One of the most daunting aspects of working for yourself is money. How will you earn it and keep a steady flow of payments for the invoice templates you submit? And more importantly, how will you track your freelance expenses? While monitoring income and expenses is vital for all freelancers to quickly and easily master, there's a bit of confusion as to what's desirable and trendy vs. what's essential and necessary.
Bookkeeping (or “accounting”, as some prefer to call it) should be something you pay attention to, however. If you’re not sure what your process is or the goals you have for your business, now’s the time to prioritize. Here are our best bookkeeping tips for freelancers of all industries, experience levels, and worth.
Note: If you want an east way to track business expenses and maximize your tax deductions at the end of the year, try Bonsai Tax. Our tax software records your receipts and reminds you of important filing deadlines. On average, users save on average $5,600 from their tax bill. Claim a 14-day free trial here.
The beginning months of freelancing can seem bleak. You likely have a good number of expenses going out, all vital to getting your new business up and running. Your client list, on the other hand, can be lacking. To build esteem and trick themselves into feeling right about their endeavors, many freelancers avoid counting all of their expenses – and this is a terrible move.
Even if your numbers are clearly in the red, with profit a long way off, it's never wise to pretend you are doing better than you are. Count your expenses (all of them) and be realistic about where you are in your budget matters. Hopefully, things will look up soon, and if they don’t, you’ll have an accurate list of expenditures to refer to when it comes time to cut unneeded costs.
What about earnings? The same rule applies. Document every penny earned – even income paid via cash or bartering – and use these numbers to see where you stand with your business. The more detail you can record, the better, as this info will be needed come tax time.
The days of keeping your accounts tracked in a notebook are over; most freelancers are savvy enough to keep their numbers stored in a 1099 excel template spreadsheet or accounting software stored on their computer. But what happens if your hard-drive is ruined, or your files corrupted? Don’t leave anything to chance.
Schedule a time weekly to backup all of your numbers and supporting documentation to a cloud-based service. It’s also a wise idea to keep your most vital financial records in paper form, stored somewhere in a fire-proof safe in your office. (Tax filings and incorporation documents are good examples for this.)
If you make the majority of your business purchases with a credit card, remember to download a copy of monthly statements at least annually. Some companies won't allow you to access account info that is older than a year easily. Others provide year-end summaries that won't show the level of detail required in an IRS tax audit. Include these digital files in your secure backup up.
No one is expected to stay on top of the thousands of tax laws that a freelancer may be subject to, but it's wise to have at least a general idea of the rules. There are many free resources explicitly directed at independent contractors that can clear up the most commonly confused points. Subjects that are of most interest to freelancers include:
Many beginning freelancers may not have multiple checking accounts or credit cards to utilize, but if you do, start by designating just one for your business endeavors. It's much easier to keep your business and personal expenses apart in this manner. When tax time comes, if you're ready to balance your books, you only have to reference one or two accounts, instead of having to pick apart months and months of statements from a variety of sources.
In addition to being more comfortable from an administrative perspective, the IRS recommends you use different tools for your business and personal activities, as well. If you are ever audited, it's much less of a burden for you to prove that an expense was indeed for your business if it's made with a stand-alone, business-only credit card or account.
Remember, the requirements for claiming most business-related expenses are that you are using the purchase for 100% business purposes. Except food or entertainment that you pay for while also paying for a client’s costs (which is allowed at 100% of the price), you cannot claim day-to-day expenses that are also personal in nature (such as a cellphone bill, plane ticket, or new computer.) Food consumed while traveling for business purposes is allowed at 50% of the cost.
Have you ever noticed how those gas station receipts fade after three or four months? Ever fished a crumpled up fast food receipt from your pocket and wondered if it was from a business lunch you vaguely remember enjoying? These situations could have been resolved by the addition of a few handwritten notes and proper filing techniques.
It's a good practice to write down the purpose of a business expense immediately after arriving home to your office, then putting it in a file or envelope just for these types of receipts. Better yet, scan it and upload it to the cloud right away. Lunch at a burger joint – enjoyed during a business conference – should have the name of the conference, the date, and the percentage of expense allowed written in clear ink in your handwriting. When tax time comes, you'll have no doubt what the purchase is for and whether it qualifies as an expense.
For times you don’t get a receipt, such as an Uber ride, you’ll need to access electronic files. I like to print those out from my computer or phone at the end of a trip and file those with the rest of my paper receipts. A brief note with the city and event I attended helps me remember the purpose of the trip later and keeps me protected in the event the IRS inquires about the receipt. It is recommended you keep tax records for three years.
Many freelancers swear by organizing their receipts, expenses, and paystubs once a week (by using Excel to maintain accounts). For those who find this schedule excessive, a monthly date with your bookkeeping tasks should suffice. To further motivate and guide, consider a billing or expensing software that seamlessly coordinates with your invoicing software to keep you informed of your financials and notify you when too much time has passed since you last updated your details.
One of the surprising ways that 1099ss get overwhelmed with their freelance bookkeeping is how they can get behind on billing. Forgetting to send out your freelance invoices, and failing to take steps to collect, can throw your expenses quickly out of relation to your earnings and create a weak performing business in no time. Start the habit of invoicing immediately after a project milestone or completion and be diligent about following up with those missing payments. You're running a business, and it's vital you prioritize your cashflow above most every other bookkeeping task you'll do.
Peers can be a vital source of information and support – especially to the new freelancer. Do your best to identify thriving freelance communities within your niche and look to their leaders for advice on the best freelance tools that will keep your freelance bookkeeping issues under control. Most independent contractors are amazingly generous with their time and counsel. (Just be sure to respect that they are busy professionals and thank them accordingly for their input).
Even the most seasoned freelancers struggle with bookkeeping from time to time. Whether it’s a lack of knowledge about a topic, or a lax attitude toward keeping records in order, each bad habit has the potential to derail your business and prevent it from thriving. Make it a priority to put your bookkeeping where it belongs in your business and commit to learning a little more about the process each year. You'll be glad of the time and energy investment when it’s putting money in the bank! Start managing your freelance business with Bonsai, sign up for a free trial today.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?