Bookkeeping for Independent Contractors: A Guide Shoeboxed

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 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.

These expenses that would normally be covered by an employer are passed to the independent contractor. Once you have chosen a bookkeeping method, you can begin setting up your bookkeeping system. This may include creating a chart of accounts, setting up a system bookkeeping for independent contractors for recording financial transactions, and establishing a process for reconciling bank accounts. If you aren’t sure about what type of system you need, we recommend reaching out to a professional bookkeeping company, like BooXkeeping, for a free consultation.

Turn business receipts into data & deductibles

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. Meanwhile in relevance to the financial aspect, when it comes to employees, the company is obligated to withhold the income tax, social security and Medicare taxes from the wages being paid. On the other hand, the company doesn’t withhold these taxes for independent contractors.

Paying taxes and having accurate snapshots of what you are estimated to pay in taxes helps a lot. Paying in your estimated taxes every month or quarter will help you avoid unexpected tax liability. A Schedule SE will be one of the schedules of your individual income tax return Form 1040.

Keeping Track of Taxable Income

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. 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. Contractors enjoy the autonomy and flexibility that come with being classified as an independent entity separate from the business they’re doing work for.

• Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service.
• As an independent contractor, you’re going to have to learn to manage these things on your own.
• But even the Standard version, priced at just $15 per month billed annually, which offers up to 5,000 invoices a year should be enough for most part-timers.
• Independent contractors may sometimes seem like another employee, but they are a completely different business entity than the businesses they perform work for.
• If the cost of your purchase is relatively low, you can record the equipment or furniture as an Expense.

The clarity in financials will allow you to make smart decisions on the growth of your company. You will want to open a bank account specifically as an independent contractor business. This will help you separate your financial status from your businesses.

Key Bookkeeping Concepts for Independent Contractors

The exception to this is when a business hires independent contractors to complete some aspects of the business. Independent contractors are responsible for their own tax payments and there are many ways that an independent contractor can improve their financial standing when it comes to tax liability. An independent contractor does not have the ease of having an employer take their taxes out of each paycheck. However, when a company hires an independent contractor, it is different.