Bookkeeping for Freelancers: How to Keep Track of Income and Expenses

The flexibility to work independently and follow your passions is one of the benefits of being a freelancer. The duty of handling your finances comes along with this independence, too. It's critical to maintain track of your earnings and outgoings to make sure your company is financially sound.

This can be difficult, but with the help of bookkeeping online training, appropriate bookkeeping techniques, and equipment, you can make the process simpler and more efficient while still making smart business decisions. We will examine the ideal methods for bookkeeping for independent contractors in this post, and we'll also provide you with some useful advice on how to monitor your earnings and expenses.

In this post, we will look at some useful advice on how to keep track of your earnings and outgoing costs so you can protect your company's finances and concentrate on what you do best: offering your customers high-quality services.

What is Bookkeeping?

Bookkeeping is the act of recording, classifying, and summarizing financial transactions of a business or organization. Delivering a piece of precise and up-to-date financial information is the aim of bookkeeping so that educated company decisions can be made.

Financial transactions are cataloged in a bookkeeping journal according to their respective dates. In order to categorize the transactions by account kinds, such as sales, costs, assets, and liabilities, ledgers are then created using the journal. The financial statements, including the income statement and balance sheet, which give a comprehensive picture of the business's financial situation, are produced using the ledgers.

Why is Bookkeeping Important for Freelancers?

Bookkeeping is an essential process for any business, including freelancers. It involves recording and tracking financial transactions, including income and expenses, to help manage your finances effectively. As a freelancer, bookkeeping is important for several reasons:

• Tax Purposes: Freelancers are required to pay taxes on their income. By keeping track of your income and expenses, you can accurately calculate your tax liability and avoid any surprises come tax season.

• Financial Planning: Knowing your income and expenses helps you plan your finances. You can use this information to make informed decisions about your business, such as setting rates and creating a budget.

• Business Management: Bookkeeping provides insight into the financial health of your business. You can use this information to make strategic decisions about your business and identify areas where you can improve.
  Now that we understand why bookkeeping is important, let’s look at some tips on how to keep track of your income and expenses.

Open a Separate Bank Account

One of the initial steps in bookkeeping for independent contractors is opening a separate business bank account. When your personal and corporate finances are merged, it can be difficult to keep track of your earnings and expenses. By maintaining a separate bank account, you can conveniently keep track of your business's transactions.

You can choose to open a business checking account or a separate personal checking account to use for your business. Either way, make sure you keep your personal and business finances separate.

Keep Track of All Your Transactions

After opening a dedicated bank account, it is important to monitor your financial inflows and outflows. This can be accomplished either through manual record-keeping or by utilizing accounting software.

• Tracking Income: Tracking your income is one of the most important aspects of bookkeeping for freelancers. It’s essential to have an accurate record of all the money you earn so that you can calculate your taxes correctly, plan your finances, and make informed decisions about your business.
  
  To track your income effectively, it's important to record every payment you receive from your clients. This includes payments from invoices, PayPal, bank transfers, and any other payment methods you use. You can use a spreadsheet, accounting software, or a journal to record your income transactions.
  
  

• Tracking Expenses: As a freelancer, keeping track of your spending is just as crucial as keeping track of your income. You can spot potential areas of overspending by keeping track of your expenses and adjusting your budget as necessary. Additionally, since it enables you to claim deductions and lower your taxable income, proper spending monitoring is essential for tax purposes.
  
  To track your expenses effectively, it’s important to keep receipts and invoices for all business-related purchases. You can use a spreadsheet, accounting software, or a journal to record your expenses. When recording your expenses, include details such as the date of purchase, the vendor or supplier, the purpose of the expense, and the amount paid.
  
  Manually keeping track of your income and expenses involves creating a spreadsheet or a journal to record each transaction. You can include the date, amount, and description of the transaction.
  
  If you prefer to use accounting software, there are several options available for freelancers. Some popular options include QuickBooks, FreshBooks, and Wave. These software programs help you track your income and expenses, generate invoices, and manage your finances.

Categorize Your Transactions

Categorizing your transactions helps you keep track of your income and expenses. You can create categories such as advertising, office supplies, and travel expenses. This makes it easier to see where your money is going and identify areas where you can cut back or invest more.

Most accounting software allows you to create categories for your transactions. If you’re manually tracking your transactions, you can create categories in your spreadsheet or journal.

Set Aside Money for Taxes

If you work as a freelancer, it is your responsibility to pay taxes on your earnings. To avoid any unexpected financial burden during the tax season, it is advisable to allocate a portion of your income for taxes.

The amount you need to set aside will vary based on your tax bracket and other factors. Seeking advice from a tax expert can help you determine the appropriate amount to set aside.

You may choose to save money for taxes in a separate savings account or your business checking account. It is crucial to keep a record of the funds you have set aside and avoid using them for other purposes.

Review Your Finances Regularly

It’s important to review your finances regularly to ensure the financial health of your business. You should review your income and expenses on a monthly basis to identify any issues and make adjustments as needed.

If you’re using accounting software, most software programs will provide reports that you can use to review your finances. These reports can show your income and expenses by category, as well as your profit and loss statement.

If you’re manually tracking your transactions, you’ll need to create your own reports using your spreadsheet or journal. You can create graphs or charts to visualize your income and expenses and identify any patterns or trends.

Keep Your Receipts

As a freelancer, you’ll likely have many expenses that are tax deductible. Keeping your receipts is important to ensure you can claim these deductions come tax season.

You can keep your receipts in a physical file or in a digital format. There are also apps available that can help you track your receipts, such as Expensify and Shoeboxed.

Make sure you keep all your receipts organized and easily accessible. You may need to provide these receipts to your accountant or the IRS if you’re audited.

Don’t Procrastinate

Bookkeeping can be tedious and time-consuming, but it’s important not to procrastinate. The longer you wait to record your transactions, the harder it will be to remember the details.

Try to set aside time each week or each month to record your transactions. This will make it easier to stay on top of your bookkeeping and avoid any last-minute scrambling come tax season.

Bottomline

Effective bookkeeping is a critical element in managing a thriving freelance business. Keeping an accurate record of your earnings and expenses can assist you in calculating your tax obligation, financial planning, and making informed business decisions.

To maintain a reliable bookkeeping system as a freelancer, consider opening a distinct bank account, recording all transactions, organizing them into categories, reserving funds for taxes, routinely reviewing your finances, keeping your receipts, and avoiding procrastination.

Incorporating these practices into your bookkeeping routine can help you manage your business's financial stability and prevent any unexpected surprises when it comes to tax season.