I realized pretty early on in my business that I am the worst bookkeeper. And every year that tax season comes sneaking up on us I’m reminded of this fact. It took me a while to get a handle on the mess of documents that are my books. But over time, I’ve garnered several tips that have helped me become a better bookkeeper for my solo operation. Here are five things you can do today to get a handle on your business finances.
Use an Accounting Software
Using accounting software can save you a lot of time and help you become a better bookkeeper. For as little as $10 per month, you can get access to a simple program like QuickBooks Self-Employed. Although it doesn’t have enough features and capabilities for someone who’s running an agency and managing payroll, it’s great for solo freelancers.
It helps you with income and expense tracking, invoicing, and determining the amount of quarterly tax you owe so you don’t get hit with a penalty. It also integrates with TurboTax so you don’t have to spend hours manually entering data when tax season rolls around.
If you have more complex invoicing needs, a program like Xero may work better for you. It allows you to create quotes for your clients and convert them to invoices automatically. It also tracks the time you spend on projects to help you bill hourly.
If you have to collect sales tax, you can do that through the app too. It has a handy feature that calculates the sales tax rate based on your customer’s location.
Xero also connects to your bank accounts and credit cards to make tracking your cash flow easy. The app will even categorize your expenses automatically based on how you categorized things in the past. Isn’t that convenient?
But if you can’t afford to invest in accounting software or don’t want to use it, you can track your cash flow the old-fashioned way.
Track Your Cashflow
I’m not very technically savvy, so I prefer to track my cash flow in a spreadsheet. But if you like to write things down by hand, you can record everything in a notebook instead.
The key is to make sure that all the money that comes in and out of your business is accounted for, which will make things much easier come tax time.
Whenever money hits your bank account, you need to write down how much money came in, when you received the payment, and who it came from. You should also record the fees you paid (i.e., PayPal, Stripe, etc.) and keep a copy of the invoice you issued.
When it comes to money that goes out of your business bank account, you need to track who the money went to, how much the payment was for, and why you gave them the money. It’s also a good idea to note whether the transaction was related to a client project or just a general business expense.
You should also keep all of your receipts for at least three years so you have evidence of your business expenses if you get audited. I keep all of my receipts for the year in a big expandable file folder, but you may prefer to scan them into your computer or upload them to your accounting software. Whatever system you use, make sure you stick to it and stay consistent.
Save Money for Taxes
Working for yourself means that you don’t have an employer handing over money to cover your taxes to the government. You’re solely responsible for your taxes, so you need to become a better bookkeeper to make sure you can afford to cover them.
Whenever you get a payment, you should set aside a portion of it for taxes. Ideally, you should keep it in a separate bank account so you won’t be tempted to spend it. I reserve about 25% of my income for taxes, but some self-employed people save 30%.
Although that may seem high, remember that freelancers have to pay the combined employer and employee amount of Social Security and Medicare taxes.
You also need to make sure that you’re keeping up with your quarterly estimated tax payments. The deadlines usually fall on April 15th, June 15th, September 15th, and January 15th. If one of the dates is a legal holiday or a weekend, the deadline shifts to the next business day.
You can use Form 1040-ES to calculate how much you owe so you can send in the right amount of money to the IRS. If you underestimate your quarterly payments, you may have to pay penalties. Since accuracy is so important, I usually have an accountant help me with this step.
Separate Your Accounts
Managing the books for your business can be a real challenge if your personal and business accounts are the same. Most business advisors recommend separating accounts as soon as you can. And from experience, I second this!
It makes tracking your expenses a lot easier if you have one account for personal purchases and another for business transactions. Many banks won’t even charge you a monthly fee for your business bank account if you keep enough money in it, so getting one is a no-brainer.
Schedule Time to Organize Your Books
Your books are not going to organize themselves, trust me! And if you put it off, managing your books will be a real task. So put some time on your calendar to organize your books. That way, your road to becoming a better bookkeeper isn’t so long and dreary.
What tips and tricks helped you become a better bookkeeper for your business? Share them with me in the comments below!
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.