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As an independent contractor, keeping track of your business expenses is crucial to managing your finances and ensuring you are claiming all possible deductions on your tax returns. However, deciding on expense categories can be a challenging task, particularly if you do not have a bookkeeper to assist with your independent contractor accounting. This article aims to provide you with a detailed understanding of bookkeeping for independent contractors, including how to categorize expenses, the importance of using an independent contractor tax organizer, and how Lunafi can help you manage your bookkeeping needs.
The categorization of expenses should depend on how you use the subject of the expense in your business. The same item may have different categories for different types of businesses. Here are some examples:
An expense for “Materials & Supplies” would typically include any tangible items used to produce your products, such as pens and pencils for a tutor or paintbrushes for an artist. “Materials & Supplies” may also include raw materials used to make products you sell, such as wax for candles or fabric for clothes. On the other hand, if you purchase illustrations, fonts, or stock images, the correct category for them would be "Media Purchases." When buying items like beads, categorize them depending on how you use them. If you are a jewelry maker who buys a case of beads to make and sell bracelets, categorize them as "Inventory." However, if you are a babysitter who buys a case of beads to make crafts with kids, categorize them as "Materials & Supplies."
When purchasing subscriptions for an online service, determine what the service provides to your business, and categorize the expense based on that. If you are purchasing a music subscription that you also use in your yoga classes, expense the service as "Dues & subscriptions." However, if you are purchasing a subscription to online courses to enhance your skills in your profession, then you are using that for “Professional Education” – and should categorize the expense as "Training." Lastly, if the service you are purchasing is specific to your business, you can categorize it as "Professional Services," no matter if it is purchased online or offline.
If your worker is your employee, and you withhold payroll taxes and file quarterly payroll tax returns, then your payments will be put in the “Payroll or Wages” category. If you are paying an independent contractor for their services, the expense category would be "Contractors." Calculating payroll and compensation is easier with a dedicated independent contractor accounting tool.
When categorizing a purchase for equipment or furniture, the correct category depends on the cost and how long you will be using them. Any item purchased that has a useful life of longer than one year is a "Fixed Asset." The business gets a deduction for these “Fixed Assets” over their useful life, called Depreciation. If the cost of your purchase is relatively low, you can record the equipment or furniture as an Expense. For freelancers or small businesses, one may claim that any purchase under $1000 can be an Expense instead of a Fixed Asset.
An independent contractor tax organizer can help you keep track of expenses and their categories. It is a tool that allows you to organize your income and expenses, calculate your estimated taxes, and generate tax forms. The organizer provides a simple and easy way to keep track of your business transactions and minimize errors in your filing.
The organizer helps you to categorize your expenses automatically and generate reports that show your business's financial health. It also allows you to access your financial information at any time, making it easy to review your spending and make informed financial decisions. Additionally, using Lunafi’s tax organizer can save you time and money on bookkeeping and accounting fees.
Lunafi is an online bookkeeping service designed specifically for independent contractors and freelancers. It offers a range of services, including invoicing, accounting, expense tracking, tax preparation, and financial reporting. With Lunafi, you can easily manage your finances from anywhere and at any time, as all your financial information is stored in the cloud.
Lunafi's software automatically categorizes your expenses and generates reports that show your income, expenses, and tax liabilities.
Bookkeeping is a crucial aspect of managing your business finances as an independent contractor. Proper categorization of your expenses can help you claim all possible deductions and save money on taxes. An independent contractor tax organizer can simplify the process of organizing and tracking your expenses. In addition, using a bookkeeping service like Lunafi can provide you with the tools and support you need to manage your finances effectively. By staying on top of your bookkeeping, you can make informed financial decisions and focus on growing your business.
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