Thanks to technology, we are changing the way we view traditional work. Freelancing is on the rise. According to a survey from Upwork, a popular marketplace for freelancers, there are about 59 million freelancers in just the US alone. 

Freelancing is a great alternative to the hustle and bustle of a 9-5. However, it also comes with a great deal of responsibility—along with the necessity of bookkeeping for freelancers. 

Managing your finances as a freelancer 

As a freelancer, you’re your own business. According to the IRS, freelancers are classified as self-employed. Which means you must manage your finances and file your taxes. This can often seem daunting, but fortunately, a few straightforward strategies can help freelancers with self-accounting. 

Why is bookkeeping important for freelancers? 

Keeping detailed and accurate books gives you the groundwork for building your financial plans as a solopreneur. It helps you measure your success as a freelancer, plan for your business goals, and prepare for tax season. 

Bookkeeping for freelancers is crucial to your business’s success. Taking charge of your finances and mastering accounting while juggling freelance work is difficult. Yes, it can seem overwhelming, and keeping books can get confusing, especially when it is not your strong suit. 

Thankfully there are a lot of tips and tools for freelancers. In this guide, we’ll share best practices to stay on top of your finances with bookkeeping as a freelance worker. 

See also: Bookkeeping Resources: 45+ Courses, Tools, Sites, and More!

Freelancer bookkeeping best practices 

A bookkeeping system that works for you is crucial to your success as an independent contractor. Fortunately, there are several solutions available on the market. Whether it is software or hiring a bookkeeper, a good bookkeeping system for freelancers will assist you in reaching your business goals.

Here are other best practices to institute:

1. Open a dedicated bank account for your business 

Separate your personal and business expenses. It might initially be difficult to keep your personal and company finances separate as a freelancer. And many freelancers likely pay their business expenses from their personal accounts. However, doing so can lead to a huge hassle as you sort through and separate personal and business expenses. 

You should open a business-only bank account as soon as you start your freelance business. It doesn’t necessarily need to be a business account. A second bank account is sufficient when you’re just getting started.

This separation in your finances helps you better visualize where your money is going and coming from, making your tax preparation and cash flow analysis more precise. This simple practice also helps you avoid financial problems in the future and determine which expenses are necessary for your work.

See also: A Definitive Guide to Commonly Missed Small Business Tax Write-offs

Why freelancers need 2 bank accounts by Flux Academy

2. Keep track of your records

Staying on top of your bookkeeping is critical to filing your taxes. Besides staying organized, you also need to keep track of some essential information, documents, and expenses for tax seasons, including: 

  • Total hours you worked on a project
  • Cost per hour for each client
  • Records of products or services you’ve provided to your clients
  • Internet and phone bills
  • Power and utility bills
  • Office supplies
  • Educational expenses
  • Software subscription fees  
  • Office rent (if you work from home, you can claim mortgage and property taxes)

In most states, freelancers must keep business-related financial documentation for up to six years for tax purposes. It’s a good practice to keep your documentation and data well organized and safely preserved, regardless of where you work or how much money you make.

Try to incorporate a coherent archiving system that allows you to quickly and efficiently access your financial data, like bills, receipts, and notes. You never know when you’ll need to find some random document from the past! 

You can also check out our step-by-step guide on filing taxes as an independent contractor to get yourself ready for tax season.  

7 record-keeping tips for small business owners by Work Life Glue

3. Manage your cash inflow 

Getting clients and contract negotiations can often be challenging for freelancers. Having a system to manage your cash inflow helps you keep track of your bookkeeping. 

a. Quotes and estimates 

Prompt sending of quotes and price estimates to clients for projects will help you land contracts more easily. It will also help you estimate how long it takes to finish the project when handling multiple clients. 

Once the project is done, your price quote can also be turned into an invoice. Making it simpler for your customers to pay you since they already have an idea of how much the project costs. 

b. Invoices 

A freelancer likely works with many projects and clients, meaning that your payment depends on your clients’ schedules. 

Staying on top of your income may be difficult when you’re waiting to be paid. Since your clients are focused on their business, they might forget upcoming bill dates, and you may receive your payments later than expected. These overdue payments can affect your cash flow and planned income. 

A solution is to send out invoices with clear due dates and set up automatic reminders for overdue payments. A little effort can go a long way in helping you receive your payments on time. 

How To Set Up Contracts + Invoices As A Freelancer | Ep5 by Paola Kassa

4. File your taxes

Filing taxes can be a challenge for a freelancer, especially given all the aspects of your business that you must handle.

Before you file your tax returns, think about your business structure. As a freelancer, your business is most likely a sole proprietorship. In this case, you pay your business taxes on your tax return by filing a Schedule C form with your Form 1040 Individual tax return. On the other hand, if you’re in a partnership or have formed an LLC (limited liability company), you can consider hiring a tax professional or using accounting software.

Self Employed TAXES Explained & Self Employed TAX TIPS (tax return documents & checklist) by Financial Awareness by K. Scholl

5. Review your financial statements regularly

As a solopreneur, you’re the one making business decisions. Consistently reviewing your financial statements gives you a clearer understanding of your business’s financial health. 

Consistent checkups on your business’s finances help you forecast budgets and account for issues in the long run. It also helps you keep track of accurate reporting on your books. 

Managing Freelance Finance by Flux Academy

Bookkeeping tools for freelancers 

You need good tools to manage your finances to stay on top of your record-keeping as an independent contractor. Here are some of the best options available in 2022.

Freshbooks for freelancers

Freshbooks’ customizable platform can help freelancers with managing their finances—allowing you to invoice your customers and get paid faster, manage your clients, and automatically track your finances. They offer a 30-day free trial and multiple subscription plans depending on your needs. 

Freshbooks Review – Best Billing Software for Freelancers + Solopreneurs? by Torie Mathis

Quickbooks for self-employed contractors

Quickbooks is a good bookkeeping software for self-employed individuals that helps you manage and track your expenses, organize your receipts, run reports, and estimate and file your taxes. They offer flexible pricing and bundles on bookkeeping for independent contractors and freelancers. 

QuickBooks Self-Employed – Top 5 Features (BEGINNER!) by Josh Burns Tech

Wave for freelancers

Wave was built for freelancers to help them manage easier invoicing and organize their bookkeeping. The best part of Wave is that they provide free bookkeeping for freelancers, and you can access unlimited accounting options. 

How To Use Wave | Wave For Beginners | Wave Accounting Software Tutorial (2022) by Knowledge by Marcus

Shoeboxed for small business owners and entreprenuers

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format with just one click—by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can easily go over and check your records anytime. Shoeboxed ensures you always have your receipts securely stored and ready for tax purposes.

Shoeboxed demo—how to turn receipts into data and deductibles!

Google Sheets for DIY bookkeepers

If you’re not too fond of software and apps, Google sheets is a good way to do your online bookkeeping for freelance work. Thankfully there are a lot of templates available online. Since Google sheets is cloud-based, you can easily access it across all your devices. You can customize it to your needs and make it as simple or robust as you want. The best part is, it is completely free! 

FREE TEMPLATE for a simple, easy, FREE way to do BOOKKEEPING by Realistic Bookkeeping

See also: 45+ Bookkeeping Resources You Shouldn’t Ignore

Frequently asked questions on bookkeeping for freelancers

What should freelancers know about bookkeeping? 

Freelancers should know that bookkeeping is necessary for their career—it should not be considered an afterthought when it comes to maintaining healthy freelance finances. Bookkeeping is important because it helps you set your goals as a business, lets you see your growth, and helps you plan for tax season. 

How do I do my own bookkeeping as a freelancer?

Whether you’re a freelancer or a small business owner, you can do your own bookkeeping with the help of bookkeeping tools like Quickbooks, apps like Shoeboxed, and spreadsheets like Google Sheets.

How do freelancers keep books?

Freelancers keep books as self-employed individuals. They must keep track of their business expenses so they can file them as write-offs during tax season. 

Are freelancers self-employed? 

Freelancers are categorized as self-employed by the IRS. Bookkeeping for solopreneurs means that you will have tax deductions that are business expenses as long as they are considered ordinary and necessary to run your business. 

In closing

By incorporating some of the helpful best practices for bookkeeping for self-employed individuals outlined in this article, you can streamline your financial record-keeping, spend more time on your business’s core tasks and bring the best services to your clients. If you’d like to discover more helpful tips on bookkeeping for freelancers, accounting tax tips, and engaging entrepreneur stories, don’t forget to subscribe to the Shoeboxed blog!

Originally published on May 5, 2022. Updated on September 26, 2022.

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