What Do Freelancers Need to Know About Bookkeeping?

Congratulations – you started your freelance career and are looking forward to doing work you love and being your own boss.

Then people start throwing around words like bookkeeping and taxes, and you start to panic.

What Do Freelancers Need to Know About Bookkeeping?

Waiting until the end of the year to perform bookkeeping will also leave you feeling stressed and overwhelmed.

Worry not.

Bookkeeping can be learned, and if not, you can always outsource it.

However, even if you choose to outsource your bookkeeping, there are still some things freelancers based in the U.S. need to know.

Before we get to that, it’s important to define what bookkeeping is.

What Exactly is Bookkeeping?

Nerdwallet has a great definition: “Bookkeeping is broadly defined as the recording of financial transactions for a business. It is part of a business’s overall accounting process. Bookkeeping can be done as frequently as daily or as infrequently as once per year.”

If you’re new to bookkeeping, read and reread that definition as many times as necessary until you have a basic understanding.

It’s important to note, while you CAN do your bookkeeping once a year, this doesn’t mean you should.

Doing your bookkeeping infrequently can result in inaccuracies and losing important documentation that you may need as proof of that financial transaction (which can translate to losing money if you can’t prove a deduction.)

Waiting until the end of the year to perform bookkeeping will also leave you feeling stressed and overwhelmed.

Inaccuracies will be harder to pinpoint, and you need accurate records when you file your taxes.

If you hire someone to sort out your bookkeeping at the end of the year, you will be charged many billable hours to sort out a giant box of receipts and invoices. So if you’re a freelancer just starting out, make a commitment to keep your bookkeeping up to date.

Now that the basics are out of the way, here are some other things you should know about bookkeeping as a freelancer:

Freelance Work is Considered a Business

Freelancers don’t have to be a registered business to have the same accounting responsibilities as a business owner.

As sole proprietors, freelancers can work and get paid under their own name.

However, they are responsible for keeping track of all of the bookkeeping, just as a business is.

The IRS recommends that businesses keep records for up to three years.

However, they can audit a business as far back as six.

All receipts, customer invoices, and bank statements related to your freelance work should be filed away and kept for six years at the very least.

Organizing all documents and financial transactions in chronological date order is the best way to do this.

Bookkeeping Starts As Soon As Money Is Spent

The moment that a freelancer incurs a business-related expense is the moment record-keeping should begin.

The reason for this is that many of these start-up costs can be deducted during tax time.

Membership dues, business-related training, supplies, and business dinners are some fees that could possibly be deducted when taxes are filed.

The government recognizes that people sometimes have to spend money in order to get a business up and running, and there are tax breaks as a result.

Failing to keep accurate documentation and proof of these business expenses could result in actually paying more money during tax time.

Freelancers Are Not Required to Have Fancy Accounting Software

Although freelancers need to keep accurate records of their daily financial transactions, depending on the service, in-depth accounting software may not be necessary.

There just needs to be some way of tracking all the money going in and money going out. Simple paper folders and excel sheets can work and are perfectly legal as long as they are accurate, complete, and thorough.

To keep your books organized and avoid inaccuracies, freelancers should strongly consider opening a separate business banking account once money starts coming in.

This way, you can easily match your bookkeeping records to your bank statements.

At the end of each month, your bank statements need to be reconciled.

This means that the transactions and balance on your bank statement needs to match your records–whether that’s a spreadsheet, a paper-based bookkeeping system, software, or cloud computing accounting.

Although not legally required, software or cloud computing accounting does have its perks.

You can sync your bank account to ensure no transaction is missed.

Also, both bookkeeping software and cloud computing let you run various financial reports that enables you to see how your business is doing.

During tax time, if you use one of the popular versions like Quickbooks or Freshbooks, your tax professional or CPA can easily access and make sense of your records, which is ideal if your freelance service has many transactions.

Each Time Money is Made, a Portion Needs to Be Set Aside for Taxes

You’ve probably read news stories where independent contractors failed to set money aside for taxes.

At tax time, they did not have the funds to pay the government the money that they owed.

To avoid this, freelancers should set aside a portion of their earnings right away (and pretend this money does not exist.)

Since freelancers are not employees, they need to pay the employer portion of federal and state income taxes, as well as self-employment taxes.

Freelancers need to keep this in mind when setting an hourly rate.

Freelancers may also be responsible for collecting sales tax if you’re selling any products.

This usually applies only to the state the independent worker lives and conducts business in.

(The only exception is if a business has a NEXUS, which is usually a physical presence or employees, in another state.) Freelancers must check with their city, state, and the IRS about which taxes are required for their particular line of work and when tax payments are due.

You Should Still Choose to Work with a Tax Professional or CPA (Even if You’re Keeping Your Own Books)

If your freelance business is fairly simple, you can choose to do your own bookkeeping throughout the year.

This can save you from paying an accountant or other tax professional to do your bookkeeping in addition to filing your taxes (because you will not be able to file taxes accurately without proper records).

If your business is more complex, and you have employees, for example, you should consider outsourcing payroll due to the various local, state, and federal legal requirements.

A professional can and should be consulted on a variety of topics you may end up needing for your freelance business, such as sales tax information (if applicable), ensuring your bookkeeping system is set up correctly, quarterly taxes, payroll, and much more.


When it comes to bookkeeping, this may seem like a scary and daunting process.

However, if the freelance service you offer is simple, you can consider keeping track of your own bookkeeping throughout the year.

This doesn’t mean you can DIY everything and forgo ever working with an accounting professional.

The most important thing to remember when it comes to your bookkeeping is that you need to record all financial transactions and keep related documents as proof.

Once you start earning more as a freelancer, you can always upgrade your bookkeeping system or hire someone to take over if you find that doing your own books is not serving your business.

Disclaimer: The information contained within this blog post is for informational purposes only and is not intended as a substitute for obtaining accounting, tax, or financial advice from a professional accountant as it pertains to your specific freelance business. Please consult a professional if expert assistance is required.

Alma is a former accounting professional turned finance writer. She has a passion for all things related to personal finance and sharing that information with others. In her spare time, she loves hiking and spending time with her family outdoors.

Leave a Reply