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The Ultimate Guide To Bookkeeping for Independent Contractors

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. 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.

Mixing personal and business expenses makes it harder to track spending, increases the risk of missing deductions, and complicates tax filing. When you track your income and expenses diligently, you gain a clearer picture of how much money is coming in versus going out. This insight helps you make informed decisions about pricing, budgeting, and growth opportunities. Without proper records, you risk overspending or running into cash shortages unexpectedly.

This simplifies tax filing and protects your records in case of an audit. Shoeboxed integrates with over 12 apps, including QuickBooks, Xero, and Wave, to automatically synchronize with your accounting software, making bookkeeping and tax time a breeze. You’re the boss, setting your own hours and enjoying a level of freedom that employees don’t have.

Benefits of Organized Contractor Bookkeeping

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.

Recording Income and Expenses

• While still nowhere close to being as burdensome as employment law compliance, the once relatively rare state law protections for independent contractors are now rapidly increasing.
• Proper documentation of these expenses is crucial to taking advantage of various tax deductions during tax filing.
• These expenses that would normally be covered by an employer are passed to the independent contractor.
• Bookkeeping for independent contractors is easy if you stick to the right steps.

The New York Freelance Isn’t Free Act, which went into effect August 2024, applies to independent contractors working in New York where payments total $800 or more in a 120-day period. Like the California law, the New York law requires a written agreement with a similar list of terms, but doesn’t require a signature, and multiple documents can satisfy the requirements. The importance of understanding the independent contractor law landscape also isn’t limited to businesses in states most likely to use independent contractors.

Avoiding Tax Penalties and Audits:

Paying taxes and having precise estimates of your upcoming tax obligations are quite beneficial. Putting your estimated tax payments in each month or every three months will help you avoid a tax bill that isn’t expected. The POWR Act’s provisions, unlike Colorado’s law regarding restrictive covenants, isn’t unusual.

Keeps Your Business Organized

Independent contractors are considered a single-member limited liability company (LLC) or a sole proprietor for tax purposes. Putting off your bookkeeping until April creates stress and opens the door to errors. Regular updates throughout the year keep you prepared and minimize surprises.

But the independent contractor relationship isn’t the wild west anymore. While still nowhere close to being as burdensome as employment law compliance, the once relatively rare state law protections for independent contractors are now rapidly increasing. And, virtually all the independent contractor protectionist-type laws will apply based on where the work is performed, much like employment laws, even if the contractor is fully remote. Look for a bookkeeping service with a track record of working with independent contractors. If you purchase a point of sale terminal, you transfer value from your cash account to your equipment account.

Be Honest About Your Earnings and Expenses

As to the first class of these laws, the most bookkeeping for independent contractors well known is in California, which makes offering a noncompete agreement to an independent contractor not just enforceable, but also illegal. This sort of restriction is still trending, with the Federal Trade Commission trying unsuccessfully to ban noncompetes completely (even with independent contractors) last year. The California Freelance Worker Protection Act, which went into effect on Jan. 1, 2025, applies to independent contractors working in California where payments total $250 or more in a 120-day period. And fewer hours of work for them means less expensive accounting for you.

• We’re here to eliminate uncertainty from running your own business permanently.
• Currently, that means you will pay 15.3 percent for social security, 12.4 percent for Medicare, and 2.9 percent for both.
• You don’t have to hire a bookkeeper or accountant, but it is very beneficial when filing and paying your taxes.
• This information is critical for managing cash flow and preparing tax returns.
• A customer is required to file and send you a copy of Form 1099-MISC whenever you accomplish work for them that costs more than $600.

This means anyone who uses an independent contractor’s services doesn’t have to provide employee benefits or take out any withholding from their paychecks. BooXkeeping is a nationwide provider of affordable outsourced bookkeeping services to small and medium-sized businesses. As mentioned before, most of the popular bookkeeping and accounting software on the market has built-in features for maintaining records built in, which makes this process much easier. Independent contractors are self-employed individuals who work for themselves and not for an employer. They typically work on a project basis and are not considered employees of the company they work for. Independent contractors have a unique set of bookkeeping needs compared to traditional employees, as they are responsible for their own taxes and financial record-keeping.