Being self-employed is challenging, especially when it comes to accounting for income.
Regular employers give you all the tools you need to verify your earnings. But without a W2 sent each year or a wage statement send each month, it can be tough to prove to lenders or landlords you make enough after income tax to qualify for what you’re trying to buy.
This guide will walk you through how to account for your income for tax purposes.
Keep a Paper Trail
However you get paid, having documents in a nice, organized folder is a key to financial planning. This way you’re able to provide anyone who may need the information your financial numbers without having to do a major search.
If you get paid through PayPal, for example, you could auto-generate your statements and save them. But that might prove tricky if you pay others as part of your ventures. In that case, a paystub generator for self employed people might do the trick.
Budget for Taxes
As a self-employed individual, you’ll need roughly 25 to 30 percent of your income for the year to go towards taxes. This might seem like a lot, but it’s the same amount that goes out for regular employees, too—they just never see it because it gets pulled from their check early.
It’s also important to know that self-employed income taxes should be paid 4 times per year. Failure to do so could result in a fine ranging from a few dollars to several hundred dollars, depending on how much you owe and how late you are in paying them.
Keep this money in a separate account and don’t touch it. The IRS is the last group you ever want to be in hot water with when it comes to tax planning.
Make Accurate Projections
As entrepreneurs, it can be easy to get ahead of ourselves or see our venture in a biased light. But when it comes to crunching the numbers and our future expectations for income, we should let the data, not our heart, do the talking.
Ground yourself in reality when making projections for the next month, quarter, or year. Use all the information you have at your disposal—signed contracts, expected revenue to be gained from marketing endeavors, and cash savings already accumulated.
Identifying your cash flow situation can help you make safer business decisions and ensure you’re not accounting for income that may never show up.
Consider Expenses
Part of staying grounded is knowing when (and where) your earnings have to go. Keep your expense sheet air-tight and free of errors and you will find your financial planning is always a little easier.
A well-kept budget combined with rigorous considerations for your expenses is a nice way to give you (and perhaps your employees) a little “salary” boost.
Accounting for Income
Accounting for income can be tricky as a self-employed person. But as long as you’re proactive in your planning for tax payments and rigorous about your budget (while relying on data), you should be okay.
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