The largest trend in the American workforce in the last 10 years has been the shift from traditional employment to freelance or contract work. The trend is undoubtedly driven by many factors at macroeconomic and personal levels, but some of the more common ones that are cited are:

• Generational change in the workforce. Younger workers are coming out of college and starting their careers as freelancers or independent contractors, partly because of decreasing job opportunities and partly because of a different way of thinking. They’ve seen the instability in corporate America that their parents experienced and want more control over their careers.
• Jobs are moving overseas. Thanks to technology companies are increasingly able to contract with workforces that operate in cheaper countries like India, China, and Mexico. It started with customer support and call centers. Now things that people never thought could be outsourced 20 years such as - engineering work, software development, back-office accounting functions - are routinely sent overseas to be done at a fraction of the cost.
• Fewer opportunities when people are laid off. That software engineer whose job just moved to India might not be able to find permanent employment as easily as he was once able to. Often the only option is to take on contract work.

As people set up their own business they take on work they may have never done before, becoming their own marketers, IT departments and accountants. As a CPA who works closely with many freelancers and small business owners I can offer a few tips to ease the transition and set up an accounting system that will serve your needs.

1. Use real accounting software, preferably online. Quickbooks is the industry standard - it has been around for the longest time, is reasonably priced and their product offering scales with your business. As with most software companies they want to drive as much business as possible to their online product, which is very good and can be had for as little as $10 a month. This is a benefit to the user too because the product will link directly with your bank and credit card accounts and you can access your company data from any web browser. Other offerings such as Xoom, FreshBooks, Wave, and Gusto for payroll are the next generation to challenge Quickbooks dominance. They all work for freelancers so test them out choose the product that you like best.
2. Set up separate bank and credit card accounts for the business. This is a legal imperative if you intend to operate as an LLC or S-Corp but it’s also the easiest way to keep your business’ books clean. Commingling business and personal expenses creates unnecessary work to sort them out.
3. If you sub-contract work to others, get W-9s from them before you start paying them so that you can issue a 1099-misc at the end of the year. If you’re growing to the point where you need help you might want to consult with an employment attorney to ensure that the people you bring on are eligible to be classified as contractors. If they’re not, don’t fret - setting up employees, running payroll, filing quarterly forms and remitting taxes is easy and inexpensive with Quickbooks Payroll or Gusto.
4. Speaking of 1099’s, reconcile the ones you receive with your revenue to ensure that your clients are correctly stating your income, and request corrections if necessary.
5. Track reimbursed expenses separately from revenue. When a client reimburses your expenses for, say, travel to a client site, you might be tempted to just classify the reimbursement as revenue and offset it against the expenses you incur. However meal and entertainment expenses are 50% deductible, so if you do it this way you’re creating taxable income that you don’t have. Track both the expense and the reimbursement separately.
6. Set up expense categories that line up with your tax return. If for example you are a sole proprietor, set up your expense structure to mirror Schedule C. This makes preparing your tax return much easier.
7. Most importantly - if you get lost, get help. Even if you intend to keep your books yourself you may benefit from having an experienced accountant provide training and guidance to ensure your company books are maintained correctly. Update everything at least quarterly but monthly is preferable. It can take more time and cost more money to clean up a year’s worth of messy books then it would be to get a little help and maintain them correctly from the beginning. If you need help please contact us. We'd be happy to help you.

In future postings we’ll go over more advanced strategies to legally minimize taxes as well as other financial implications that you may have to contend with as an independent contractor but it all starts with a clean and well-maintained set of books. Follow these tips and you’ll be well on your way!