A Bookkeeping System for Freelancers

A lot of people got into freelancing and sole proprietorships last year. Since the job market tanked, many people took their skills into the open market. That’s what America is all about right? Anyone can make money!

But now its tax time. Many of these same freelancers are finding themselves in a pile of debt with Uncle Sam. Poor record keeping has led to disaster because there are no ways to prove expenses, even if they were known. Fear, uncertainty, and doubt has filled the minds of these freelancers.

If you are one of those people, I have a 3-website solution for you:

1. Freshbooks. This site will handle your invoicing. It keeps things very simple, secure, and accurate. You can invoice based on time and materials, fixed fee, or however else you see fit. You can set up automatic invoicing, and automatic payments. Invoices can be online or the site will snail mail your customers. According to their own data, users get paid an average of 14 days faster than using their old system (whatever that was).

2. Outright. This site is to keep track of your income and your expenses. It integrates with Freshbooks, so your income side sort of takes care of itself. The expenses are conveniently divided into IRS Schedule C categories, making your life a lot easier at the end of each quarter. Speaking of taxes, they actually estimate your tax payments for you! The site has a “taxes” tab. At the end of each quarter, it will calculate both your self employment (social security and medicare) tax and your business income tax (based on 10% marginal rate on your profit). They are probably on the high side, but its better to be safe and get money back, right? Another great feature is the 1099 calculation, based on you using the “contractors and freelancers” expense category. The site will then make a list of all the contractors you paid at least $600.

3. Shoeboxed. Here is where you will store electronic copies of your receipts. You mail your receipts to shoeboxed, they scan and store them. Outright can pull your expense data right from shoeboxed, but you may have to manually edit the categories to get them to match up. To save money, you can do the scanning and upload them to shoeboxed for free.

Pricing: If you are a really small operation, you can get away with using these three sites for free. If you have 25 clients or less and less than 150 receipts/month to scan, your total cost will be $34/month. Expect Outright to run $10-$20 when they come out of Beta, bringing your total to $54. By doing this, you will have very little to actually enter into Outright. You simply sit down for 20 minutes a month to reconcile your information with your bank statement, and view your reports.

Limitations: To be honest, I’m not crazy about web-start-up-accounting-apps. What happens if they go out of business? Will your data be usable by anyone else? By using old trusty Quickbooks, you get the security of knowing you have your financial data that can be read by any accountant or bookkeeper. Also, the reporting on Outright is weak when compared to a serious piece of accounting software like QuickBooks.

Another option: Not to be a shameless promoter or anything, but for close to the same cost, my company offers full service bookkeeping using Quickbooks, electronic storage of receipts, and custom quarterly reporting.

You have to do something. In your second year, if you are not making estimated tax payments every quarter, the IRS will penalize you- severely. Use something that will allow you to keep accurate track of all your income and all your expenses.

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