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Bookkeeping Tips for Freelancers

Freelancing is the new way to work for millions of Americans in today’s economy. Many are attracted to the freedom of working in the comfort of their own home. Freelance workers typically are subcontractors performing various tasks for one or more clients, often electronically with the ability to transmit their work to clients via email or a similar method.

While the work from home arrangement offers greater scheduling flexibility and many other attractions, there are some challenges that many freelancers are often unaware of. One place where many at home workers struggle is in the area of bookkeeping. Since most are accustomed to receiving a paycheck from an employer, they are ill prepared for the need to keep their own records and handle their own tax reporting.

Here are some tips for freelancers to ensure they do not end up in tax trouble at the end of the year:

Estimate Quarterly Taxes: Many freelancers are unaware that they are supposed to pay their taxes quarterly instead of annually. When tax time comes, they are often surprised to find out they were supposed to be making payments on a quarterly basis throughout the year. It is often helpful to keep a separate bank account to use for setting aside quarterly taxes, rather than mixing these funds into their general account(s).

Do Not Forget About the Self-Employment Tax: Freelancers are responsible to pay all of their Social Security and Medicare taxes, as opposed to the employer-employee arrangement of only paying half. In many cases, self-employment tax may be the largest tax liability a freelancer has, so it is important to remember to put aside this entire amount or you may end up short at the end of the year.

Keep an Accurate Record of Expenses: The good news for freelancers is they have far more opportunity to itemize tax deductions than a typical employee does. At home workers are allowed to take deductions for their home office, business use of vehicle, cost of equipment such as computers, printers, paper, office supplies, advertising, continuing education, travel expenses, and a portion of meals/entertainment. However, it is important to be aware that the IRS looks closely at these kinds of deductions, so it is important to document them in detail.

Invest in Bookkeeping Software: There are many affordable software programs out there to help freelancers manage their records more effectively. If your budget allows, a good bookkeeping software program can be a worthwhile investment.

Talk to a professional accountant for valuable information to help you understand how you can take advantage of the benefits from freelance work.

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