How to Keep Good Records: A Few Basics for the Self Employed
Maybe that short-term contract you signed was extended, or your direct sales business is really taking off. If you suspect that you’ll actually start making some noteworthy cash, it’s time to start getting organized, and prepare yourself for being self employed for real.
Every year, independent contractors fearfully begin their taxes—and rightly so. Tax time for self employed workers is like a knock in the head. Why didn’t I keep track of those receipts? Why didn’t I set money aside? It’s common to then wish that you had an employer breaking off a huge chunk of your earnings each paycheck, so you don’t have to do it yourself.
It’s easy for other freelancers to say “just keep good records, and you’ll be fine!” But what exactly are “good records” and how do you “keep” them?
Think Differently About Your Expenses
Once you’ve determined that what you’re doing isn’t a hobby, and you expect to make enough to call it a business, begin seeing the money you spend differently. You’ll notice that a lot of people will tell you to save your receipts, but not which ones to keep or why they’re deductible.
Here’s a general, but not foolproof, question for saving a receipt: Would you have bought that if you weren’t self employed?
Would you have bought that Starbucks latte if you weren’t using their free Wi-Fi to work, or meeting a client? Would you have ordered new business cards if you weren’t planning to use them for your business? Can you work without a computer or Internet in your home office?
Chances are that, no, you wouldn’t have spent any of that money if you didn’t have a business to run (even if it’s done primarily in your pajamas).
Don’t Keep Bad Records
If you just did your taxes and realized that you didn’t enter many, if any, business expenses, cry with joy. You’ve found a money-making scheme that fills your bank account without any out of pocket costs!
That’s probably not the case, and there’s a leaning tower of receipts somewhere that you didn’t deduct as expenses.
It’s easy to start off the year with a plan to save every slip of paper related to your freelancing efforts, perhaps a box to toss any loose slips. But it was forgotten by February.
A trick I use is to work in the same area, literally on top of, where I track my income and expenses. Some will say to get a huge folder to store files by client, others to digitize it all. I say, get a small 6×9 binder and go on a little spree to find a few of the same-sized folders, writing pads, and a little calendar. Save that receipt as an expense for next year!
Find yourself scribbling out reminders on random pieces of paper and layering your monitor with sticky notes? Put those notes in your binder, organized by client or date.
Did you just run to post office to mail out product fliers? A folder can be used to store the receipt and track the miles you drove to and from your destination. Again, you wouldn’t have driven there if it weren’t for your business.
Holidays Don’t Matter
The dates that should be looming overhead are now April 15, 2013 (now past), June 17, 2013, September 16, 2013, and January 15, 2014. Take out the calendar and pencil in, highlight, and gold star those quarterly tax deadlines.
Don’t want a huge tax bill and penalty next year? The Self Employment Tax rate is currently 13.3%, so take that number and set aside as much as you can. Manage your money online with a tool like Personal Capital, keeping Tax, Emergency, and Retirement savings accounts separate and up to date. Schedule alerts, and pay what’s due on time so you aren’t surprised with future fees.
Follow a blog like Debt RoundUp for savings tips and start checking off all those little things you can deduct—they add up! As a freelancer, expenses should be on your mind from the moment you start generating income. It’s not too late (and never boring) to see the money you spend as dough that will go right back into your wallet.
Author Bio: This article was written by Brenda Harjala, Community Manager for SuperMoney. Super Power Your Finances with SuperMoney.com.
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