Transitioning from traditional employment to self-employed involves challenges, including how to deal with the accounting and bookkeeping responsibilities. While working a regular job, your employer used to withhold your estimated taxes from your paycheck. Now, as a self-employed worker, you must calculate your tax payment every quarter. While you can do your accounting and bookkeeping manually, you can simplify matters by getting an accounting software for self-employed.
Self-employed individuals must keep accurate and detailed books in managing their business. These are important to avoid fraud and other issues as the business grows. An individual must have a basic understanding of the accounting requirements for the self-employed.
How to do Accounting for Small Business
Accounting for small businesses is done by maintaining a complete record of all the income and expenses and accurately getting financial information from business transactions.
This critical activity helps small business owners track and manage their money effectively, especially during the growing stages. A business accounting mobile app helps in the generation of invoices and completion of payroll in addition to being aware of your business’ past and present performance per month.
Bookkeeping for a Small Business
The accounting process begins with the analysis of financial transactions and entering those that pertain to the business entity into the accounting system. Business transactions not related to the business, such as a personal loan taken for personal reasons of the owner, are not included in the business documents.
The first step in the accounting process is the preparation of source documents. The source documents or business documents are the foundations for recording transactions.
Business transactions are recorded in a journal, also known as the Books of Original Entry, in a chronological order using the double-entry bookkeeping system, which includes two accounts – debit and credit.
The process is made more accessible by using a particular journal to record recurring transactions such as purchases, sales, cash receipts, and more. Transactions that do not go to the specialized journals are recorded in the general journal.
The general ledger is a record of accounts that display the changes made to each account based on past transactions, together with the current balances in each account. It is also known as the Books of Final Entry.
Unadjusted Trial Balance
A trial balance is prepared to test if the total debts will equal the full credits. The accounts are taken from the ledger and arranged in a report form. The balances of the debit and credit columns must be equal.
If the debit and columns are not equal, it means that the trial balance has errors that need to be located and corrected with correcting entries. Some errors may exist despite the debits equaling credits. Such errors are most likely caused by the double posting or due to the omission of some entries.
At the end of every accounting period, the accountant must prepare the adjusting entries to update the accounts that are summarized in the financial statements such as income earned but not recorded in the books
Adjusting entries are made for accrual of income and expenses, allowances, depreciation, deferrals, and prepayments.
Adjusted Trial Balance
Once the adjusting entries are made, an adjusted trial balance is prepared. The trial balance tests if the debits will match the credits after the adjusting entries are made. The trial balance is the final step before the preparation of the financial statements.
The financial statements are the end products of the accounting system. They include the income statement, statement of changes in equity, balance sheet, statement of cash flow, and notes.
The preparation of the system for the next accounting includes the closing of temporary accounts that are measured periodically, including the income, expense, and withdrawal accounts. The balance sheet accounts, called the permanent accounts, must remain open for the next accounting cycle.
The last step of the accounting cycle is the preparation of a post-closing trial balance to test the equality of the debits, and credit amounts after the closing entries are made. This trial balance contains real accounts only as the temporary accounts are closed for the accounting cycle.
Setting Up a Small Business Accounting System
When starting a business, you must open a separate bank account that will keep your business finances separate from your personal finances.
When setting up a small business accounting system, you need to choose a method of how to record your financial transactions. There are two methods of recording income and expenses: the cash basis and the accrual basis of accounting.
Under this method, you record income and expenses upon the completion of the cash transactions. You will record revenue for a product only when the product has been fully paid for by the customer.
Most businesses prefer the accrual basis of accounting for recording transactions. Under this method, you will record income when you make a sale and expenses when you incur them, regardless of whether you received or paid cash for the product or service. You need a double-entry accounting system and record two entries for every transaction.
As a small business owner, you can hire an accountant, record transactions with simple accounting, or use accounting mobile apps to record your business transactions per month.
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Determining your Payment Items
Based on the nature of your business, you might decide to offer credit to customers. Instead of collecting payments at the point of sale, you may choose to send invoices to them per month or at a later date.
If you decide to extend credit to customers, you will need a consistent system of creating and sending invoices per month. You will find mobile apps loke zoho books, which can take care of time tracking, send invoices, settle quarterly taxes and monitor your bank accounts very helpful.
How to do Accounting for a Small Business
If you are a small business owner, hiring an accountant can save you time and money. Accountants can help small business owners with the following tasks:
- During the formation of your business, an accountant can help you write a business plan
- Advise you on the entity structure of your business
- Help you obtain appropriate licenses such as business licenses, sales tax permits and set up a credit card or employee bank account
- Set up your accounting software and chart of accounts when you do not want to incur the bookkeeper’s services on a per month basis
- Deal with compliance and complex sales tax issues
- Handle complex labor costs including wage and labor compliance issues that can sink even the most profitable businesses
- Help you meet the requirements for creditors or licensing agencies
- Maintain inventory records by dates purchased, stock numbers, purchase prices, dates sold and sales prices
Small business owners who cannot afford to hire a professional may consider automating their small business accounting practices with one of the many cloud-based software accounting applications.
Most of these applications cover the basics of accounting from invoicing, credit card payments, and payroll. There are some mobile app versions that allow for data entry as well as a time tracking facility. The software like zoho books can assist you in keeping accurate records and create basic financial statements per month.
How to do accounts for self-employed
Self-employed individuals must keep accurate and detailed books to manage their business successfully and avoid fraud and other issues that are common when a company is growing. It is, therefore, essential to have a basic knowledge of the specific accounting requirements for self-employed.
Important Financial Documents
Being prepared for business begins with keeping track of any relevant financial documents and forms. The following are some documents that you will come across in the process of managing your self-employed accounting:
- Form W-9 – It is a request for taxpayer identification number and certification. It is similar to a W-4 form, except that it signifies that you have separate business and will not have any taxes withheld. As a self-employed, you have to send a copy of the form to your clients and vendors.
- Schedule C (Form 1040) – Schedule C is used in reporting business profits and losses when you pay yearly taxes. It is also where you have to list any business-related deductions. Self-employed individuals need to calculate the cost of goods, expenses, and gross profits to fill out this form correctly.
- Schedule SE (Form 1040) – This form helps you figure out your self-employment tax. The tax includes your federal income tax amount and your contributions to the Social Security and Medicare. This form is filed annually together with your regular tax return.
- Form 1040 – ES – If you anticipate that your business will generate over $1,000 in taxes, you will be responsible for paying quarterly income taxes. Form 1040 – ES will help you estimate your tax burden quarterly throughout the year using the form’s instructions. You may complete each payment voucher so you can mail it in or pay your bill online.
- 1099 Forms – It is the form that your clients will use to report how much money they paid to you during the previous tax year. It is similar to a Form W-2, but for freelancers or self-employed. There are several types of 1099 forms for different types for payments:
- 1099 – MISC. – Clients are responsible for sending a Form 1099-MISC to self-employed individuals whom they pay $600 or more in a single year. The person or company that pays a self-employed individual must file a 1099 tax form with the IRS and send him a copy.
- 1099 – K – This form is for people who have accepted credit card payments. You should only receive a Form 199-K if you have made 200 or more transactions, and your accepted amount exceeds $20,000. This form will be sent to self-employed individuals by either their merchant account provider or a website service with whom they do business, such as Uber.
Here are the best accounting software features to check:
Payroll Management – A simplified way to get your financial status up-to-date. From a variety of payroll specialties like processing and accurate calculation of employee’s salaries, check preparation and printing process, and tax and legal compliance responding with accuracy.
Billing/Invoicing – This feature for the accounting system is specially designed for invoicing and billing. The system enables its clients to mundane collections automatically. The mechanism itself provides strategic operations for efficient and updated payment methods that comply with industry standards.
Forecasting And Budget – This is a great way to see how your financial standing looks from the current year and provides an ideal estimated budget interpretation for the coming year. With this method, you can easily set feasible goals with a positive sales target based on your company’s forecast.
Fixed Asset Management – This module can be inclusive or comes separate from the system. It manages your financial documents/data accurately and conveniently. There are multiple specialties that it can provide from cost records, audit history, resource allocation, depreciation calculation, etc.
Project Accounting – This comes as an additional software ideal for vertical industry applications. This type of software is ideal for most software developers and construction operators which have a variety of project demands and rules that differ generally over each project.
Accounting – The main component for every reliable mechanism. The system deals with fixed assets, general ledger, bank reconciliation, and account receivables and payables. These are the fundamental components of every accounting software and additional advanced inclusions differ for every user’s demands.
Inventory Management – This special toolkit enables you to take full control of your business and product stability. You will have full access and control to product availability and transaction movement to prevent loss from delivery issues like understocking or overstocking.
Fund Accounting – Most non-profit organizations and government agencies used this type of feature for donation expenditure tracking, GASB, grant management, financial reports special suite, and regulations.
How to do Accounts for Self-employed
As a self-employed, you may not be in a financial position to hire an accounting team that will help you throughout the year. Self-employed individuals must continue to follow the best practices for accounting and bookkeeping. The best accounting tools are free and will help you keep your finances in order:
- Track income – You can successfully manage your business and full your tax obligations if you track any income received with accuracy and care. Even if a client fails to send you a Form 1099, you should still report the income derived from this sale to the IRS.
- Track expenses – As it is essential to track income per month, self-employed individuals must record all business-related expenses. Together with payments to employers and suppliers, a self-employed individual may often write off costs related to supplies, business advertising, office space, health insurance, mileage, and travel. You must keep detailed receipts of your purchases per month to let you back up every exemption that you will claim in your tax return.
- Calculate net income – Once you have calculated the values of income and expenses, you can now determine your net income using the following formula:
Net income = Revenue – Expenses
Revenue refers to all inflows and other types of sales. Expenses, on the other hand, include all costs associated with the generation of said revenue. The calculation of net income is one of the first steps in finding your cost of goods sold and contribution margin, which assesses how a particular item or group of items is helping or hurting your bottom line.
- Follow up on invoices – As a self-employed person, you do not receive regular salaries and paychecks. You must take steps to secure sufficient cashflow. Along with sending invoices to your clients, you need to make sure that you follow up on any late invoices. The best accounting tools will help you ensure a steady livelihood and continue your business operation. Also, it is a smart idea to retain hard copies of paid invoices if you experience computer problems down the line.
- Investing in Software – If you do not have a solid background in finance, you want to consider purchasing a small business accounting software program that will help you keep your books in order. Accounting software, such as QuickBooks Self-employed, can help you and other self-employed business owners prepare estimated quarterly payments, track expenses and deductions, and even fill out Schedule C and other essential forms.
The IRS will not accept the excuse that you made a mistake on your tax return because you do not have an accountant. If you cannot afford an accountant, a suitable software program will help you keep your self-employed business organized. Whatever option you choose, make sure that it will be the best one for the size and needs of your business.
How much is an Accountant for Self-Employed
A self-employed individual can set his financial records and tax payments in order with the help of an accountant. Accountants can charge between $150 and $400 or more an hour. The rates depend on the type of work, the size of the business, and its location. You will pay lower prices for your routine work if a less-experienced or lesser-trained employee does it. Bookkeeping services performed by a lesser-trained employee will cost you from $30 to $50 per hour.
The total fee of an accountant depends on the project. As an example, if you are buying a Los Angeles area business that is for sale for less than $1 million, an accountant will charge you from $5,000 to $25,000 for a “due diligence” evaluation fee on all financial aspects of the company and its transactions.
For a simple start-up business, an accountant will charge you between $75 and $600 for a minimum half-hour to one and a half hours of consultation of going over your business structure and fundamental tax issues. Typically, quarterly and annual financial statements are prepared by a bookkeeper or someone who is using accounting software. It will take half an hour, up to an hour and a half for an accountant to review these reports while looking for trends or discrepancies, interpret them, and give advice. For these services, the rates vary from $75 and $600 per hour.
If you are the owner of a retail business in California with 12 employees who generate their monthly financial statements using QuickBooks software, you still have to budget about $300 to $400 annually for two hours of consultation with an accountant. Your needs vary depending on the complexity of your business and your industry, and how much you already understand about the finances of your business.
QuickBooks can have different plans and pricing. The Simple Start is available for $12 per month. The Essential plan starts at $20 per month, while the Plus plan starts at $35 per month.
In addition to QuickBooks, there are other accounting software for self-employed that you can use to help guide your business to growth and success, including:
- Xero with its easy-to-use features
- FreshBooks that are best for independent contractors
- Zoho Books that is best for small and simple businesses
- SageOne is the best for low-price accounts software.
These are all good accounting software for self-employed. Most are free and easy to download online since these are mobile apps. For questions and inquiries, they also offer free support and access to a mobile apps knowledge base or frequently asked questions.
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