If you’re a freelancer, you’re technically your own business. This means you need a way to track your expenses and mileage, as well as how much money you earn and who hasn’t paid your invoices. If this is your first time trying to set up an accounting system, or if you’ve outgrown your old accounting system, it can be overwhelming. Fortunately, it’s fairly easy to set up a basic system once you understand what you need.
An accounting system simply tracks your income versus your expenses. Depending on how you run your freelance business, you’ll need to record payments from multiple clients, track your car’s mileage to client sites, send invoices, and make quarterly tax payments. If you only work with a small group of regular clients that send you a 1099 and don’t plan on having expenses, you could store your 1099s in a file folder for each year, along with the nominal expenses. However, this isn’t the best idea, as you won’t have an accurate total for what you pay taxes on if you don’t keep track of your income throughout the year.
Most freelancers get their income from many different sources, with some 1099s and some clients that don’t need to issue one. You’ll need a way to track all of these payments and keep up with invoices. Relying on your calendar of deadlines isn’t always reliable, as some clients don’t pay.
To have an accurate record of your income, you need a process and a place to track it. At the very minimum, you could have a separate bank account where you deposit your freelance earnings. This keeps a record of what you’ve been paid. Just make sure to transfer money out of this account before spending it on personal things. You could also record every time you get paid on a Microsoft Excel spreadsheet, tracking who paid you how much for what services.
There are two parts to tracking expenses: organizing receipts and keeping the totals in one place. Learn about what categories can be deducted and which ones you can use. Make a folder for each applicable category and file relevant receipts into the folders each time you spend money. Before filing them, note the amount, category, vendor, and date into your expense tracking system. This can be a notebook, spreadsheet, or a more formal system. To keep track of mileage, write down the starting and ending odometer readings, the purpose of the trip, and where you went.
As a self-employed person living in the United States, you’ll likely need to pay quarterly tax payments to the IRS. You calculate this by looking at your income from the past three months and applying the appropriate tax rate. You then add the tax payment as an expense.
Technically, you can use a Microsoft Excel spreadsheet to track your income and business expenses forever. However, as your business grows you may eventually find it cumbersome to manually track individual payments and expenses. You can invest in software to make this easier.
If you drive a lot for work and have a fair amount of expenses, Taxbot makes it easy to snap photos of your receipts and track your mileage on your phone. QuickBooks is an industry leader, but it’s expensive. If you hire an assistant, run payroll, pay other contractors, or have lots of small payments, it might be worth using QuickBooks to connect your bank accounts to and automatically track payments. Wave is a free option similar to QuickBooks.
No matter which option you choose, know that you can always change your mind as you grow. Just keep great records and avoid an unnecessary switch in the middle of a tax year.
This has been provided for informational purposes only, and should not be relied on for tax, legal, or accounting advice. Hired, its affiliates, and subsidiaries are not a tax, accounting, or legal advisor, and as such, do not provide tax, accounting, or legal advice. Please consult your own tax, accounting, and legal advisors for official advice regarding such issues.