Bookkeeping for Independent Contractors: Everything You Need to Know

Having a clear picture of their financial figures will help any independent contractor understand their business better. They will better understand how to charge for their services by understanding their expenses. The trade-off is that your employers do not put money towards your health insurance, workers’ compensation, bonuses, unemployment taxes, payroll taxes, or contribute to your 401(K).

• This may include reviewing financial reports, reconciling bank accounts, and monitoring cash flow.
• For freelancers or small businesses, one may claim that any purchase under $1000 can be an Expense instead of a Fixed Asset.
• This involves comparing the transactions recorded in your bookkeeping system with the transactions recorded by your bank.
• As an independent contractor, you tend to dread the upcoming tax season; it usually means days of drowning in itemized receipts.
• Our company worked with several independent contractors in different service realms.

Remember that as an independent contractor, you’ll have to set aside all of your self-employment taxes, Social Security, and Medicare contributions yourself. The company’s https://www.bookstime.com/ Cash account balance of $7,000 needs to be decreased by $25 for the bank service charge. As a result, the adjusted balance per the company’s books is $6,975.

Run your business your way

As a contractor, your wages will be heavily scrutinized and it is best to have the most accurate snapshot of your estimated tax payment to avoid being hit with a larger than expected tax liability. People that work for a business are usually classified as employees. This means the business owner is responsible for withholding and reporting a certain portion of the wages earned by the employee.

You many not have considered this, but requesting your own EIN or Employer ID Number can greatly benefit you. Instead of just being a «contractor for hire,» becoming your own business provides many tax breaks that you wouldn’t receive otherwise. There are many tax benefits and saving that come along with having a business entity.

Bookkeeping for small construction business

The “independent” in independent contractor simply refers to the fact that the contractor is a non-employee, and is independent of the company they’re doing the contracted work for. Note that this balance is different from the company’s books balance of $7,000. Generally, neither balance is the correct amount of cash that should be reported on the company’s financial statements.

Our bookkeepers will develop an easy framework when setting up your books. There are a lot of business expenses that independent contractors need to keep track of in order to pay the least possible income tax. Our professionals advise independent contractors on accounting best practices that save time and money.

Zoho Books

Bookkeeping is critical to running a successful business as an independent contractor. Filing taxes as an independent contractor can be a complex process, but it is an important part of your bookkeeping efforts. It is important to accurately report your taxable income and any deductions and credits you are eligible for. It may also be helpful to consult with a tax professional to ensure that you are in compliance with all tax laws and regulations.

While there are charges for some extra features like payment processing, payroll, and bookkeeping support, the free starting price point makes it a winner for many independent contractors. Instabooks contractor expense tracking software and app is designed for independent, private, general contractors. Record and keep track of daily contract spendings and expense transactions using simple voice commands then let Instabooks automatically categorise them in expense related accounts accurately. An accounting contract does more than just lay out the duties and responsibilities of the accountant or bookkeeper brought on as an independent contractor. The best practice for the self-employed is to keep accurate financial records for tax-deductible expenses and taxable income. Software solutions such as QuickBooks can help manage independent contractor tax liabilities and is beneficial for recording and tracking your expenses and earnings.

Biggest Mistakes You Might Be Making as an Independent Contractor or Freelancer

If you’re an independent contractor, you have to pay self-employment taxes to the IRS (the current rate is 15.3%—12.4% for social security and 2.9% for Medicare). Using accounting software like QuickBooks will allow you to reconcile your bank accounts quickly. A video showing this process in QuickBooks will be available in the near future. Consulting with a professional bookkeeper or accountant can provide valuable insights and ensure that you are in compliance with all financial regulations. In summary, invest time and effort in your bookkeeping process, and you will immediately see the benefits.

There are a ton of great free and paid options that make it much easier to handle bookkeeping for independent contractors. Independent contractors are self-employed individuals who work for themselves and not for an employer. They typically work on a project basis and are not considered employees of the company they work for. Independent contractors have a unique set of bookkeeping needs compared to traditional employees, as they are responsible for their own taxes and financial record-keeping.

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With the TurboTax bundle, you can instantly transfer your financial data. Use built-in reports to see how your business is doing and take advantage of opportunities. Snap a photo of your receipt and we’ll match and categorize expenses for you. →  You can make an unlimited amount of legitimate tax deductions, but you must keep good records of those purchases in case of an IRS audit. →  Any income you received or earned is not considered salary or wages. You’ll likely need to file Form 8829 along with your Schedule C when taking the home office deduction, which you can learn more about in our guide to the home office deduction.

• Use Instabooks to auto reconcile your contract transactions against business bank account transactions.
• You likely became an independent contractor to get away from the typical workday or have a particular skill that businesses desire.
• You can stuff your receipts into one of our Magic Envelopes (prepaid postage within the US).
• Bench assumes no liability for actions taken in reliance upon the information contained herein.