Farwah Jafri | October 20 2021
Freelancing is a viable career option for people who enjoy working at their own pace. As a freelancer, you’re an independent contractor which makes you your own boss. You get to enjoy more time off chasing other passions and interests, but you need to make sure you’re also making enough money to sustain that lifestyle. This is why accounting and bookkeeping are crucial skills for freelancers so you can enjoy a profitable year.
Here are some of the most important bookkeeping tips that you, as a freelancer, should know and implement in your freelancing career to better understand your cash inflows and outflows.
The first tip is to keep your business reserves separate by creating a separate account for business income. When you mix personal and business accounts, you lose track of your earnings from the business or the expenses incurred as a result. When the two get mixed up, you might end up using some of it without deducting the taxes, which will create trouble for you later.
Keeping a track of your inflow and outflows is the most basic bookkeeping tip. Bookkeeping is maintaining a record of all your financial data, income, taxes, expenses, and deferred payments. Keeping all your records straight helps in planning, reporting, and predicting future cash flows as well.
Freelancing, at times, can be an inconsistent source of income. You are going to have dry spells that often last for months. This is where having a separate account and bookkeeping tips come in handy to save you from getting into acute financial troubles.
With freelancing, even your time spent in business is considered as the opportunity cost. For instance, if you are spending 3 hours a day freelancing, you earn about $30/hour. What if you spent this time at a job that paid $100 for a day? The 10 dollars that you lost if you are freelancing is also a cost that you must take into account.
See Also: How To Calculate Net Income
At the end of every financial year, you are bound to pay the taxes regardless of the other expenses you are responsible for.
Calculate the taxable income that has to be paid, and if you are unsure of the amount, we suggest you set aside thirty percent of your income for taxes. Even if the tax payable is less than 30%, you will have a bonus amount that will be left after the tax is paid!
It is best if you record the tax paid each year to know how much increment has been added in the payables each year; this way you will be able to determine the trend and predict a rise or fall for the next year or couple of years – a classic accounting tip for freelancers.
Depending on your state laws, to disclose your income to the authorities, you are required to have a perfectly maintained cash flow log. Bookkeeping for freelancers could be a difficult task for beginners as the income streams are often varied and irregular at best. It’s best to trust a professional who can help you out at a lower cost.
One of the best accounting tips that you are ever going to receive is about planning a budget and stick to it. Accounting for freelancers is all about analyzing the current cash flows and predicting how things will be in the next month or year.
Once you are following our bookkeeping tips and maintaining a record for every single expense and income, you surely don’t have to worry too much about preparing a budget – it will be automatically generated with each accounting period based on historical records.
In short, a budget not only helps you to be alert about when you might be overspending but also allows you to meet your periodic targets, allocate appropriate resources in projects, and manage your money efficiently, thus, keeping you in control of your freelancing income.
. While budgets help you plan for the long-term (quarterly, biannual or annual basis),
cash flow forecast statements represent your monthly cash spending and receipts. Cash flow forecasting gives you a more realistic view of your freelancing income and expenses. This accounting tip not only helps freelancers in managing their short-term expenditures but also enables them to distinguish clearly between two important financial metrics: cash flow and profits.
Making sure your accounts are well maintained and up-to-date is an important bookkeeping step for freelancers. This helps in knowing where your inefficiencies lie so that you manage your resources better.
Building your credit control policy is essential for your safety. Credit control means you should only work in advance for specific clients whom you are sure will pay the dues on time. Freelancing is a risky industry, and you will find many people exploiting freelancers in the form of unpaid labor. This accounting tip will help you minimize the risk of bad debts and bad credit periods.
Freelancing is all about maintaining your relations with your existing and potential clients. Or if you have a pool of employees, keeping a good relationship with them is also essential.
Producing and recording invoices, paying people, and getting paid on time is how things should be. These timely payments help keep the motivation levels intact, along with ensuring that the freelancers can also pay their bills on time.
Most freelancers in the U.S. are automatically considered sole proprietors in the eyes of the law. This means that the income you earn is regarded as your personal income, and you are, therefore, liable to file and pay taxes as an individual, which you have to pay quarterly.
A helpful accounting tip for self-employed people is to register their business as a Limited Liability Company (LLC) and acquire any essential licenses and permits accordingly. Doing so will not only ensure that you will not be personally liable for any debts incurred in the name of the company but having a legal company status means that you can keep proper accounting records as per professional bookkeeping practices followed in your state. A registered business can protect you from both personal liabilities and take advantage of tax savings.
Bookkeeping for freelancers can be a challenging task, especially if you are juggling multiple activities at the same time
A professional accountant takes care of the books so you can focus on getting more freelance work. If you are not from an accountancy background and know little about bookkeeping, it’s best to seek help from an expert.
Accounting experts like Monily enable freelancers, independent bookkeepers, and the self-employed in data entry, taxation accounting, and budgeting. We empower you to handle your accounts more efficiently, prepare year-end accounts for auditors, and concentrate on building a freelancing business on its feet.
Bookkeeping for freelancers is quite essential to know your incoming and outgoing cash. You get better at knowing where your money is being spent, and so you can control and curtail unnecessary expenditures. An important benefit of following these bookkeeping tips is that you are prepared for any emergencies or a lull in your freelancing income beforehand.
Check-in with professional bookkeeping and accounting services so you can save the hassle of running your books when you can spend that time working on more freelance opportunities. Want to learn about how to make your freelancing career more profitable? Get in touch with our experts today!
Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.