Six tips for freelancers to beat the bookkeeping blues
Freelancers often choose to work for themselves out of a desire to gain more freedom and independence – indeed, it’s reportedly the top reason to ‘go it alone.’
But staying on the right side of the law with duties like bookkeeping is often perceived as being at odds with this fundamental freedom; it’s even regarded by some as a gloomy chore. The reality however is that there are six things all freelancers can do to make bookkeeping a tad more liberating, writes Stuart Masters, managing director of The Financial Management Centre.
Tip #1: Keep personal and business finances separate
Unlike for companies, there is no formal legal requirement for self-employed people to keep their personal and business banking separate, although this is highly advisable to do so.
Keeping business and personal finances separate means opening a separate bank account for your business. This helps ensure you maintain enough funds in this account to meet daily cash flow needs. Keeping personal and business finances separate also makes things easier if you ever become subject to a tax inspection by HM Revenue & Customs.
Be diligent when looking for a business banking provider. Some providers charge high monthly fees and raise a charge for each transaction. Some freelancers are advised to simply open up a separate personal bank account as opposed setting up a ‘business account.’
Tip #2: Don't under-report revenue
When you work for yourself, it's tempting to brush small revenue items under the carpet. However, this is considered tax fraud. HMRC specifically targets freelancers as they’re deemed an 'at risk' group for not paying their ‘fair share’ of tax. HMRC has many powers to catch tax cheats so don’t be tempted and don't under-report income.
Tip #3: Keep up-to-date on making bookkeeping entries
Don't neglect your books. Many freelancers neglect their books until they're faced with a mountain of paperwork. Instead, process invoices and receipts at least once a month, if not once a week. Also carry out a ‘bank account reconciliation’ at least on a monthly basis. Likewise, keep sales and purchase invoices in chronological order, preferably using a numbering system.
Tip #4: Consider freelance accounting software or an online bookkeeper
Consider using a hassle-free freelance cloud accounting software, especially if you or your business is mainly online and tend to log-on from numerous locations. Make sure the system you use suits your specific needs and exploit the system’s potential to the full. Remember, the whole point of cloud accounting is for you to be able to access your accounts from anywhere with an internet connection and on any device, including a mobile or desktop.
Tip #5: Keep a record of all business expenses
HMRC requires you to keep a record of each business expense you deduct from your revenue for at least five years. If you don't keep expense receipts, you can't legitimately deduct these items away from pre-tax profits when calculating your income tax liability.
Ensure you're up-to-date on all tax-deductible expense items and know how to go about claiming efficiently and compliantly. So organise receipts by month, for example, and take care to staple small receipts to a piece of A4 paper so they do not become disorganised. Also, don't forget 'petty cash'-type expenses. These items add up substantially over the course of a year.
Tip #6: Fill out your tax return well before 31st January
Don't procrastinate when it comes to your tax return. Payment is due on or before January 31st each year. However, you can lodge your tax return well in advance of this data. If you are entitled to a refund you'll get it when you send in your tax return so you will not have to wait until end of January. You'll learn your exact tax liability for the tax year well in advance of 31st January. This gives you plenty of time to save up before 31st January when your tax bill becomes due.
Try these six tips and see how you get on. If ‘doing the books’ still seems too much for you, then consider outsourcing your books to a professional bookkeeper, an online solution or accountancy practice. Services that specialise in micro-businesses are the ones that FreelanceUK readers should consider the most. Happy bookkeeping!
8th October 2015