Follow This Simple Instruction for Your Succesful
Many people start freelancing after they lose a job, quit a job, or take early retirement. They know they have marketable skills and can make a living working for themselves, with a flexible schedule and autonomy to choose which projects to take on, and which to decline.
What many would-be freelancers and self-employed individuals don’t realize immediately is that they will need to track the financial information related to their business, watch cash flow and keep important records in case they get audited by the IRS. This aspect of freelancing often comes as something of a rude shock. But self-employed record-keeping and accounting does not have to be difficult.
If you want to succeed, follow these simple principles
It’s very important to separate your business finances from your personal bank accounts. Open a business bank account and run your company through that account. Do not mix your personal cash with your business account unless you make a formal contribution, with paperwork to support it, to start your company. It’s easy to pay for your business expenses with a dedicated business credit card, on which you may be able to get a good rate and rewards points. If you use primarily one card for your company, you are likely to get a detailed expense report from that card company at the end of the year, which can help immensely as you prepare your tax returns.
Although you have a very small likelihood of facing a tax audit, you should assume that you will be audited and keep records as if you will be. Self-employed individuals, particularly those who claim home-office deductions, do have a greater chance of being audited than employees do, particularly if their adjusted gross income is $100,000 or more.
Even if you think that you have only a miniscule chance of drawing an IRS audit for your freelance business, you should organize and retain financial records such as invoices, checks, expense receipts, contracts with clients and bank statements for up to five years. Maintain an online or physical business calendar and archive it or keep it with your paper records in case you need to show when you met with clients or attended a conference. The IRS tends to particularly scrutinize expenses you claim for business meals, entertainment and travel, so be very diligent about collecting and saving those receipts. With many institutions issuing online records these days, it’s easier to organize your home office, but you will probably still have paper on file for some items. Organize your papers by sub-categories and tax year and keep them in a secure location that is easy to access in case you ever need them.
The days of physical accounting books are long gone, giving way to myriad accounting programs that are available for your computer or online “in the cloud.” You can choose from a straightforward spreadsheet or a simple accounting program. The 2011 version of QuickBooks provides excellent insight to most freelancers about their revenue and expenses. Check your financial data on a daily basis, or at least weekly, and do comparisons between how your company is doing this year versus the same period last year. This way you will know whether your business is growing, staying static or floundering. Programs such as QuickBooks can also give you important information like which of your client invoices are overdue. This kind of data becomes extremely valuable when you need to step up your collections on accounts receivable.
In some cases, freelancers may need more detailed, industry-specific software, depending on their business and industry. No matter which software program you choose, enter your freelance income and expenses in the system frequently (or hire someone to do it for you), keep your numbers up-to-date and generate periodic accounting reports, such as cash flow and profit and loss statements.
If you don’t understand basic accounting or don’t want to handle it yourself, you can hire a bookkeeper and an accountant to help you evaluate how your freelance business is doing financially. Learn how to read the financial documents your CPA generates; if you’re unsure what the numbers mean, ask your accountant to sit down with you and explain the basics of items like profit-and-loss statements and accounts-receivable statements. A good accountant who specializes in freelance businesses should be happy to give you some time for a tutorial as long as you don’t ask during tax season. He or she can also help you determine how much to charge and how to build your overhead into your hourly rate or flat fee.