When you’re starting out as an independent contractor, accounting practices may not be top of mind. But now is the perfect time to develop those good habits that will save you a ton of hassles and heartaches later.
1. Save Receipts
As a business owner, you’re entitled to many tax deductions on expenses, from travel to office supplies to advertising costs. But you can’t claim those deductions (or pass an audit) if you can’t prove they happened. That’s why you need to keep good records.
For converting paper receipts to electronic records, you can choose from a variety of receipt scanning and tracking apps, such as Expensify and Shoeboxed.
2. Keep Business and Personal Expenses Separate
That purchase on your credit card statement from Best Buy: was it for the office printer or your home TV? Doing your books — and your taxes — will be a nightmare if you lose track of what category your purchases should have been put in. Ways to idiot-proof your bookkeeping entries include:
• A separate bank account for the business
• A separate credit card for the business
• Accounting software that automatically codes entries
3. Back Up Financial Records
What would happen to your business if your computer died or your office burned down? Keep copies of everything (both digital and paper) in a separate location. Many entrepreneurs are moving to cloud-based digital storage, which allows remote access and top-of-the-line security without the need to buy a lot of expensive hardware and software.
You may not require much in the way of a bookkeeping system when you’re starting out, but you will as your business expands. Choose software that can scale up with additional capabilities as necessary — and save yourself having to make major changes later.
5. Save for Setbacks
Don’t plow all your profits back into the business. Set aside a percentage of that cash as a hedge against the unexpected events that could ruin you: illness that prevents you from working, natural disasters, economic downturn and so on. There are also the expected large expenses to save for, such as inventory stocking and tax payments.
6. Pay Estimated Taxes
Since you’re not working for an employer who takes payroll taxes out of every paycheck, you’re responsible for making your own periodic income tax payments. Estimated taxes are divided up into four payments, one due every quarter. This is easier on the wallet than making one huge payment in April when you file your tax return (however, you can make one annual payment if you’re willing to pay a small penalty).
Estimated taxes are filed with IRS Form 1040-ES. Learn how to estimate the payment amount and how to make payments here.
7. Hire the Expertise You Lack
Not sure what business laws or tax regulations you must follow? Clueless about bookkeeping formulas? Rather than waste your own time and energy trying to figure it out, it may be more cost-effective to outsource those tasks.
At Xendoo, we specialize in accounting and bookkeeping for small businesses. An affordable monthly fee puts decades of expertise and industry-leading, cloud-based software at your fingertips. While we do the numbers, you can get back to doing what you do best.