If you’re considering contracting – or any kind of self-employment – you need to understand these essential pieces of tax and financial information.
Get Relevant Tax and Financial Advice
The most important piece of financial advice for new contractors? "Secure the services of a tax consultant or preparer knowledgeable in your field," says Kathleen M. Morris, a certified tax and financial consultant for Donahue & Associates in South Boston, Mass. "Friends and co-workers may be able to recommend someone. You want someone who knows the ins and outs of your area of expertise so they’ll be able to guide you appropriately," she says. Be discerning. "Usually you’ll work with that person for years to come, so it’s vital that you choose someone you have confidence in, and sense too that they’re comfortable working with you."
Be a Record-Keeping Pro
Track all income and expenses: Know how your money comes in, and how it goes out. "Keeping good records is the key to success in any business," says Morris. "Bookkeeping software can help you out. Find out what your colleagues use. Perhaps they’d be willing to help you get started." Or ask your tax advisor to recommend a professional bookkeeper.
Pay Estimated Taxes, If Necessary
Some clients will withhold taxes from your earnings. Others won’t. "If an opportunity arises for you to do contract work and no taxes are going to be taken out, meet with your tax person to find out which expenses are tax deductible, how to track them, and discuss the need to prepare estimated tax payments," says Morris. "It’s easy to end up in a tax penalty situation if you don’t prepay your taxes."
Get Business Plastic and Checking
To simplify record-keeping, your tax advisor may recommend using a dedicated checking account and credit card for all business-related expenses.
Keep Invoicing Simple
Invoicing need not be complicated. Indeed, for a solo or small business, software such as QuickBooks may be overkill. Invoicing clients using a simple Excel spreadsheet, or even a Word document, can suffice.
You need to eat. But before you get paid, your client typically needs to see an invoice. So the sooner you invoice, the faster the accounts payable department will cut your check. (And if it’s been 30 days, by all means send your client a polite follow-up inquiry.)
Track Hours, Billable or Otherwise
Lightweight software tools (such as TimeLog for Mac) can help track your hours, billable or not. Typically, you select the project you’re working on, then hit start/stop. The benefit of such software is its ability to slice and dice information and export it in multiple ways. This simplifies invoicing for hourly work, or determining the total time invested in a fixed-price project.
By logging your work time, you can regularly divide your earnings by hours worked. This will show you the relative dollars per hour each client pays. Use this information to help rank your clients. Then over the long term, try to get more work from your best clients, add better paying clients, and eliminate the least remunerative ones.
Become a Better Entrepreneur
What’s the best way to refine your business skills, while also learning from peers and marketing yourself? "Local colleges and communities sometimes offer workshops on becoming an entrepreneur," as do alumni groups, says Morris. "This is a great way for a person starting a business to share ideas and network." It’s also a good way to advertise your services, or even find someone to design your business Web site. (Of course, the Internet can help, too.)
Anger Not the Taxman
Feeling flush after your first paychecks arrive? Savor it. Just don’t forget to set aside taxes. One effective strategy is, "out of sight, out of mind." Meaning, immediately move what you’ll owe in taxes into a separate savings account.
Are You Contracting Material?
These skills aren’t rocket science, but they"re essential for succeeding at self-employment. If you can’t be bothered with them, consider a day job. But if you can track your income and expenses and pay your taxes on time, you’ll have mastered the bookkeeping prerequisites for gainful self-employment. Now go forth and bill.