Becoming self-employed gives you the freedom to choose your own path in the workplace. But your aspirations can quickly spiral out of control if you fail to keep your books in order. Come tax season, any missing receipts or incomplete records can undermine all your hard work for that year, especially if they result in you being stung by the taxman.
For this reason, careful and routine bookkeeping should be a top priority for any freelancer. In particular, traders who work from home should make sure they are putting regular time aside each week to deal with their accounts. The household contains many distractions and unless you adhere to a strict schedule, you can easily forget to file away important paperwork. If you want to succeed in business, then you need to give your business every opportunity to succeed, which means finding a way to keep everything in order.
1. Keep Hold Of All Financial Documents
Even if you run a relatively small operation, you are bound to rack up a number of expenses over the course of the tax year. Since your business purchases reduce your taxable profit, you can save a stack of money by claiming back any expenses. However, you must be able to prove these expenses were essential to your business, so saving all your receipts should become routine practice.
Freelancers can claim on all kinds of work related items from laptops to vehicles, but only if they can be cross-referenced by the tax office. In the event of an investigation, you may also be asked to present other documents such as bank statements and invoices. You must store these either at home or online for at least five years after the 31 January tax return submission deadline. Be sure to file them in chronological order so you have easy access to them at any time.
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2. Separate Personal and Professional Assets
Working for yourself can become tricky if you’re not keeping track of which finances are personal and which belong to your business. In order to avoid any confusion, you’ll should open up a separate account for business transactions. Even if you’re only bolstering your main income with freelance work, the differentiation will make your life a lot easier.
For one, it allows you to work out exactly how much money is tied up in your business at any point. This makes budgeting and costing a much simpler task and means you are unlikely to get into any financial trouble. On top of this, with all business transactions going through this account, you won’t face the problem of deciding retrospectively which expenses were crucial to your job.
3. Keep Track Of Your Income
Nowadays, online and mobile banking have made it possible to check your balance at any given moment. But it is still worth keeping track of all your invoices, so you know exactly where the money has come from. By retaining copies of all your invoices, you can match them with the money going into your account to make sure there are no discrepancies. Invoicing software is available online for this very purpose, so you don’t have to worry about stashing payment details around the house or office. With routine checks, you can ensure you’re being paid every penny you’ve earned and easily report your yearly income on tax returns.
4. Get Into A Routine
Despite working more flexible hours, it can still be tricky for freelancers to fit everything into a hectic week. By the time tax season rolls around, you may not be as prepared as you first thought you were. Tax returns can be difficult to complete if none of the necessary paperwork is immediately to hand and even harder if there is no discernible order to it. To overcome this problem, you need to begin filing documents from the very first day of the tax year. Whether you do the majority of this online is up to you, but you still need to put aside 20-30 minutes a week to make sure everything is in order. There’s nothing worse than finding yourself scrabbling around for documents three days before the deadline, so develop a bookkeeping schedule and stick to it.
By: Chris Weston
Chris Weston is the director of Aston Black Accountants in Milton Keynes, UK. Chris has over 25 years experience in accounting and taxation, working with his small team of staff to provide quality advice for small businesses up and down the country.