Financial Management for Independent Contractors
When you begin working as an independent contractor, it’s vital you manage your business finances well. So, check out the following top-notch tips so you can get to grips with your financial management.
Understand the Local and Federal Tax Laws and Forms for Contractors
As an independent contractor, you earn an income but do not receive a paycheck. Instead, you work without a formal employment contract and you set your own rates for the work you do. Your invoices are then paid by your clients. While software like Joist for contractors can make this step easier, you’ll still have to settle the bulk of your finances yourself. That means when it comes to doing your end-of-year tax return, you won’t receive a W2 form as you would if you were employed. Instead, your clients will send you a 1099-MISC form. You also need to know what other forms you need to comply with local and federal tax laws. For instance, you need to create a W9 form to report certain types of income as an independent contractor. Use this simple W9 generator to create a form within minutes. The information on a W9, which is primarily for providing your correct taxpayer identification number, is used by clients to prepare 1099-MISC forms at the end of the year. Once you understand the local and federal tax laws and which forms you need to use, you can get to grips with your financial management and taxes much more easily.
Understand Your Operating Expenses
Before you can utilize financial management solutions, you have to understand your operating expenses. Even if you’re working from home with only a laptop and a phone, you still have operating costs. Equipment like laptops and phones, as well as things like office supplies, car mileage, and home office space, are related to your business. So, you need to understand your operating costs before you move on to managing your business finances. Also, many of the costs, such as car mileage and office equipment, will be tax-deductible business expenses.
Track Your Income and Expenses Meticulously
As an independent contractor, it’s vital you track your income throughout the year meticulously. You should record every payment and transaction you make. This is important for your taxes. Your clients will report to the IRS what they have paid you, so your records must match the 1099-MISC forms your clients send you at the end of the year. Having accurate records of both your income and your expenses is important for paying both your income tax and your self-employment tax.
Develop a Budget
If you don’t develop a budget, you will be running a risky business. Not setting a budget is a recipe for disaster. You need to form a plan for spending your money, based on the expenses and revenue of your business. In basic terms, you need to cover the costs of services sold and make a profit, or initially plan to make a loss and have an excellent plan for recovery in place. You also need to project your expenses. That is because although budgets work well on a monthly basis, there will always be other periodic expenses to pay. By planning for those periodic costs, you can schedule them into your month-to-month budget. At the end of the day, the more organized you are with your financial budget, the more you’ll be able to make a healthy profit.
Pay Your Bills on Time
Don’t underestimate how important your credit rating is as an independent contractor. You may need a good rating to obtain clients or loans. To ensure you always have a high credit rating, pay your business bills on time. Simple!