Business

How to Keep Good Records: A Few Basics for the Self Employed

This is a guest article by Brenda from SuperMoney.com.  If you are interested in contributing to Debt RoundUp, please follow our guidelines.

How to Keep Good RecordsMaybe 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.

Image courtesy of FreeDigitalPhotos.net

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37 Comments

  1. May 20, 2013 at 7:20 am — Reply

    Keeping good records is so important for tax purposes. I think scheduling blocks of time each month (or even a full day/evening) to make sure you have everything in order is a great approach, versus waiting until end of the year and scrambling to check all your records. Thanks for guest posting!

    • May 20, 2013 at 10:06 am — Reply

      You are so correct. I made many record keeping mistakes when I was running my ecom business. I try not to make those same mistakes again.

    • May 20, 2013 at 7:12 pm — Reply

      Keeping up to date saves a lot of time in the end. I can’t imagine sitting down to go over months and months of records.

      • May 21, 2013 at 9:37 pm — Reply

        I have done it before and it is a time suck. There is nothing fun about it.

  2. May 20, 2013 at 7:20 am — Reply

    I use google calendar for the dates and get a reminder email not to miss them. It could be costly to do so. I try to scan everything that is important as well, like passwords and such, to find them easily even if I am not near my paper folders.

    • May 20, 2013 at 10:07 am — Reply

      Good tips Pauline. I appreciate you providing some feedback.

  3. May 20, 2013 at 7:26 am — Reply

    Keeping good records is vital to running your own business. We keep the physical copies of all of our receipts (assuming it’s not bought online) and back it up with an Excel spreadsheet detailing all of them. That way, once it comes time to do our taxes we just have to email the Excel docs to our CPA and he has all that he needs.

    • May 20, 2013 at 10:07 am — Reply

      Nice tip John. That is a great idea with the excel sheet.

  4. May 20, 2013 at 8:25 am — Reply

    I definitely need to be more organized and keep better records. Something that I need to work on!

    • May 20, 2013 at 10:08 am — Reply

      I still need to work on it. I have gotten better, but no where near where I should be.

  5. May 20, 2013 at 8:56 am — Reply

    I learned the hard way how much bad records will kill everything. Dealing with the IRS isn’t fun by any stretch of the imagination, and when you have to prove what you KNOW is the truth but can’t find the paper to back it up? Yeah….that’s a bad day.

    • May 20, 2013 at 10:09 am — Reply

      Ouch, that doesn’t sound exciting at all.

  6. May 20, 2013 at 9:26 am — Reply

    Important point about keeping good records – this saved us from a heck of a mess one time when the IRS got our tax returns 6 months late.

    • May 20, 2013 at 10:09 am — Reply

      Eww….I am sure that was not fun, but good thing you had it together.

  7. May 20, 2013 at 12:03 pm — Reply

    I set aside 50% of all money coming in to cover all taxes. I know it’s too much, but (a) it’s a simple number and (b) it forces me to keep my spending below that. It’s a habit we acquired while we were still working: we always had way more deducted than we needed. This way we always got a refund, which we used to fund annual type projects (replacing the fence, repainting the house, etc.). I know people say you shouldn’t do it, but the interest you forego is pennies and it’s kinda nice to see what we saved while we weren’t looking.

    Oh, and what a nice incentive to get our taxes filed as early as we can!

    • May 20, 2013 at 12:26 pm — Reply

      Nice system William. I understand your concept and if it works for you, then good to hear. You don’t want to be scrambling for money to pay your taxes just because you didn’t put aside enough.

  8. May 20, 2013 at 2:32 pm — Reply

    Great tips! I try to stay on top of it by setting aside some every quarter, but it still seems like I need a day to get everything organized during tax season. There are many joys to owning your own business, but there are definitely days that I miss being an employee.

    • May 21, 2013 at 9:40 pm — Reply

      I have been on both sides Shannon and I do like not having to work on paperwork.

  9. Jake Erickson
    May 20, 2013 at 2:43 pm — Reply

    These are great tips. Keeping good records is such a big deal when you own your own business. Not only will it help with taxes, but it will also help you run your business better.

    • May 21, 2013 at 9:39 pm — Reply

      Keeping good records will allow you to focus on the other important aspects of your business. It is all about efficiency.

  10. May 20, 2013 at 2:46 pm — Reply

    Great suggestions! I agree that keeping your stuff organized is important, and even more so is setting money aside for taxes and for the expensive accountant. For us the receipts are relatively easy to keep organized. Setting money aside is a lot more difficult. Here it is almost the middle of another year and we have yet to set money aside. Not cool for us.

    • May 21, 2013 at 9:38 pm — Reply

      Setting money aside is important and many people forget about it. I hope you catch up Sicorra.

  11. Harry Langenberg
    May 20, 2013 at 3:09 pm — Reply

    This is great advice! Thanks for the tips…

  12. May 20, 2013 at 9:37 pm — Reply

    I’ve found keeping track of the bills, expenses, and taxes are some of the toughest parts to manage with our business. In fact we considered outsourcing most a lot of this in the near future so we can spend more time working on our business and not just managing the paperwork.

    • May 21, 2013 at 9:36 pm — Reply

      I agree with you Chris. This was the part that took me the longest to get control of.

  13. May 20, 2013 at 11:17 pm — Reply

    I have an excellent bookkeeper who is worth every penny!

    • May 21, 2013 at 9:36 pm — Reply

      Glad you don’t have to worry about it. Good bookkeepers are definitely worth it.

  14. May 20, 2013 at 11:57 pm — Reply

    I like the idea of being self employed but withholding my own taxes is something I don’t like as well. It’s just to tempting to spend do something with the money rather than set it back for the government. But that just goes along with being self employed.

    • May 21, 2013 at 9:37 pm — Reply

      You have to be dedicated to withholding your own taxes or you will be in for a rude surprise during tax time.

  15. thepotatohead
    May 21, 2013 at 12:22 am — Reply

    Ughhhh….Record keeping is the bane of my existence. Something I know I’m horrible at and need to get serious about, but keep putting it off. I’ve wasted so much money on late fees for misplaced bills and the thought of missing documents at tax time drives me insane cause somehow i’m always scrambling to find that last form that i need.

    • May 21, 2013 at 9:34 pm — Reply

      I hate record keeping as much as you do. I know that I need to make some changes, but have yet to find the right resource.

  16. May 21, 2013 at 11:09 pm — Reply

    Record keeping is an eternal challenge for me. Thanks for the good tips!

    • May 22, 2013 at 10:30 pm — Reply

      Me as well Alex.

  17. Jenny @ Frugal Guru Guide
    May 22, 2013 at 2:44 am — Reply

    That’s just for Social Security! Don’t forget Medicare, too. 🙂

    • Jenny @ Frugal Guru Guide
      May 22, 2013 at 2:46 am — Reply

      Whoops, that did include Medicare, but at the 2% discounted rate. It’s back to 15.3% now. 🙁

  18. May 28, 2013 at 2:01 pm — Reply

    Thanks for the tips! It definitely helps to stay organized. I’v been using a filing cabinet to stay organized. I don’t want those receipts running off!

  19. Darron Connelley
    June 19, 2013 at 6:02 am — Reply

    Data backup online is not too hard. My computer documents are all encrypted at Twentie. Their cloud is the fastest and also free.

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