Being a freelancer allows you to work on projects that interest you at your own pace. Freelancers can pick work from several clients across many time zones and in different areas of expertise.
This freedom, however, comes at a price. Freelancers and self-employed individuals are responsible for determining a fair pay structure for their work, invoicing clients, and maintaining their bookkeeping records. They must also pay their taxes on time and put money aside for retirement and health insurance.
Employees don’t have to bother with accounting and bookkeeping because their company’s HR department does that for them. Freelancers and self-employed individuals, on the other hand, need to keep track of all transactions, invoices, and expenses because they are in charge of their livelihood.
With modern apps and bookkeeping tools, self-employed individuals can oversee their income and expenses and monitor client payments. While this simplifies bookkeeping, they still need to stay informed on any changes in tax-related issues, including deadlines, potential rebates, and tax incentives.
Whether you are new to freelancing or you’ve been self-employed for years, here are some accounting basics that may help you manage the books.
To make a living out of freelancing and self-employment, you should be familiar with basic accounting and bookkeeping to establish how much income you are earning. After all, you are responsible for all revenue you generate for yourself and your family. Therefore, you should make sure you know how much money you earn.
Organize all your clients and customers in a way that offers you a clear overview of your biggest clients, recurring ones, the most rewarding ones, and the longest projects you are working on. Such a system helps you evaluate how much money you earn, how regularly you get paid, and the trajectory of your business.
You have to organize a similar system for your expenses. List all your business-related expenses, from utility bills and rent to transportation, insurance, software licenses, office equipment, gas, and more.
This will tell you how much money you are spending on your business. Comparing your income and expenses will give you a clear picture of your profits. If your earnings are too low, you should either increase your income or reduce your costs.
The point of being a freelancer or a self-employed individual is to create earnings for yourself without answering to an employer. This freedom comes with accounting responsibilities that are easy to perform with the help of a bookkeeping professional. Knowing your expenses is crucial to your success.
When you have finished a project, don’t delay invoicing your client. It keeps the momentum going and helps you bring your business revenue regularly.
Some freelancers choose to invoice their clients once a month. They monitor all finished work and invoice all clients together. If you want to dedicate a specific time to invoice your finished projects, try to do so more often than once a month—perhaps once every 10 days.
While some clients may wait to pay their invoices, your business still needs a consistent cash flow to cover expenses and your salary. When you invoice regularly, you ensure a smoother business cash flow, and you have enough money in the bank to keep you and your business going.
It is easy to forget unpaid invoices, especially when you are busy finishing projects and chasing new clients.
An unpaid invoice means you are not getting paid for the work you provided. It is a burden on your business and your income.
Various accounting software packages keep track of unpaid invoices and remind you of the money you are owed after a specific time.
You can also include a due date on all your invoices to clarify to your clients that you expect to get paid by a specific date. If the invoice remains unpaid, you should send reminders for overdue payments.
Many freelancers and self-employed individuals find it daunting to nag clients to pay their invoices. And yet, their success depends on it. Make your invoicing simple and straightforward, and most clients will happily follow your payment schedules.
Many new freelancers make the mistake of rolling their personal and business expenses together. However, this makes it harder to catch up on your bookkeeping and keep records straight.
Your business account should only contain funds for business expenses, taxes, insurance, and other business-related payments. This lets you easily follow your cash flow and remind clients of overdue payments.
Your personal account should handle all personal expenses, from gym membership to holiday spending and grocery shopping.
Separating your accounts helps you get a better grasp of your business expenses. If, for example, you are paying too much for contractors, software, hardware, and office equipment, it will show in your profits. If your business expenses are mixed with your personal ones, the picture will inevitably get blurred. You won’t know how well your business is doing and whether you need to change your pricing tactics.
You should keep records of all your business-related transactions. You can keep hard copies of your invoices and receipts or use a current accounting tool that lets you take photos of your receipts and upload them online.
Utility bills, phone receipts, travel expenses, office supplies, hardware and software purchases, work insurance, website maintenance and hosting, marketing and advertising expenses, gas, office rent or mortgage, and internet bills are all deductible from your freelancing income.
Detailed records ensure you can lower your taxable income and reduce your tax liability during tax season.
Things evolve quickly. Some clients move to a different supplier while new ones sign contracts with your business.
One of the most common bookkeeping mistakes business owners make is not regularly reviewing their business’s financial health. Set aside time every few months to evaluate how your business is doing.
Most accounting tools let you input the time you dedicate to each project. Review how much time you spent on projects and assess whether you get paid adequately for each. You should review your rates if you feel you weren’t compensated for your time.
Also, check your expenses and see whether there is room for improvement. For example, you may find a better insurance package with lower rates, or you may be able to bundle your mobile and landline in a cheaper package. If you buy your office supplies in bulk, you may benefit from discounts, so you can order them once per year and benefit from lower prices.
Your review will also tell you which clients are paying on time and which ones require chasing up. For late-paying ones, establish a stricter payment schedule and send more reminders of overdue payments. This is called accounts receivable aging and gives you data about overdue debts.
There is also accounts payable aging, which concerns payments you must make to contractors, vendors, and suppliers. Try to keep both as low as possible for better cash flow prediction and a more robust business bank account.
Finally, check your profits and make sure you are paying yourself a livable salary. The fact that you work for yourself does not mean you shouldn’t get paid for your work. After all, you are your boss—and a good boss looks after their employees.
If your profit margin is too low, you could increase your sales by advertising your business more regularly or doing more work.
As a self-employed individual, time is your most precious asset. You dedicate time to each project, but do you know how long each project takes?
Time-tracking software helps you evaluate how much time each project requires. The software will keep track of administration time, including sending proposals, preparing reports, and issuing invoices, for example. It will also account for work time and communication time—i.e., how much time you spend talking and meeting with a client.
You need to get paid for the work you provide, but freelancers often need to pay more attention to the time they spend on projects. If you find out that, for instance, you spend too much time on administrative tasks, you could automate or outsource some of them and increase your productivity.
One crucial part of bookkeeping is tax compliance. As a freelancer, you must pay taxes for yourself and be responsible for your business. Every time you get paid, set aside a percentage of the money you earned for taxes. The rate depends on your earnings and expenses, but you should set aside 15% to 30% of your net income against taxes. If you do this regularly, you won’t have to panic come tax season.
If you expect you will owe more than $1,000 in taxes, you could also pay estimated taxes divided into four payments throughout the year.
If you are feeling unsure about the complexities of freelancing accounting, Remote Quality Bookkeeping is your professional bookkeeping service. We are a nationally leading outsourced bookkeeping company that routinely helps businesses with bookkeeping at competitive rates.
Our simplified solutions help your business keep track of invoices, receipts, and payments. We also take care of payroll, tax preparation, and bookkeeping to give you time and space to focus on making money for you and your family. Start your free trial, or call us at 866-567-4258 to talk to a bookkeeping specialist and let us help you focus on your business—not your bookkeeping!