As an independent contractor, you tend to dread the upcoming tax season; it usually means days of drowning in itemized receipts. Taxes get really complicated for independent contractors…but there are tools available to independent contractors that can simplify tax season.
How? One method is to instantiate monthly bookkeeping practices, either by working with a bookkeeper or by conducting monthly bookkeeping yourself. You’d be surprised how much you can benefit as an independent contractor by tracking your books monthly.
But what is bookkeeping and why should contractors care so much about it? In this blog, we’re going to cover bookkeeping, the difference between independent contractors & payrolled employees, and the benefits of monthly bookkeeping for independent contractors.
What is bookkeeping exactly? Well, put in simple terms: bookkeeping is the practice of recording your day-to-day transactions. These transactions can include:
Independent contractors may need to record additional transactions like office expenses, supply purchases, rental spaces, and more. This is because independent contractors are considered to be their own business entity. They’re categorized differently than payrolled employees in terms of taxes and bookkeeping. Bookkeeping for independent contractors works a bit differently than bookkeeping services for employees; it’s more complex and requires some additional tracking before tax season.
As an independent contractor, U.S. law classifies you as your own business entity. As such, you need to be responsible for more than a payrolled employee in terms of financial record keeping. An employee is on a company’s payroll. Their benefits and employment taxes are handled by their job. In contrast, contractors need to handle their own benefits and employment taxes. We’ve gone more in depth into the differences between independent contractors and payrolled employees below.
The first difference between contractors and employees is pretty obvious: Independent contractors have more autonomy in their work. Contractors can typically set their own hours and determine where they work. They can work from home or from a dedicated office space. In contrast, payrolled employees are expected to work a certain number of hours from a predetermined space, typically an office space that’s shared by other employees.
Additionally, independent contractors don’t have to go through as much training and onboarding as payrolled employees. Contractors are commonly hired for a specific service, so the bulk of what they do is completing assignments and tasks in relation to the service they were hired for. There isn’t as much need for employers to educate contractors on work culture, team dynamics, and the company’s long-term goals. There’s more of an emphasis on building long-term relationships with hired employees who are expected to grow alongside the company they work for.
Contractors enjoy the autonomy and flexibility that come with being classified as an independent entity separate from the business they’re doing work for. They aren’t considered employees of the company, so independent contractors retain different benefits that employees usually don’t have. This includes setting their own hours and determining where they work.
While there are plenty of benefits to working as an independent contractor, keep in mind that it does come with its disadvantages. Employees are on a business’s payroll, meaning the business that employs that person provides access to benefits and withholds taxes. These certain taxes include things like Social Security tax, Medicare tax, federal income tax, and state income tax.
Employees can sign up for health insurance that’s been provided by their employer, but independent contractors are expected to obtain their own health insurance. Contractors aren’t considered employees, so while they enjoy more autonomy, that independence requires them to handle their own insurance and taxes.
As mentioned above, businesses take care of employee benefits and tax withholdings. This means that independent contractors are paid an agreed-upon amount that is not taxed. Then, once independent contractors file their annual tax returns, they must pay all taxes associated with their income. So, independent contractors must pay income tax and self-employment tax. They must also track and deduct business expenses like health insurance and home office expenses.
That’s one of the reasons why bookkeeping for contractors is more complex than bookkeeping for employees. There are more factors to consider before tax season, and hiring a bookkeeper for monthly bookkeeping is a way to manage these various factors.
So there are quite a few differences between independent contractors and hired employees. As such, many who work as independent contractors juggle the different challenges and opportunities of their work themselves. A lot of contractors tend to avoid even thinking about bookkeeping until they’re filing their tax returns. For many, tax return preparation is a long, frustrating process.
But it doesn’t have to be. One way to solve the encroaching tax headache is to instantiate monthly bookkeeping for contractors. You can do this by hiring a bookkeeper or by dedicating time each month to tracking your monthly expenses and income yourself. Let’s go deeper into uncovering the benefits of monthly bookkeeping for independent contractors.
Though this may seem obvious at first glance, separating your personal expenses and business expenses as a contractor can get complicated quickly. This separation goes beyond using one card for business expenses and another for personal expenses. As an independent contractor, you are required to track your deductions and estimate along the way how much you’ll need to pay in taxes.
That’s why monthly bookkeeping for contractors is so helpful. It better tracks the money you have coming in and the money you have going out. Using monthly bookkeeping, you can gain invaluable insight into what expenses can be written as deductions when you file your tax return. You and your bookkeeper can work together to simplify the monthly overview of your finances as an independent contractor.
In addition to providing you with an understanding of what qualifies as a business vs. personal expense, monthly bookkeeping for contractors helps you better track customer bills and payments. It’s easy for things to get lost in the complexity of daily work, especially if you’re working as an independent contractor full time. And what is bookkeeping if not tracking all these complexities in an organized, easy-to-understand way? Monthly bookkeeping for contractors ensures you’re paying the right amount to the right people at the right time – and that your customers are doing the same for you.
In addition to providing better tracking capabilities, monthly bookkeeping for independent contractors helps you more efficiently review your income and estimate upcoming tax payments. Also, monthly bookkeeping allows you to do this on a more regular basis; you won’t be surprised by anything because your financial record keeping is streamlined.
By hiring a monthly bookkeeper, you’ll better track your payroll and be provided with current insight into your finances. Bookkeepers organize all the different facets of your payroll into an understandable viewpoint.
Finally, monthly bookkeeping for contractors simplifies your taxes. It allows you to understand what amount you’ll have to pay during tax season months in advance. With monthly bookkeeping, you won’t be surprised by the taxes you owe and can enact a payment plan that works best for your situation. Additionally, you can save money on tax payments through monthly tracking of deductions and business expenses.
So now you understand the basics of bookkeeping for contractors: what is bookkeeping, why are you considered different from a payrolled employee, and what benefits are there to setting up monthly bookkeeping services. All that’s left is to find a bookkeeper to help you consolidate your business expenses and income into an easy-to-understand viewpoint.
4Corner Business Services is Denver’s answer to bookkeeping, accounting, and business advisory services. We offer expert accounting, tax, and organizational services to small and large businesses across the Denver metro area. As an English-Spanish bilingual firm, we offer accessible, accurate, and timely advice for all your business needs. Whether you're looking for accounting & bookkeeping services, organizational support, or business consulting services, 4Corner is here to help you grow as an independent contractor.
You can contact us today to learn more about the services we provide customers who are looking for monthly bookkeeping services for independent contractors.
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