As an independent contractor, you have established a business and you are a small business owner, which comes with certain obligations and opportunities. One of these obligations is keeping accurate and organized records of your income and expenses, commonly known as bookkeeping. In this comprehensive guide, we’ll cover the importance of bookkeeping for independent contractors, the accounting methods you can use, the critical standard bookkeeping terms you should be familiar with, and the benefits of working with certified bookkeepers.
Importance of Bookkeeping for Independent Contractors
Bookkeeping for independent contractors is essential to keep your small business healthy or sustainably grow your business. Recording and tracking income and expenses are the core of bookkeeping, but it is more than just keeping track of the money coming in and going out of your business. It’s about understanding where your money is coming from, where it’s going, and what financial decisions you need to make for the future of your business.
Proper bookkeeping for independent contractors can help you with;
Tax Preparation
Accurate records of your income and expenses will ensure you are paying the right amount of taxes and can help you avoid penalties and fees associated with mistakes on your tax returns.
Maximizing tax deductions
Keeping track of your expenses will help you identify which ones are tax-deductible, and you can claim them on your tax returns. This will help you understand the tax benefit you can avail of and help you organize finances and avoid tax audits.
Producing financial statements for investors
If you are looking to secure financing or investments for your business, you will need financial statements that show your business's financial health and potential. The proper financial statement will increase the confidence of your investors and lender and will help you have access to cash flow to fund important events.
More informed long-term decision making
Having accurate records of your income and expenses can help you make better-informed decisions about your business's future. With so much data available now a day you can utilize this to have a competitive edge over your finances.
Managing cash flow
Bookkeeping can help you understand how much cash is coming in and going out of your business, allowing you to manage your cash flow more effectively. It will help you understand different cycles and will help you have access to cash on important dates.
Accounting Methods for Independent Contractors
There are two main accounting methods for independent contractors: single-entry bookkeeping and double-entry bookkeeping.
Single-entry bookkeeping is the most basic method of accounting, where every transaction is recorded in a general ledger, either on paper or in a spreadsheet. It's suitable for smaller operations and includes tracking income and expenses.
Double-entry bookkeeping, on the other hand, requires you to make two entries in your records for every transaction, making it more complex than single-entry bookkeeping. For example, when you make a sale, you would make one entry for the increase in revenue and one for the decrease in inventory. You may want to invest in accounting software to help you manage your books if your business grows in complexity.
Critical Standard Bookkeeping Terms (bookkeeping for independent contractors)
As an independent contractor, you need to be familiar with the following critical standard bookkeeping terms:
Revenue
It is the total amount of money you earn from your business activities in a particular financial period usually the financial year. It should go without saying, but you should maintain track of your revenue. How much money do you bring in, and how do you do it? Do certain products and services generate significantly more revenue than others?
Business Expenses
It includes all the costs associated with running your business, such as office rent, equipment, supplies, marketing expenses, etc. Keep track of all your company expenses, as previously stated. This is particularly essential when it comes to tax bookkeeping because most company expenditures are tax deductible when the time comes to file.
Profit
If you measure your income and expenditures, you can now start tracking your profit, which is the bread and butter of independent contractor bookkeeping. How much money do you make after deducting your expenses? Profitability tracking allows you to watch and prepare based on your profit margins over time.
Tax Payments
Tax payments are a distinct area of expenditure, and keeping an account of them is critical. For starters, you must understand where and when your money is moving. As an independent contractor, you must also keep note of these expenditures to ensure they are made. Payroll taxes, which include social security, Medicare, and self-employment taxes, should be paid. Throughout the year, you must also pay periodic anticipated income taxes. Keep note of these purchases to ensure that they are made on time.
Accounts Payable
Accounts payable are expenditures that have been set but have not yet happened. Perhaps you owe the money, but it hasn't yet left your bank account. Knowing how much money you owe and how much you have on hand at any particular moment is essential for good accounting.
Accounts Receivable (tracking for bookkeeping for independent contractors)
Accounts receivable refers to expected payments that are still due and need to be completed on the scheduled date. When you sell goods or services on credit to your customers, those transactions will be identified in accounts receivable until you receive the cash for that purchase.
Work with Certified Bookkeepers
Bookkeeping for independent contractors can be complex and challenging. And it helps to consult with accounting professionals to set up your accounting system and maintain appropriate records. Certified bookkeepers at Bookkeeping Pro Services can help you ensure that your bookkeeping is accurate and up-to-date. Allowing you to focus on your business operations and growth. Professionals at Bookkeeping Pro Services love to manage your business finances while bookkeeping for independent contractors and help you spare your time to do what you love.
Related blogs to read
What is Accounts Payable? Why is Account Payable (AP) Important?
Bookkeeping Basics for Small Business Owners
