An independent contractor is any person who works on a contract basis on a specific project or task. It can be individual entrepreneurs, freelancers, and other business objects. The word “independent” means that these specialists are not employees and are not dependent on the firm they deal with under the contract. Let’s discuss why it is essential to seek help from an accountant for independent contractor.
Main differences between an independent contractor and an employee
A contractor is not an employee of the company with which he interacts. The employee is regularly paid wages; taxes are withheld from these earnings; the employer forms his work schedule. The contractors get money when they finish projects, pay taxes, and do their job when they want.
If you work as an independent worker, your employer will not pay for your health insurance, unemployment taxes, bonuses, compensation, income taxes, etc.
Sometimes employers treat contractors as employees; in such cases, the IRS may fine them for misclassification.
What accounting techniques may independent contractors use?
Controlling income and expenses is the backbone of accounting, which means you must record data whenever you receive or spend capital.
The registration of each transaction in a general ledger in paper or electronic form is called maintaining a single record; it is one of the most popular accounting methods. It is enough when we speak about small transactions, but as the business develops, it is necessary to switch to double bookkeeping.
Double-entry accounting requires you to make two entries on your statements. So, when making a sale, you need to make one entry to increase revenue and the second to decrease inventory. In this case, more than one table in Excel may be needed, and you must consider installing special software.
Keeping proper financial records is time-intensive and small mistakes can be costly. BooksTime makes sure your numbers are 100% accurate so you can focus on growing your business.
The importance of monthly bookkeeping
Many contractors don’t even think about accounting before filing their tax returns. However, the process of estimating mandatory payments becomes long and painful. One way to eliminate an impending headache is to organize monthly bookkeeping. You can hire an accountant or independently keep track of your monthly revenue and costs. Let’s discuss the advantages of monthly accounting:
- Allow you separate every business spending from personal expense: this separation goes beyond using different bank accounts for business and individual needs. It is helpful to control deductions and, at the same time, evaluate how much you must pay in taxes. Monthly bookkeeping lets you monitor incoming and outgoing capital and get data on what expenses can be recorded as deductions when creating a tax return.
- Controlling every customer invoice and payment: it’s easy to get lost in your day-to-day activity, primarily if you work as an independent contractor full day. And what is accounting, if not a systematic and understandable control of all financial processes? Monthly reporting ensures you transfer the agreed amount to the right people on time, and customers will remember to pay you.
- Ability to review payroll: regularly recording financial transactions allows you to estimate income and upcoming tax payments. Using the services of an accountant for independent contractor, you may control wages and receive up-to-date data on your financial situation.
Monthly bookkeeping greatly simplifies tax procedures. It lets you understand how much you must pay during the tax period. With accurate calculations, you won’t be surprised by the taxes you’ll have to pay, and you’ll be able to maintain the right payment plan. Besides, you can save on taxes by regularly monitoring deductions and business costs.
Should an independent contractor hire an accountant?
Many contractors have started doing their bookkeeping. When you begin, you may be on a budget, so dealing with your books independently can help you save capital.
As the business develops, you may notice how beneficial it would be not to spend time on economic procedures to concentrate on performing tasks within your qualifications, attracting new customers, etc. Partnering with a professional to save your finances will give you the liberty you need to increase your income.
Many independent specialists see significant benefits from dealing with CPAs, especially during tax season. A qualified accountant helps you with mandatory payments and generates and deciphers financial reports, including balance sheets, income statements, etc.
When hiring a bookkeeper, you may wonder if you can afford it. It is better to consider whether you can afford it without professional advice.
As an independent contractor, you understand the need to outsource certain aspects of the business. That’s likely how you started. If you are involved in several projects that need to be completed as quickly as possible, then maintaining your bookkeeping can become a heavy burden.
Working with a professional accountant for independent contractor will help eliminate some of the stress of paying taxes and put you in control of your financial situation. In addition, the correct bookkeeping will improve your chances of obtaining a business loan if you need borrowed capital.
Author: Charles Lutwidge