Bookkeeping for Independent Contractors: Everything You Need to Know

If you work as an independent contractor, the Internal Revenue Service (IRS) classifies you as a business. You will need to perform bookkeeping and pay your business taxes to avoid potential problems. Unlike an employee, you won’t receive a W-2, and the businesses with which you work won’t pay the employer share of your Social Security and Medicare taxes. You will be responsible for paying the self-employment tax. Here’s what you should know about bookkeeping and taxes as an independent contractor from the accounting professionals at TMD Accounting.

Independent Contractors vs. Employees

Independent contractors are not considered to be employees of the businesses for which they work. Employees receive regular wages, have schedules created by their companies, and have taxes withheld from their paychecks. By contrast, independent contractors are paid for the projects on which they perform work, handle their schedules, and handle tax payments on their own.

You will also be responsible for buying private health insurance and will not be eligible for workers’ compensation if you are hurt on the job. Finally, independent contractors also are not protected by major employment laws.

Accounting for Independent Contractors

The first thing you should do is determine which accounting method to use, including the cash-basis or accrual-basis accounting methods. The cash-basis method is simple and simply means that you track your income upon its receipt and your expenses at the time you pay them. The accrual-basis method involves counting your income when you earn it and your expenses at the time they accrue rather than when you receive or pay them. A certified public accountant (CPA) at TMD Accounting can help you choose the method that is best for your independent contracting business.

How Independent Contractors Pay Taxes

As an independent contractor, you will have to pay the self-employment tax, which means you will pay taxes to Medicare and Social Security. The self-employment tax is reported on Schedule SE. Before you complete Schedule SE, you will first need to use Schedule C of Form 1040 to calculate your business’s total income or loss.

If you earn more than $600 while working for one of your clients, your client will send a Form 1099-MISC to you and the IRS. If you do not receive this form, you are still responsible for including the money that you earned. You should have a separate saving account you use to deposit money throughout the year to pay your self-employment tax so that you don’t have a huge tax bill at the end of the tax year. Independent contractors typically also must make quarterly estimated tax payments throughout the year.

Bookkeeping for Independent Contractors

You must conduct proper bookkeeping throughout the year as an independent contractor. Having organized books can also help to ensure that you don’t forget to pay accounts receivable, that you send your invoices on time, and that your bills and expenses are paid on time.

You will need to track all of the money that comes in and that you pay out for business-related expenses. You should have a separate business bank account and keep your personal account separate.

Track all business-related expenses and save receipts, including the following examples:

  • Office lease expenses
  • Business computer, phone, and printer receipts
  • Hours spent per project
  • Jobs you have completed
  • How much you charge per hour for each client
  • Operating expenses
  • Money paid to you
  • Bank transfers
  • Travel expenses
  • Bills for utilities, phone, and internet
  • office supplies
  • Career-related courses, subscriptions, and books
  • Accounting software receipts

Establish your Business Entity

It is a good idea to register your business with the state and choose a legal entity structure under which to operate. You can opt to register as a sole proprietor, but this type of entity will not protect your personal assets from potential liability claims. Many independent contractors instead choose to form limited liability companies (LLCs), which offer liability protection. You should also apply for a federal employer identification number (FEIN) from the IRS even if you don’t have employees.

Once you establish your entity structure and get a FEIN, you can open a business bank account. Make sure to also open a business saving account to save money for your taxes and set aside at least 30% of your income each month. Keep your personal and business accounts separate to avoid potential problems.

Reconcile your accounts at the end of each month to make sure your books and accounts accurately reflect your income and expenses. Accounting software can be helpful, and hiring a professional from a firm that offers small business accounting services can be even more so. Most independent contractors can benefit from hiring a CPA to help during tax time to help prevent potential mistakes. Depending on your business, you might also benefit from having a CPA help throughout the year to provide guidance and support that could help you save money as you grow your business.

Find an Accountant for My Small Business

When you are an independent contractor, you are also a small business owner. Keeping on top of your books and taxes is critical to prevent potential tax problems. Call TMD Accounting today for help with your business accounting at 1-856-228-2205.

The Ultimate Guide to Independent Contractor Taxes – New Jersey

Independent contractors have to worry about federal income tax, self-employment tax, and local and state taxes when they file their returns. Sole proprietors use Schedule C with Form 1040 to report their business profits and losses to calculate the taxes they will have to pay. To avoid an underpayment penalty, independent contractors must also submit quarterly estimated tax payments each year. When you begin working for one or more companies, they should determine whether you should be treated as an independent contractor or employer based on several factors. If you are classified as an independent contractor, you will be responsible for paying both your portion and the employer’s portion of your taxes and will receive a 1099-NEC at the end of the year instead of a W-2 for your annual earnings. Here is what you need to know as an independent contractor about taxes from TMD Accounting.

Taxes Self-Employed People Must Pay

Independent contractors must pay federal, state, and local taxes and the federal self-employment tax. Here are the taxes self-employed people must pay:

  • Federal income tax at a rate ranging from 10% to 37% based on the total income for the tax year
  • Self-employment tax to pay into Medicare and Social Security with tax rates of 15.3% for net profits of up to $147,000 and 2.9% for net earnings above that amount
  • Additional federal taxes in some situations such as the net investment income tax, alternative minimum tax, and additional Medicare tax
  • State and local taxes, including income tax, registration and licensing fees, and business tax
  • Sales tax if you sell goods
  • Excise tax if you sell items such as guns, cigarettes, alcohol, or telephone services

Understanding the Self-Employment Tax

The self-employment tax includes a 12.4% Social Security tax on your net profits up to $147,000 and a 2.9% Medicare tax on all net earnings. This means you will pay a total self-employment tax of 15.3% on your earnings up to $147,000 and 2.9% on any earnings above that amount. If you have net earnings of more than $200,000 as a single taxpayer or $250,000 as a joint filer, you might also have to pay an additional 0.9% Medicare tax.

Available Deductions for Independent Contractors

There are many different deductions that might be available to independent contractors, including the following:

  • Home office deduction for contractors who work from home and use the office space solely for business purposes on a regular basis
  • Health insurance premiums
  • Retirement plan contributions
  • Depreciation of your equipment, machinery, and furnishings for your office and business use
  • Truck and auto expenses if used for work
  • The qualified business income deduction
  • Expenses for outside services and contract labor
  • Miscellaneous business expenses

Preparing to File Your Taxes as an Independent Contractor

Before you file your taxes, it is important for you to organize everything. You will need to know the gross amount you made as an independent contractor and how much you spent on tax-deductible expenses. Gather your 1099-NECs, profit and loss statements, expense statements and bills, receipts, and other relevant documents together.

Report Income and Deductions on Schedule C

When you fill out your Form 1040, you will use Schedule C to report your business income and deductions. You will report other sources of income, including rental income, dividends, and interest on Form 1040.

Report Net Self-Employment Income on Schedule SE

Once you complete Schedule C, you will then carry over the self-employment income to Schedule SE to calculate your self-employment tax. The self-employment tax will then need to be entered in your Form 1040 tax section.

Complete Form 1040

On your Form 1040, you will include all of your other non-business income. You can also claim non-business deductions on Form 1040, including things like student loan interest, charitable donations, self-employed health insurance, itemized deductions, and others.

Calculate Your Federal Taxes

When you enter everything into your Form 1040 and perform the calculations, you will see your total federal tax obligation. After you subtract your estimated tax payments made during the year, you will either owe taxes or have an expected refund.

Estimate Your Taxes for the Next Tax Year

As a self-employed person, you will need to estimate the taxes you’ll likely owe in the next tax year so that you can divide that amount into quarterly estimated payments to send each quarter throughout the year.

Complete Your State Income Tax Return

Once you have completed your federal tax return, you will then need to complete your state return.

What Happens if You Can’t Pay?

If you can’t pay your taxes in full, you can complete Form 9465 to request an installment arrangement. However, you can’t owe more than $25,000 and must show that you do not have the means to pay your taxes. You will then have three years to pay. The IRS will penalize you for waiting to pay your taxes after the deadline. If you fail to file a tax return by the deadline, you will be assessed a 5% penalty for each month of the outstanding amount you owe but haven’t paid. If you submit your return on time but do not pay what you owe, the late payment penalty will be 0.5% of the tax owed for each month you are overdue.

Find an Accountant for My Small Business

Small business accounting services can help to make filing your taxes simpler. If you are self-employed, working with TMD Accounting might help to ensure your taxes are filed on time and correctly and that you claim the deductions that are available to you. Contact us today to schedule an appointment at 1-856-228-2205.

Bookkeeping vs Accounting: Which is Right for Your Business?

Is there a difference between bookkeeping and accounting? If you have a small business, you know it can be challenging to keep an accurate record of your financial information. There are key differences in the roles that an accountant and a bookkeeper play for your business. You can better view your financial health, prepare for the future, and get a handle on those day-to-day finances with help from these professionals. Here is what you need to know about bookkeeping and accounting for your business.

Bookkeeping and Accounting Differences

Bookkeepers and accountants have different roles. While they have a common goal and similar tasks, these skill sets are used for various purposes. Take a look at these differences.

A bookkeeper will help to answer your day-to-day financial questions. These professionals can produce financial statements, such as a balance sheet. A bookkeeper will balance your ledger, record daily transactions, maintain expenditures and income records, and enter your credits and debits.

An accountant works a little differently. These professionals will analyze your business costs, provide macro-financial advice, and adjust the ledger entries. An accountant also prepares your taxes and helps you with in-depth budgeting. Plus, you can get assistance with strategic planning. Sometimes, you don’t have to find a separate bookkeeper or accountant. Some small business accounting services will handle all of these tasks for your company.

Maintaining Your Books

You should find a reliable bookkeeper if you need someone to manage the books. These individuals will maintain a ledger. Mostly, they use a software program to track those finances and ensure the books stay balanced. They record every transaction to an account for your expenses and income. You will want a reliable bookkeeper when you need a day-to-day picture of your financial health. When your books are maintained daily or weekly, you will never have to pay “catch up” when it comes time for taxes.

When it comes to your ledger, your accountant usually determines the accounting method, whether it is the cash basis or accrual method. The accountant will use these books to assess your business and help you make plans. All that information on the ledger will assist your accountant in preparing your tax documents.

Offering Business Advice

You can count on your accountant and bookkeeper to be key advisors for your business. When your bookkeeper works on your ledger, they can detect potential red flags if any issues arise. Since a bookkeeper has a more micro view of your books, they can help provide advice about budgeting and spending for the short term.

On the other hand, your accountant is an invaluable resource when it comes time to understand your larger financial picture. Every quarter, your accountant assesses your company’s financial statements to understand your profit, losses, and cash flow. Additionally, they can provide you with updates about the potential financial issues with your business. An accountant helps you understand how certain decisions will affect your financial goals.

Creating a Financial Strategy

When you have accurate records, you can see how your money flows on a short-term basis. With that information, you can decide where to take your business in the future. While the bookkeeper works hard to strengthen your company’s foundation, you need an accountant’s help with those future plans.

A skilled accountant will help you scale and plan for the future. They will analyze the books to see what works or needs to change. In most cases, they can help your business move into the next phase of your plans. Accountants can assist with other tasks, such as strategic tax planning, calculating growth, analyzing investments, and acquiring assets.

Bookkeeper vs. Accountant: Which Is the Right Choice for You?

If you want someone to handle the day-to-day finances of your business, choose an experienced bookkeeper. Accurate record-keeping is an essential aspect of your business. With help from a trusted bookkeeper, you can make that process more manageable and straightforward.

When you need to have a big picture outlook and assistance with strategic planning, an accountant can help. For example, if you want to acquire real estate, an accountant can incorporate your ideas and analyze your finances so that you can make the right choice for your business.

All businesses need to keep track of their expenses, transactions, and income. Do not think that you have to choose one professional over the other. These professionals can work together to give you a better overview of your short-term financial health and long-term financial goals. Some accounting services can handle all these responsibilities so that you can get the best of both worlds.

The Bottom Line

Every business owner needs to understand the financial side of their company. Bookkeepers and accountants can help make the process easier when it comes to your records. These professionals will work together to help with your finances.

You will want an experienced bookkeeper to set up your books and maintain them for your business. A skilled accountant understands your business beyond those day-to-day activities so that you can make smarter financial decisions. A bookkeeper and accountant can set up your business for success, allowing you more free time to focus on other matters.

Need an Accountant for My Small Business?

At TMD Accounting, we helped small businesses plan for the future and manage those day-to-day financial duties. We are a flexible, affordable, and reliable option in the area. Whether you need help with tax preparation or payroll, our team will assist your business. Schedule a consultation by calling 1-856-228-2205.

Small-Business Bookkeeping Basics: Here’s What You Need to Know

Small-Business Bookkeeping Basics: Here’s What You Need to Know

If you own a small business, accurate bookkeeping is vital for your finances. It can impact the success and growth of your business. Bookkeeping is not just one function, but it encompasses a variety of tasks, from data entry to managing accounts. Make bookkeeping a priority for your business. Here are a few things you need to know about bookkeeping basics for small businesses.

 

What Is Bookkeeping (and Why Is It Important)?

In basic terms, bookkeeping is keeping track of all your financial records and transactions. For small businesses, bookkeeping is part of their accounting system. A well-managed bookkeeping system should include records for operational costs, business transactions, and other expenses. All of these entries must be accurate and up-to-date.

 

Without these records, you will not know whether your business is making a profit or taking on losses. You also need the proper records so that there are no issues when it comes time to pay taxes or payroll. You can quickly fix any discrepancies by catching them early. However, you will not know about those issues unless you have maintained your financial records.

 

Choosing a Bookkeeping Method

When it comes time to choose a bookkeeping method, you have two choices: single-entry or double-entry. Before you can start keeping your financial records, select one of these methods. These bookkeeping systems determine how and where you record every financial transaction.

 

If you want a simple bookkeeping option, consider the single-entry method. You will need to record every financial transaction only one time. These transactions will be listed either as income or an expense. The single-entry process is excellent for smaller businesses that don’t have equipment or inventory included in their finances. However, single-entry recording is often less accurate than double-entry.

 

With the double-entry method, all transactions are entered twice in the record. They are recorded as either debit or credit. When you think of “balancing the books,” this is the method used. While double-entry procedures are more complicated, they prevent costly errors in recording transactions. You will be able to catch any mistakes before they lead to significant financial problems.

 

The entry system method that you choose will impact how your bookkeeping processes will work in the future.

 

Don’t forget about choosing an accounting method. Like bookkeeping, there are two options: accrual-based or cash-based accounting. Accrual-based accounting records, bills, and invoices even when money has not been exchanged. For the most part, accrual-based accounting is the primary method for most businesses. Cash-based accounting records all transactions where the funds have changed hands. With this method, invoices or outstanding bills are not recorded until paid.

 

General Ledgers, Payrolls, and Taxes

Years ago, many small businesses would record all financial transactions in a physical book called a general ledger. Today, these ledgers are digital, allowing business owners to enter and organize all transactions with accounting or bookkeeping software.

 

When you send an invoice, pay a bill, or make a sale, these financial transactions should be recorded in the general ledger. There are several ways to set up a ledger. You can use a spreadsheet or ask for help from a small business accounting services company. In any case, you need to keep track of these transactions, or you could find yourself in financial trouble.

 

After setting up a general ledger, think about your payroll system. If your business has hired anyone as an employee, you need a system for payroll. Your bookkeeper can help to establish a payroll schedule. With that, you can ensure that your business is withholding the right amount of taxes.

 

Don’t forget about those independent contractors. While they might not be an official employee of the company, you still need to track your payments to them. At the end of the year, you could be required to file 1099s for each contractor.

 

A well-managed bookkeeping system is needed to help with taxes at the end of the year. If you neglect to record transactions, you could be scrambling to file taxes on time, causing you to miss deductions or pay penalties. Bookkeeping can help keep all of your financial records up-to-date. Some states require you to track any taxes you may have charged to clients. If you don’t have these records, it can lead to fines and other financial headaches for your small business.

 

Is Bookkeeping the Same as Accounting?

Many people refer to accounting and bookkeeping interchangeably. While they both work hand in hand, they are two different operations. Accounting usually carries more responsibilities than bookkeeping. Accounting professionals are highly trained and will have a CPA license. Bookkeepers focus on record-keeping duties, such as maintaining a general ledger.

 

On the other hand, an accountant focuses on a broader range of activities and can create more complex financial reports. A bookkeeper can help file payroll taxes during tax time, while an accountant will assist with business and personal tax filings.

 

Find High-Quality Professionals

As a business owner, you could tackle record-keeping duties by yourself. However, think about outsourcing these responsibilities to a group of professionals. With a little extra help, you can focus on your business and leave the recording to others. First, you may want to hire a bookkeeper who can help manage all day-to-day records, categorize expenses, track accounts payable, and account records, and reconcile all books.

 

If you want more in-depth help, consider an accountant for those financial duties. These professionals will be able to advise you at different stages of your business, help file taxes, manage payroll, and create financial statements. Bookkeeping is not hard work, but it can get away from many people. When that happens, you could struggle to manage your financial records.

 

Let Us Help With Your Bookkeeping and Accounting

At TMD Accounting, we have over 40 years of experience. We are an affordable, reliable, and flexible option when you need bookkeeping and accounting services in Gloucester County. Many small business owners struggle to manage those financial records. Our team is ready to help you. If you need an accountant for your small business, schedule an appointment by calling 1-856-228-2205.

 

How to Find the Right CPA for Your Small Business in South Jersey

How to Find the Right CPA for Your Small Business in South Jersey

When you operate a small business in South Jersey, you have plenty of things on your mind. However, you might not be thinking about the accounting side of operations. Your business needs money to thrive so that you can offer services and products to those customers. You need a professional to help keep track of that money, and a Certified Public Accountant (CPA) is the person for that task. Finding a qualified CPA for your small business can be challenging. We have some tips for finding the best CPA for your South Jersey small business.

 

Why You Need a CPA for Your SMB

You already know that you need to maintain your small company’s finances. While you could handle those responsibilities by yourself, consider hiring an accountant for your small business. A professional accountant will take care of those little financial details. They can help with bookkeeping, prepare profit-and-loss statements, and file tax returns.

 

A CPA is an accountant who has met all the experience and educational requirements for the state of New Jersey. They have also passed the Certified Public Accountant exam.

 

When you work with a CPA, your finances are in good hands. Remember that a CPA does not make your business decisions, but they can provide you with the best advice to make an informed one.

CPAs can help with:

 

Keep in mind that a CPA can do more than file taxes or update your books. Running a small business is complicated. You have many responsibilities on your plate. While you might want to handle the financial side by yourself, it can be overwhelming. A CPA will ensure that all of your records are up-to-date and accurate. With their help, you can take some of those duties off your list.

 

What To Look for in a Small Business CPA

Before you start searching for a CPA, you need to decide what duties you want them to handle. Will you need a full-time financial advisor or just want them to take care of payroll? Once you have decided what you need for your small business, you can begin the search.

 

Many people turn to the internet for a reputable CPA. With an online search, you will have a list of CPAs in the area. Make sure to check all of their credentials. Online searches are notorious for having inaccurate information. You may think you are working with an experienced accountant, but they might not be an official CPA.

 

It is crucial to find a person who has passed the exam for a Certified Public Accountant. You need to know that they have met all the requirements and are licensed. Along with the exam, CPAs must continue to fulfill their education requirements to stay up-to-date with local, state, and federal tax laws. If you hire them to prepare your taxes, they must have a Preparer Tax Identification Number (PTIN).

 

After that, make sure the CPA is someone you can trust. Remember, you are counting on them for financial help and guidance. A trusted CPA will have established an excellent reputation in the community. These small business accounting services are the ones that have helped local businesses with their accounting needs. Find someone with a stellar record to assist with your taxes, payroll, or bookkeeping.

 

Once you have narrowed down your search, don’t be afraid to meet in person, especially since they will handle your money. If the accountant does not want to meet, you might want to find someone else for the job. CPAs know it is a big responsibility to manage someone’s financial records. They want you to feel confident in their abilities and will gladly meet to discuss your needs.

 

Some small business owners are hesitant to schedule a meeting. Bring a trusted friend or mentor to get an unbiased opinion about the CPA if you don’t want to meet alone. You can determine if you want to proceed with a working relationship by scheduling a consultation.

When you have found a CPA, always bring a few questions to the meeting.

 

Questions To Ask a CPA Before Hiring

For the meeting, you will want to have some questions on hand. Ask about the size of the team, their accounting services or specialties, and their experience. Here are a few other questions to get you started.

 

“How Long Have You Been a CPA?”
This answer should be straightforward. While you may want to give someone a start in their career, you should hire a CPA with at least two years of experience.

 

“Are You Available Year-Round?”
If you need a CPA for a one-time job, this answer might not seem like a big deal. You should hire someone who works as a CPA as a full-time job. When you have a question, you want to know that they are only a phone call away.

 

“Can You Represent Me in an Audit?”
Most CPAs are called Enrolled Agents. If you get in trouble with the IRS, they have the authority to speak for your business and represent you. In the event of an audit, you will want someone in your corner.

 

“How Many Employees on Staff?”
Many CPAs will have staff members who assist them. You will want to know who will handle your account, learn about their qualifications, and find the best ways to communicate with them.

 

“How Much Do You Charge?”
Always ask about how they bill and the fees associated with those services. Some CPAs might bill hourly, while others charge a straight fee for their services.

 

Looking for a CPA for Your Small Business?

Now that you have all this information, it is time to find a qualified CPA for your small business. At TMD Accounting, we are a family-owned business that has served Gloucester County for over 40 years. We are an affordable, flexible, and reliable option for your accounting needs. Schedule a consultation by calling 856-228-2205.