Bookkeeping for Independent Contractors: Everything You Need to Know

Accountant for independent contractor

The software can be an app used on your phone or tablet or one downloaded to your computer. Typically, accounting apps for independent contractors will help with organizing and storing records and receipts, keeping track of accounts payable and accounts receivable, and performing bookkeeping tasks. Independent Contractor Tax Advisors is a licensed CPA firm that provides accounting services and tax advice for contractors, consultants and other self-employed clients across the U.S. For a low, fixed monthly cost, we use sophisticated strategies to legally minimize the taxes of independent contractors and freelancers while improving bookkeeping, streamlining payroll, and reducing IRS audit risk. Our clients love us because we simplify their lives and put more money in their pockets. People that work for a business are usually classified as employees.

  • She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns.
  • Instead of just being a « contractor for hire, » becoming your own business provides many tax breaks that you wouldn’t receive otherwise.
  • There are many ways an independent contractor can track their income and expenses.
  • Businesses hire independent contractors to do a specific task or a set of tasks for a period of time.

Independent contractors may sometimes seem like another employee, but they are a completely different business entity than the businesses they perform work for. If you are not diligent in separating your personal and business bank accounts, you might get paid directly to your personal account. You will get paid for the projects you work on, do taxes on your own, and work when you want to Accountant for independent contractor work. You tell the contractor what you want done, and you pay for results. However, if you tell the worker how and when and where the work is to be done, you risk having that worker re-cast as an employee by the IRS. If a new owner takes over a business from someone else, there is potential the new owner could be liable for the predecessors tax burden if workers have been misclassified.

If your part-time business generates more than 1,000 invoices a year, you’ll need to upgrade. 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. QuickBooks has versions for both Windows and Mac, as well as an online version, which works best for independent contractors. We’ve listed the regular price, but each plan is discounted during your initial subscription. You can take advantage of a variety of tax deductions, but you have to document your expenses with receipts and invoices.

Do independent contractors need to track everything?

Their specialized knowledge may not be related to things like benefits, bookkeeping and other business-related tasks. We have extensive experience meeting the accounting needs of businesses of all sizes, from sole proprietors to corporations. This means that those without an active in-state license are subject to the ABC test, outlined above. The burden is on the employer to prove that the non-California or unlicensed accountant in question is an independent contractor by proving all three prongs of the test. None of the above applies when your company hires an independent contractor—a publicist to get your company’s name in the news, for example, or a freelance website designer.

Many new independent contractors will start out doing bookkeeping themselves. Cash can be tight early on, so being responsible for your books can help you save some money while starting your business. Getting paid to your personal account can be too tempting to sweep it under the rug.

We Can Help With the Accounting, Bookkeeping and Tax Preparation for Your Business

If you do not file your profit and expenses, you are putting yourself at risk of being audited by the IRS. Tracking the money you bring in and the money you send out of your account is essential as an independent contractor. Anytime you complete more than $600 of work for a client, they will need to file and send you a copy of Form 1099-MISC.

This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.

The business they work for will withhold and report a portion of the employee’s wages. A percentage of each check is withheld to fund unemployment, social security, Medicare, and tax liability. Each year, all employee taxable income is proven on a W-2 form and filed to the IRS. The traditional factors used to assess worker classification do not translate easily in today’s economy given how businesses are changing their models to offer different services to customers. For example, do you still get into your car, drive to the grocery store, shop, check out and drive home?

Accountant for independent contractor

Proactively estimating year end taxes is not only required to avoid underpayment penalties, it can also reduce your year-end tax burden since your are strategizing for the coming year versus reacting to past expenses. Since revenue can be dynamic and your annual tax liability can change based on new projects and expenses, we recommend mid-year tax planning to adjust for revenue changes and business development. If you don’t tax plan, at least consider opening a separate bank account for taxes and each time you receive a client payment, deposit a percentage based on the tax bracket. In business, an individual offering products or services, while not formally appointed as an employee at a company, is considered an independent contractor. Typically people such as doctors, dentists, veterinarians, lawyers, and accountants are considered to be in independent trade. Generally, contractors or subcontractors control how and what it takes to complete requested services, which differs for employees.

Take Advantage of These Tax Tips Before 2018 (and the Tax Cuts and Jobs Act) Begin

California has a notable adoption of an ABC test that garnered mainstream attention in the state’s Supreme Court ruling in April 2018 in the case of Dynamex Operations West, Inc., v. Superior Court. The ruling established that companies must use a three-pronged test to determine how to classify workers. This test assumes that workers are employees unless the company that hires them can prove otherwise.

  • Being a bookkeeper for yourself and having an efficient bookkeeping system in place is essential if you’re an independent contractor.
  • As an employee, the employer has control of the job performance and must withhold federal, state, medicare, and social security taxes from the employee’s paycheck.
  • If not, these employers will be subject to the ABC test instead of the Borello test.
  • It is the most expensive service on this list, but includes everything you need to run your basic business administration without lifting a finger.
  • Get the education and resources you need to make informed business decisions and establish quality business processes, including bookkeeping and cash management tasks.

Provided you comply with the IRS rules (ask your accountant!) this can help reduce your tax burden when working on projects that require long-distance travel. Typically an independent contractor will first send you an invoice, which will specify certain payment terms. Depending on your accounts payable process, you might also send them a purchase order back to confirm the invoice before issuing the final payment.

IRS guidance

We service clients throughout Virginia and Washington, D.C., including Arlington, Fairfax, Alexandria and Falls Church, VA. If you train someone, direct their tasks, set specific hours, and dictate how and when the work should be completed, the IRS is likely to see them as an employee. You’ll likely need to file Form 8829 along with your Schedule C when taking the home office deduction, which you can learn more about in our guide to the home office deduction. In addition to insurance premiums, you can deduct other out-of-pocket medical costs, such as office co-pays and the cost of prescriptions.

The exemption only applies to accountants holding an active license from the State of California. If you are saving for retirement, create a plan that allows you to save the maximum. Owning a company allows you to leverage your retirement plan to contribute well up to $50,000 (and in some cases more) tax free dollars depending on the type of plan you choose. This is one of the best ways to build up your nest egg for your future.

The IRS considers training the worker how to do the job to be strong evidence of employee status. The consider periodic or ongoing training about procedures and methods as very strong evidence of employee status. An independent contractor get their own training because they are self-employed working for many clients or customers, not one employer. Unlike employee wages, which you’ll handle through your payroll, you pay your independent contractors like you would any other kind of supplier, via your accounts payable system. They can be a sole proprietor, a freelancer with an incorporated business, a professional with a Limited Liability Partnership (like a lawyer)—it really doesn’t matter what kind of business entity they run. The “independent” in independent contractor simply refers to the fact that the contractor is a non-employee, and is independent of the company they’re doing the contracted work for.

If you attempt to reconcile your books on your own, it can be a monumental task. Using accounting software like Zero, Wave, or Freshbooks, will allow you to reconcile your bank accounts quickly. As a contractor, keeping your accounting transparent will also allow you to see your income and expenses more clearly. The clarity in financials will allow you to make smart decisions on the growth of your company. Saving money and paying estimated taxes in advance will help set you up for a more promising future.