Accounting and Bookkeeping for Freelancers

Accounting and Bookkeeping for Freelancers

Freelancers often enjoy greater flexibility and diversity in their work, which is one of the draws of this approach to employment. Those who are self-employed get to be their own bosses, which also means assuming all responsibility for income taxes, business expense deductions, and other bookkeeping tasks. Accounting is an unavoidable part of freelancing. However, it’s possible to manage these ongoing duties with an organized system for invoicing and bookkeeping.

Once a freelancer succeeds in acquiring work, managing a workload can be challenging. Tracking time and maintaining a fluid calendar of tasks is crucial for a freelancer’s success. Invoicing is the standard protocol for setting up payment terms for deliverables. Freelancers must device a contract with each client that outlines payment terms and the scope of work. Once the contract has been agreed upon by all parties, the freelancer creates an invoice that states the terms. The most common terms include payment within a specified number of days, with invoices submitted after the work is delivered to the client. For optimal payment results, an invoice should include a full outline of the payment terms, the due date of the payment, and banking details to enable the client to complete the payment. If additional fees will be applied for a late payment, the invoice should include this stipulation as well.

A self-employed professional should maintain an accounting system that tracks finances. This system should include jobs for each client, the number of hours spent working on each job, the cost for each hour of work or for the entire job (depending on the pricing structure), business expenses incurred for the work, and payments received from the clients. Many applications and software suites provide accounting services such as generating invoices, tracking accounts receivable and accounts payable, and generating cash flow reports.

People who are self-employed do not have taxes withheld from their paychecks the way regular employees do when they work for employers. As clients make payments to freelancers, it’s crucial for the self-employed professional to calculate the amounts of federal and state taxes owed on this income. Estimated tax payments should be paid on a quarterly basis throughout each year using specific forms provided by the Internal Revenue Service for federal taxes and by each state for state income taxes. Quarterly estimated taxes are due on the 15th of April, June, September, and January. Fines may be levied for late payments and if underestimating occurs.

The taxes owed must be offset by business expenses to arrive at an adjusted tax amount. Common business expenses for freelancers include claiming a business use of the home, such as a home office. Any other direct expenses that pertain solely to the business can be deducted as well. If other indirect expenses occur that connect with business activities, freelancers can deduct a proportional amount for tax purposes. Self-employed professionals who use their personal vehicles for work can also report this expense. The Internal Revenue Service offers a standard rate for mileage expenses. Freelancers who use this method must track business mileage carefully, including the date, destination, and purpose of each trip. Reporting this expense simply involves adding up the mileage and multiplying it by the standard rate. Freelancers can also opt to use a different method that involves recording the odometer reading at the beginning of the year and then tracking business miles driven for the entire year with dates, destinations, and purposes for the trips. At the end of the year, the vehicle’s odometer is read and recorded. This calculation involves figuring the percentage of miles driven for business-related purposes. Records are also necessary for other vehicular expenses such as gas, oil, repairs, maintenance, and insurance. The freelancer then adds these expenses and applies the business mileage percentage to arrive at the net expense.

Learn more about freelancing in general and accounting practices by visiting these websites:

Masters in Accounting Online