Under current tax law, an independent contractor is classified as a business. Independent contractors need to pay taxes and keep accurate bookkeeping records. While you probably become an independent contractor to get away from the typical workday, it doesn’t mean that there are no responsibilities. Keeping track of your finances can help grow your business. Here are a few smart accounting practices you should use as an independent contractor.
How Independent Contractors Differ from Employees
Anyone who works a traditional job for a company is classified as an employee. The company will withhold and report a portion of its employees’ wages. Social Security, Medicare, unemployment, and tax liabilities are withheld from the employees’ checks. At the end of the year, all the taxable income is documented on a W-2 form filed with the IRS.
As an independent contractor, you are not classified as an employee. The opposite is true. Yes, there is a lot more freedom with this type of work, but you are responsible for keeping track of expenses, paying quarterly taxes, and maintaining all bookkeeping. Most employers will pay workers’ compensation, unemployment taxes, and payroll taxes. In addition to that, the company contributes to a 401(K) and pays some health insurance premiums. When you are an independent contractor, you must cover all those costs.
Why Bookkeeping Is Essential for Independent Contractors
As you can tell, you have a big obligation as an independent contractor. That is why you need to keep up-to-date and accurate records for your business. It can be easy to fall behind on these duties. You could get involved in a project or forget to add an entry.
However, you must properly record every expense and payment in your books. Otherwise, you will have difficulty determining your payments during tax season. Proper bookkeeping will allow you to set up financial reports so that you can plan for the future. Organized books ensure that every invoice is sent and all bills are paid.
If you need help with bookkeeping, consider hiring a company specializing in small business accounting services. These professionals can help manage your bookkeeping and assist with other accounting responsibilities. With that, you can save time and prevent any problems with incorrect entries in the future.
Smart Accounting Practices
Now that you know the importance of good bookkeeping and accounting, here are a few smart accounting practices to incorporate into your business.
Choose Your Accounting Method Wisely
As an independent contractor, you have two accounting methods: cash-based or accrual-based accounting. A cash-based method is simple. It tracks your income when you receive it and documents those expenses as they are paid. Accrual-based accounting records your income when earned but not received. With that, you can account for the money when a project is finished, giving you a better look at your future finances. If you want to know which accounting methods will work for your business, reach out to a trusted accountant. They can help you find the process that will work for your independent company.
Pay Estimated Taxes
As an independent contractor, you need to pay self-employment taxes to the IRS for Medicare and Social Security. These taxes are paid when you file a Schedule SE. The schedules are included with your Form 1040. Before filling out the SE, you need to calculate the total income/loss with a Schedule C.
When you complete more than $600 of work from a client, they need to file and send a copy of Form 1099-MISC. The client should also send all of that information to the IRS. Independent contractors are responsible for saving money to pay taxes on a quarterly basis. Paying those estimated taxes can help you avoid any unexpected tax liabilities. You should save between 30% to 40% of your income for taxes.
If you don’t want to deal with financial surprises, you need to track everything. You must document all the money sent in and out of your account. All that documentation can protect you in the event of an audit. Today, there are many ways to track your expenses and income. You can hire someone or use a software program. Whatever method you choose, select one that you can use on a daily basis. It is vital to record everything, including:
- Equipment purchases
- Hours spent working on a project
- Hours billed to a client
- Invoices paid to you
- Phone and internet bills
- Bank transfers
- Office supplies
- Accounting software and other costs
- Web hosting and design costs
Don’t Mix Personal with Business
Remember to keep those finances separate. You should open a bank account specifically for your business. With that, you can separate your finances from your personal accounts. Along with helping to ease the bookkeeping duties, a business banking account can help prove that your expenses are tied to the business.
Ask for Help
You might want to handle these duties by yourself, but it is okay to ask for a bit of assistance. A professional bookkeeper or accountant can help manage those books and finances. With their help, you will have the most accurate data for your records. All of that goes a long way to help with your taxes and plan for a brighter future.
Bookkeeping and accounting can be overwhelming, especially when you have other responsibilities. These services will ensure that all invoices are sent, and you are paid. Most importantly, they can maintain order and accuracy in your books. Yes, you could try to keep up-to-date on these records, but it can be a time-consuming task. With help from a professional service, you can benefit from their expertise whenever you need it.
Need an Accountant For Your Small Business?
At TMD Accounting, we understand it can be challenging for small businesses to take care of those accounting and bookkeeping responsibilities. For over 40 years, small and large companies have trusted us for their payroll, taxes, and bookkeeping services. We are a reliable and affordable way to manage your financial health. Schedule a consultation by calling 856-228-2205.