Basic bookkeeping is a lot like preventative medicine: it’s an up-front chore but you’re much healthier and wealthier in the long run.
Freelancers are in a tough spot. Even as the world shifts to a freelancing economy (35% of the US workforce and growing!), the tax system isn’t set up for freelancers at all. So not only are freelance workers having to work a lot more than salaried employees, they have to be much more savvy and proactive about their finances. And until the government shifts to accommodate this new wave of workers, freelancers will have to fend for themselves in order to retain the most during tax season. Here are four ways freelancers can get smarter at managing their books.
1. Establish a financial tracking system.
Look, we’re not going to spend a lot of time on this one because this is what we do (and we’re trying to stay unbiased here!). But whatever software you use, be it Billy or Quickbooks or Excel or an actual physical notebook with paper in there and everything, you need to establish a financial tracking system for your business. After all, you can’t manage your books if you don’t have one in the first place.
2. Get into a routine of bookkeeping and reviewing.
We see freelancers flat out abuse their Google Calendars. There’s hardly any white space after keeping track of every meeting, all the traveling, work lunches, free time, etc. We’ve seen freelancers schedule in naps and smoke breaks (or vape breaks if you’re in LA). Yet almost all of them never schedule in 30 minutes a month to attend to their finances.
Building this into your monthly routine is, again, a preventative measure that will save you tons of hassle in the long run. We asked why this might be important to Julie DeLong, COO of Backyard Bookkeeper:
“If you get into the habit of entering and reconciling at least monthly, you won’t ever develop a backlog. You’ll also be able to enter the data while the transactions are still relatively fresh in your mind.
That second part should ring true especially for freelancers who have to deal with monthly 1099s, invoicing multiple customers, and expensing everything from meals to electricity. This is why we have always recommended freelancers get into The Money Habit starting today, since it’ll just get harder and harder to start as your career (and income) grows. Julie gives insight into what freelancers should be reviewing each month as well:
“A lot of business owners, especially freelancers, think that bookkeeping consists only of updating your bank account registers. However, this is only a very limited view of your finances. Your P&L (Profit & Loss) summarizes where your money is being spent, and also gives you a better idea of your net taxable income. Your balance sheet will reveal whether you’ve made any big bookkeeping mistakes, remind you about your receivables and payables, and help you keep track of your equity in the business. It is important to review both your P&L and balance sheet on a monthly basis.
3. Pay your quarterly estimated taxes.
Freelancers who get sticker-shock when their tax bill arrives all have one thing in common: they neglected to pay their quarterly estimated taxes.
Keep in mind, if you are self-employed and your tax liability is $1,000 or more for the year, you most likely have to pay estimated taxes throughout the year. Unfortunately, it’s sort of like having to file your taxes three extra times a year. Fortunately, however, they don’t have to be perfectly precise (hence the term estimated) and better yet, if you’ve followed the first two steps above, they should be a breeze.
Know your income for the past 3 months? Know what expenses you can deduct? Then you should have a good estimate of what you need to pay. Quarterly tax payments are actually a perfect example of how a little preventative bookkeeping medicine can make a hassle a lot less bothersome.
For your convenience, here are the deadlines for these quarterly payments:
- January 1 — March 31 (Due April 15)
- April 1 — May 31 (Due June 16)
- June 1 — August 31 (Due September 15)
- September 1 — December 31 (Due January 15)
4. Simplify your books.
The more complicated something is, the less you’re likely to spend time tackling it. This is absolutely true, and a real psychological hurdle, to managing your books. Often times, if you use a template or financial software, the base settings will show you too many accounts in general; accounts that you may not have any use for in your specific freelance work. Julie recommends you simplify your chart of accounts as much as possible, eliminating the ones that you don’t plan to use in your business:
“For example, if you work out of a home office, you can probably eliminate ‘rent expense.’ If you provide professional services and don’t sell any physical products, you can eliminate ‘cost of goods sold,’ and so on. Getting rid of the accounts you don’t use will greatly reduce the amount of guesswork required to keep things updated, as well as making it much less likely you make mistakes simply because you type in the wrong account. Also, your expense accounts should reflect broad categories, not detailed ones. I’ve seen too many small businesses waste a lot of time grouping utility expenses, for example, into expense subcategories of ‘gas expense,’ ‘electricity,’ etc. Simplifying your expense categories makes your P&L easier to look at and understand.”
By keeping it simple, you’re more likely to not be overwhelmed by finances and get more involved with the bookkeeping efforts that will greatly reduce your financial woes in the future.
Special thanks to Julie DeLong over at Backyard Bookkeeper for contributing to this post! Please visit her site for more information about bookkeeping.