While there are many benefits in being your own boss, carrying the sole responsibility for paperwork and financial management is a significant drawback.
If it’s your first year forging your own path as an independent professional, there are a few ways you can limit the potential financial damage and frustration come tax return time. The first is to simply outsource the work and the responsibility.
You no longer have access to a corporate finance department, and you may not have the resources to retain your own accounting staff immediately, but you can contract out responsibility for specialist services like financial and administrative paperwork. An umbrella company offers a number of benefits in that regard, covering a wider range of contractor pay, tax, legal documentation, and insurance-related overhead duties than a more limited bookkeeper or virtual assistant could be entrusted with.
If outsourcing responsibility isn’t an option, you will have to take on more administrative tasks yourself. For that reason, independent contracting can be an extremely busy occupation, because not only do you need to do the work for which you are being paid, but all the other work that is necessary for the regular and successful operations of a company, such as administrative, accounting, and marketing duties.
The most important thing you need to do to manage your taxes well is to keep excellent records. Come up with a system that you can follow to record every time any sum changes locations. Capture every expenditure and income line and do this on a very regular basis. Make the paper file, spread sheet, or app extremely easy to access at all times by putting it on your desk, pinning it to your desktop, or saving it to your home screen. If necessary, put in a repeating calendar item with an alarm to remind yourself to take the time to record all transactions on a daily, weekly, or monthly basis.
If you are keeping detailed records on a regular basis, you will find all financial matters much easier to deal with. The next step is to generate automated reporting off your financial records. A good finance app can do much of the heavy lifting for you, but a traditional Excel spread sheet works well as long as you understand the formulas to use or are willing to outsource the report design to a more knowledgeable party. This is important because you need to know your financial health at any given time from an operational standpoint, and also because your tax responsibilities are tied to your income.
If you’re a new contractor, this next step may be a bit harder. Ideally, you want to project your income in order to have a sense of what kind, and what amount, of tax you will be responsible for collecting and remitting to the government. If your self-contracting business is slow to grow, your tax obligations will be less onerous, but if you start to grow quickly, they can balloon unexpectedly into significant sums. Paying more frequently, at least every quarter, can help to avoid distressing situations where the sums required are painfully large.
Stay ahead of your tax obligations by keeping meticulous financial records, paying taxes more frequently, and if at all possible, outsourcing this chore to the experts.