to bookkeeping are different. The most crucial thing is to develop and maintain a financial tracking system that works for you.
Examples of what to track:
- Office space rental
- A computer, a printer, or a phone receipts for purchases
- Hours spent on a project
- All tasks you complete for clients
- Price per hour for each client
- The expenses of running your business
- Invoices that have been paid to you
- Transfers from the bank
- Client fees
- Travel costs
- Internet and phone charges
- Career-focused seminars, classes, and publications.
- Office equipment
- Costs associated with web hosting and design
- Software for keeping track of finances.
Be Honest About Your Earnings and Expenses:
You risk receiving payment directly to your personal account if you are not careful to keep your personal and business bank accounts separate.
It can be too alluring to just brush it under the rug to get paid to your personal account. Even though there are some immediate advantages, such as not having to pay taxes on that money, getting caught during an audit is not worthwhile.
It will also be easier for you to see your income and expenses as a contractor if your accounting is transparent. You can decide wisely on how to expand your business thanks to the transparency of the financials.
For bookkeeping and accounting, should I do it myself or hire a pro?
Many new freelancers will begin by doing their own bookkeeping. Early on, money may be tight, so keeping good records can help you save some cash as your company grows.
You’ll realize how useful it would be as your company expands if you could use the time you spend on bookkeeping to complete tasks that are more closely aligned with your area of expertise, find new clients, and other things. You’ll have the freedom you need to expand your business as an independent contractor if you hire a professional to handle your bookkeeping needs.
It will be advantageous for most independent contractors to hire a CPA at the very least to assist during tax season. Your balance sheet, income statement, statement of cash flow, and other financial reports can be created and understood by a competent accountant, who can also assist you with tax season. It provides you with a clearer picture of the state and direction of your company at the moment.
You might ask yourself if you can afford to hire a professional before making your decision. However, the question you should be asking is whether you can afford to forgo seeking professional assistance with such crucial information.
Despite the fact that they can occasionally resemble another employee, independent contractors are actually their own legal separate legal entity from the companies they work for. An employer’s ability to easily deduct taxes from each pay check for an independent contractor is not available. They operate their small businesses instead through independent contractors. The books and accounting need to be their main priorities.
Any independent contractor will be able to understand their business better if they have a clear picture of their financial data. More accurately calculated tax payments to the IRS will be possible for them. If they are aware of their costs, they will be able to charge more for their services.
1. What Is Independent Contractor Accounting Software?
Accounting software for sole proprietors is accounting software designed with sole proprietors in mind, as opposed to large corporations. The software may be downloaded to your computer or may be used as an app on your smartphone or tablet. Accounts payable and accounts receivable management, bookkeeping, and organizing records and receipts are all typical uses for accounting apps for independent contractors.
2. How Much Does Independent Contractor Accounting Software Cost?
Independent contractor accounting software varies in price. There are free and paid versions, with more features typically available in the paid versions. Some apps provide free 30-day trials, while others give discounts for paying for the entire year in advance.
3. Does Independent Contractor Accounting Software Make Sense Financially?
Independent contractor accounting software is an investment that pays off. A self-employed individual oversees their own accounting, bookkeeping, tax filing, and deadlines. You can save time, money, and effort by using an accounting app, which also makes it easier to keep track of your income and expenses. Start with a less expensive, basic accounting software package if you’re just getting started or have a small number of clients. If your business expands, you can always upgrade to a version with more features.
4. What Factors Influenced Our Selection of the Best Accounting Apps for Independent Contractors?
There are numerous accounting apps available on the market. After reviewing the most popular ones, we narrowed them down to the top seven. Based on their functions, features, and integrations, we selected these as the best accounting apps for independent contractors. We also looked at their pricing, the number of versions available, and whether the app is tailored to the specific needs of independent contractors.