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Bookkeeping for Freelancers: A 2022 Guide

The term “freelancer” was originally used to describe a medieval mercenary whose lance wasn’t sworn to the service of one lord. And while they’re no longer hired assassins, freelancers are still “killing it.” According to Payoneer, a freelancer’s average hourly wage in 2022 was about $28, almost double the national average.

While freelancing may improve your pay, it also brings new responsibilities—including the obligation of keeping your own books.

Build a sustainable career as a freelancer by approaching bookkeeping as an integral part of the job and setting aside enough time and energy to do it correctly.

What is bookkeeping?

Bookkeeping is the process of recording your professional financial transactions and the techniques you use to record these business transactions. (Fun fact, it’s also the only word in the English language (besides bookkeeper) with three consecutive double letters.)

The key components of bookkeeping, whether you’re a freelancer or a multinational corporation, are always the same:

  • Recording of transactions: For freelancers, income and expenses are their most relevant recorded transactions.
  • Categorization: Your income and expenses need to be categorized according to where the money is coming from or going to and why. For example:
    • (Income) sales revenue, $2,400 (money came from customer)
    • (Expense) rent paid, $1,500 (money went to the rent expense account)
  • Reconciliation: Reconciliation is process of matching transactions entered into your records with the corresponding bank or credit card statements. Reconciliation is done at the end of every month.

The purpose of bookkeeping is to keep your financial records up-to-date. When your transactions are up-to-date, you’re able to create accurate financial reports that measure your performance and help you make adjustments when necessary.

What’s the difference between bookkeeping and accounting?

Bookkeeping makes accounting possible—it’s the act of recording your financial transactions. Accounting is what you do with those records.

Through business accounting, you can gain insight into your business’s health based on your bookkeeping records.

Here’s a list of common bookkeeping tasks:

  • Recording and categorizing daily payments and expenses
  • Sending invoices
  • Recording payments received
  • Conducting monthly bank reconciliations

Accounting tasks would be the following:

  • Adjusting revenue and expense entries
  • Analyzing financial statements
  • Offering general financial advice
  • Performing audits
  • Providing tax planning and advisory services
  • Filing tax returns

Anyone can do bookkeeping (especially with the aid of bookkeeping software), but accounting requires greater financial expertise. Many freelancers, even the most independent ones, hire certified public accountants (CPAs) to handle more complex financial matters like financial forecasting, tax planning, and tax filing.

An accountant can turn the bookkeeping data you’ve compiled into insights you can use to improve the financial health of your freelancing business.

What is bookkeeping?

Why is bookkeeping for freelancers important?

When your books are in order, you’ve set the foundation needed to develop financial strategies that can increase revenue and career stability. A balanced bookkeeping system helps you measure success, plan strategically, develop realistic objectives, and make sure you’re prepared when tax time comes around.

You can plan

Bookkeeping shows you not just what you’ve earned and paid, but what you’re owed and owe others. When you understand your cash flow, you can plan ahead, create budgets, and manage your money more effectively.

Tidy profit and loss reports, income statements, expense reports, and balance sheets give you a clear vision of your business’s health that you can use to predict potential opportunities and problems.

You’re able to make fast business decisions

Control of your finances also leads to confidence.

When you have real-time data about the state of your finances, you can react quickly, fearlessly jump on opportunities, and lead your business with conviction.

Figure out ways to boost profitability

Identify pointless expenses and cut unnecessary spending.

You can also identify what type of jobs make the most sense for you to take. Bookkeeping data gives you visibility into how much time you’ve spent on each job and how much money you made.

Use this data to adjust your hourly rates and pick jobs that make the most financial sense for you to take on.

Ability to secure loans more easily

Banks don’t give businesses or individuals money without making sure they’re a safe and reliable investment first.

They’ll want to see your credit score, your business plan, and, of course, your cash flow history and financial projections. Unorganized and error-riddled bookkeeping paints you as a risky client.

Fewer potential problems with the IRS

While Internal Revenue Service (IRS) audits are sometimes inevitable, bad bookkeeping leads to sloppy tax filing—which is the quickest way to get yourself on the IRS’s radar and potentially incur a plethora of fines and penalties.

If you get audited, proper bookkeeping will make the process much less stressful. You must comply and be able to provide proof of accounting records when asked.

Easy cooperation with your accountant

Freelancers don’t need to hire a full-time accountant, but consulting an accountant on complex matters is never a bad idea. Contractors and independent workers commonly hire accountants to help them file their taxes properly.

When you’ve done a good job with bookkeeping and organizing your financial records, that makes an accountant’s job much easier. It also decreases the time it takes them to help you, which works out well for you financially, especially if your accountant charges by the hour.

Why is bookkeeping for freelancers important?

How to set up a bookkeeping system

Based on your needs as a freelancer, decide how you are going to receive and send money and what methods and tools you’ll use to keep track of these transactions.

Luckily, freelancers can usually keep their bookkeeping system very simple.

Open a bank account

Open a bank account specifically for your freelancing duties. Having a separate freelance account instead of using your personal bank account will minimize confusion.

According to DebtHammer CEO Jake Hill, a business checking account is the way to go for freelancers.

“These are usually much easier for companies to set up direct deposit with and it also makes it easier for freelancers to have a clear record of the money they make, as well as their own business expenses for tax purposes.”

Decide on payment terms and methods

Based on the nature of your freelancer business, decide on how you want to collect payments.

For example, if you offer ongoing consulting services, it might make more sense to offer customers a credit system and charge them on a subscription basis (with weekly, monthly, or annual rates). If you are charging by the task, it’s probably best to invoice your client upon delivery.

No matter what method of payment you’ve chosen to receive, make sure you’re keeping detailed records.

“The key is documentation,” according to Carter Seuthe, CEO of Credit Summit Consolidation. “Whether you take checks, electronic transfers, credit cards, or all of the above, you should keep your invoices and receipts.”

Choose between cash-basis and accrual-basis

Choose your method of recording your transactions. There are two main options: cash-basis and accrual-basis.

Cash-basis means you record all of your income and expenses when cash transactions are made. For example, you record your revenue when the customer pays you, not when you agree on a job. This method is the simplest, but it also has limitations. Cash-basis provides a limited look at your income and expenses and doesn’t let you make financial projections.

Accrual-basis means that you make a record of the revenue or expense before the actual payment is made. Small businesses prefer this method because it allows them to get a more accurate picture of their financial position based on expected cash inflows and outflows.

However, freelancers might prefer the simplicity of cash-basis.

“If your freelancing work is primarily fee-for-service, such as writing or coding, cash accounting usually works perfectly fine. If you deal more in large projects or maintain an inventory and purchase supplies, accrual may be a better choice,” Seuthe said.


Use bookkeeping software

The main benefit of using bookkeeping software is that it streamlines and automates many of the processes associated with bookkeeping.

Compared to keeping a ledger or maintaining a spreadsheet, bookkeeping with the help of software is far less time-consuming and, more importantly, less error-prone.

“I started bookkeeping with Excel, but that got unwieldy fast, said freelancer marketing consultant Matt Lally. ”I don’t have time to reconcile every transaction manually in a spreadsheet. It’s essential to move to online accounting software that does it for you.“

Software helps freelancers save time through a number of features, including:

  • Invoicing and billing: Bookkeeping software can automatically create digital invoices for recurring orders, track them, and help you to remind customers to pay you.
  • Online payments: Most bookkeeping software integrates with all of the most popular online payment gateways, making it easy for your clients to pay you quickly and securely.
  • Expense tracking: Software helps you track and categorize your expenses to better understand where your money is going. You can also scan and upload receipts to help you reconcile at the end of the month.
  • Reconciliation: Bank reconciliation is the process of summarizing your banking and business activity by reconciling your bank account and financial records. Bookkeeping software streamlines this process by connecting with your bank account to automatically fetch statements from bank feeds and keep track of them digitally.
  • Reporting: The best accounting solutions help you track not only your finances but also give you the functionalities needed to analyze them. Accounting reports provide insights into financial trends and help you maintain your freelancing business’s financial health. Neat’s accounting software allows you to run a variety of vital reports—including profit and loss statements, cash flow statements, balance sheets, and transaction reports.

Software also saves data securely in the cloud, so you don’t need to worry about losing critical financial records.

Best practices to make bookkeeping for freelancers easier

If you’ve spent most of your career as a salaried worker, then you’ve probably never had to keep your own books. Thanks to modern technology—namely bookkeeping and accounting software—tracking your professional finances doesn’t have to be a burden or a chore.

Bookkeeping software simplifies data entry and the storage of your financial records, while accounting software also provides features like cash flow analysis and forecasting. Neat checks all these boxes.

To make keeping consistent and accurate records of your freelancer activities a breeze, couple your accounting software of choice and these basic freelance bookkeeping best practices.

Schedule time for bookkeeping duties

If you’re getting caught up in other parts of the job and are forgetting to dedicate time to your bookkeeping, use a calendar app or task management app to pencil time in for bookkeeping each week.

Too much time spent on bookkeeping—even with the help of software—could be a great sign. It could mean the volume of transactions has increased significantly, and your freelancer business is flourishing.

If that’s the case, it might be time to hire a freelance bookkeeper to help you out.

Keep meticulous records

A serious pain point of freelancing is getting paid on time. Meticulous record-keeping can help you get your money on time as well.

Keep records of the following:

  • List of clients
  • Cost per task or hour
  • Hours spent on tasks
  • Business expenses
  • Invoices sent/received
  • Payments received

All this data can be neatly collected, organized, and automatically updated with bookkeeping software. You can also use bookkeeping software to set due dates and reminders to make sure you’re always on top of your invoicing.

Prepare for tax season by saving and claiming freelancer deductions

If you’re used to a salary, you might experience a real shock when you make your first tax payment as a self-employed worker. To prepare for tax time, set aside money for tax purposes every month into a savings account. A rule of thumb is to set aside at least 30% of your income each month for taxes.

As a freelancer, there are also a number of tax deductions you’ll be able to claim to save money. Make sure you know what they are and keep track of them. Some common tax deductions available to freelancers include:

  • Business-related travel and vehicle expenses
  • Self-employment tax deduction
  • Power and utility bills
  • Office supplies and equipment
  • Website design and hosting
  • Phone and internet bills
  • Career-related education: classes, books, seminars
  • Business-related software (accounting software included)
  • Health insurance
  • Retirement contributions
  • Advertising expenses

Couple these best practices with keeping detailed financial records to set yourself up for a stress-free tax filing experience.

Modern professions call for modern bookkeeping solutions

Technology like bookkeeping software can make bookkeeping—one of the most stressful aspects of striking out on your own as an independent worker—incredibly easy and convenient. The biggest challenge is finding accounting software that fits you best.

Neat’s bookkeeping solutions are tailored to fit the exact needs of freelancers. Neat provides all the tools you need to automate and streamline financial record-keeping without having to navigate unnecessarily complex systems and features that aren’t designed for you.

Start a free trial today to see how Neat makes bookkeeping for freelancers super easy.

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