For freelancers, accounting might not be first on the list of business priorities. However, taking the time to put some basic structures in place can save you a big headache when it’s time to file taxes. It’s also important to keep track of your clients and invoices so that you can collect payments in a timely manner. We’ve put together a few bookkeeping tips to help ease the pain of accounting.
1. Start with a system
Don’t wait until you’ve reached the end of your first tax year to think about keeping records. It’s all too easy to forget about old invoices or expenses. As soon as you decide to strike off on your own, it’s time to set up a freelance bookkeeping system. There are plenty of options to choose from in this regard, so you can find a system that best works for you.
Accounting software is probably the easiest way to keep track of your records. You’ll need to fill in your details to get started, and from there, the software will help you get organized. It’s also worth consulting with a professional bookkeeper for advice when you’re just starting out.
2. Build accounting into your work schedule
As a freelancer, you’re already juggling a lot of different plates. In addition to providing services to clients, you also have to worry about marketing, generating leads, quality control, and follow-up. You might use a to-do list or calendar app to manage all these different tasks. Whichever system you choose, set aside a block of time every week to balance your books. It doesn’t have to be more than an hour every Friday, but you need to make sure that every expense and payment has been recorded. When it comes to accounting for freelancers, a little goes a long way.
3. Keep detailed records
A major component of self-employed bookkeeping is simply tracking your day-to-day tasks. Once you’ve set up a system, you need to keep accurate, detailed records of all your business activity. This should include:
A list of clients you work with
Hours spent working or tasks completed
Cost per hour or task
Business expenses, with receipts
Payments made via bank transfer
Payments received from clients
Details like these can be easily input into your accounting software, which then uses the data to generate invoices. It will also automatically generate accounts receivable, accounts payable, and cash flow reports to keep your financial records updated. This is vital in case you’re ever audited, or if you need to apply for lines of credit.
4. Know which expenses to track
There are some expenses which are clearly work-related, such as website hosting costs and office supplies. Your accounting software can also be written off as a business expense. But if you work from home, the line between personal and professional use can become blurred. While office rent can be listed as a business expense, what about your home office? According to the IRS, you can deduct certain expenses associated with a home office, provided it’s your primary place of business.
5. Separate personal and professional accounts
Along these same lines, differentiate between your personal finances by setting up separate bank accounts solely for your business. Any basic accounting for freelancers will require you to see how much money is coming in and out of your business, and a dedicated account will assist with this. This makes it easier to plan new projects, budget for the year ahead, and determine whether clients have paid invoices.
6. Budget for your tax bill
One of the most common self-employed bookkeeping pitfalls is not accounting for tax bills. While money is taken out of each paycheck when you’re a salaried employee, you’ll need to take care of this yourself as a freelancer. Set aside a bit of cash each month, in a separate savings account. This can be used in place of automatic deductions by an employer. A good rule of thumb is to set apart 30 percent of your income each month.
Being self-employed gives you a high degree of freedom, including the ability to choose a freelance bookkeeping system that works for you. Whether it’s fully automated through software or involves an old-fashioned filing cabinet, the most important thing is to track every detail of your finances to avoid getting caught out by an unexpected audit.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.