Why Freelancers Should Keep a Paper Trail for Income and Expenses?

Working as a freelancer can be very fulfilling, but at the same time it also comes with a variety of challenges. Maybe the main challenge is that you work from home, and you also have to take control over many business tasks. Not everyone is accustomed with those, and it can be overwhelming to tackle these things. However, if you learn how to keep things under control, that will help immensely, and it will surely make the process much easier to manage.

Keep track of invoices and payments

One of the major things that freelancers will need to handle are payments. Those and invoices go hand in hand, because invoices are how you get paid. The invoice needs to have client details, invoice number, service description, the amount charged, along with the payment method and any due date. It’s a proof of income and it also establishes credibility. Payment records tend to use invoices as backup, just in case there are disputes.

Business expense receipts

You want to lower your taxes, and in order to access those deductions, you need to have receipts. Whether you subscribe to software, buy a laptop or pay for the internet, as long as it’s a business expense, you can use that as a deduction. There are all kinds of deductions you can make. However, those will depend on the use case and what niche you are working in. 

Regardless of the expense, you do want to store a digital copy, but also a physical one. That’s why it makes sense to use a utility bill creator to create a copy of your bills. You want to have those ready, as you might be able to deduce some of the costs related to the utility bill, too.

Bank account statements

As a freelancer, you might have to receive payments via multiple platforms. So the best way to handle those is to have a statement from your bank regarding the account. It’s great because you can identify discrepancies, it will confirm payments, and it will support the income reports for taxes which can prove to be extremely useful in these situations.

Agreements and contracts

Staying organized as a freelancer is crucial, and a very good rule of thumb here is to keep a copy of each contract you signed. Also, store any of the addendums or amendments, extra pages related to the contract or anything of that nature. Email confirmations can also be stored as well. Those will be used as proof, in case many issues arise. Contracts are great because they will protect you when there are disputes. You can use them as evidence, which is extremely important to keep in mind.

Tax forms

Regardless of where you live, you will need to file your taxes. Sure, in some regions you have to do that quarterly, but in most regions it’s something you have to do on an annual basis. Keep track of your expenses and income, and make sure that you file your tax returns before the deadline, just to be on the safe side. You might face audits and all kinds of other problems. The most important thing is to learn how to manage the tax forms properly, and if you do that in a good manner, it will not be an issue.

Mileage logs

In case you travel for your business a lot, you do want to log the mileage. You can use that to deduct business expenses, which can be extremely handy to do. However, it’s not that easy. You have to include the start and end location, miles driven, but also the date and purpose of that trip. Apps such as MileIQ can be useful if you are looking for automatic tracking, so it’s certainly handy to use that. 

Create a backup of digital documents

Having paper documents is handy, but at the same time, you also want to have a digital backup of everything. You can start using platforms like Dropbox, Google Drive and so on. At the end of the day, having a digital copy in the cloud is always handy, and it gives you a great opportunity to keep a good track of your finances. It might not seem like much, but those extra copies can make a huge difference.

How much does it cost to keep a copy of your records?

Naturally, it depends on the type of tools that you use, and there are other factors involved as well. For example, there are upfront costs related to the tools you use, cloud storage, receipt scanning tools and if you hire an accountant. Using tools can be a solid idea because it allows you to reduce errors, and it will help you automate the tracking process, too.

Plus, as a freelancer, time is of the essence. If you want to handle these documents on your own, it does make sense to allocate enough time for the process. That could lead to 30 minutes on a weekly basis for recording transactions, 2 hours for monthly reconciliation and 1-2 days for the year-end preparations when it comes to filing and handling taxes.

Is it worth it, though? Of course it is, because you can claim a lot of business expenses and thus save tax money. Plus, if you don’t handle this with extra care, you could miss deductions, deal with heavy fines from the IRS, not to mention client disputes can prove to be inherently problematic as well.

Mistakes made by freelancers

When you go the DIY route, it can be very easy to make mistakes, that’s human. And unfortunately, a lot of freelancers make financial mistakes. Here are some of the mistakes you will encounter, more often than not.

• Don’t mix your personal expenses with business expenses, that’s not ok and it will always lead to issues.
• Not recording some of the expenses is a problem, because it can lead to all kinds of penalties, and you want to avoid that.
• Don’t rely just on bank data. Keeping receipts and even manually or digitally tracking expenses with dedicated tools can help quite a bit.
• Not creating a backup for the data is a problem. If you lose the documents, they will be lost forever, and you really want to avoid that as much as you can.
• Ignoring professional help is another issue. If you can access professional assistance for deductions and other similar things, get that help. It will be worth its weight in gold.
• Some people forget to reconcile accounts, and that could become a problem as well. The same thing is valid when you delay updates, as it will lead to more work and additional stress down the line.

Conclusion

It can be difficult for a freelancer to deal with finances, especially during the first years. However, these tips and ideas shown above are very useful and they will make it easier to avoid costly mistakes. It’s crucial to take your finances very seriously. Once you do that, it will be much simpler to solve issues, focus on results, and in the end, the outcome can be excellent. Yes, you will have to go through some trial and error, but if it’s all managed correctly and you have a paper trail, that can make a huge difference!