Accounting is an unavoidable part of self-employment. It is not only a mandatory requirement by the taxman, but can also help you control your business’ finances.
If you decide to go it alone, instead of working with an accounting expert, it can be a daunting prospect. In this article, I’ve detailed my top tips for handling your newfound responsibilities.
1. Set up a business account
Using a personal account for business is a good way to cause confusion. Instead, you want to create an entirely separate bank account dedicated to your professional income. This way you’ll know exactly what you are making and, perhaps more importantly, so will the taxman.
Do this immediately after you decide to become self-employed, as setting it up further down the line will just make things more complicated.
2. Learn about your deductibles.
Deductibles, otherwise known as expenses, are a lifeline for businesses being weighed down by expensive operating costs. The taxman will offer you a break on your taxes, reducing the amount you have to pay back, based on the sum of your annual expenses.
What you can claim for depends on the type of business you run, but it often boils down to two types of expenses. The first is inventory costs, equipment necessary for running the business such as a computer for a blogger or even a truck for an electrician.
The second is operating costs, this includes the day-to-day costs of running your business like travel, food, rent, maintenance etc. Operating costs remain largely similar throughout all business sectors, but inventory costs range widely depending on what it is your company does. Before you claim deductibles, do a bit of online research as to what kind of expenses your small business is allowed.
At the end of the day, if it is necessary for the running of your business, it is likely you can claim it on expenses. It is also worth noting that you cannot claim an unlimited amount of expenses and that a limit is set depending on how much your annual earnings are. When considering expenses, take the time to think about how much you are projected to earn for the tax year, as it can help you to work out what you will be taxed on, and what you won’t.
3. Retain receipts, invoices and bank statements .
Before you even make your first transaction, set aside a space to store financial records. It may be a computer folder (that is backed up to the cloud) where you save all receipts and invoices to, scanned physical copies, or a filing cabinet. No matter what you decide, stick with it, keep all records in the same place and ensure it is updated every time there is a transaction.
These records are your evidence in the case of any disputes with the taxman or if you have difficulties filing your returns. They are also vital for claiming on deductibles, as they prove your claims are valid business expenses.
4. Budget for tax .
When your business starts to see profits, it is worth remembering that (unless your earnings are under the taxable threshold) not all of that profit is yours.
Instead of spending away, always save a percentage appropriate to your estimated tax payments at the end of the year. If you save too much due to tax deductions, you get a nice bonus, if you save too little, you could face penalties for late payments or have to sell off assets in order the make them.
5. Get accounting software to manage it all.
The days of hefty ledgers and page after page of notes are dead, and good riddance! When doing your own accounting, make sure you invest in robust, yet user-friendly, accounting software that allows you to track all your spending, expenses and forms of income.
There are loads of options available, so do a bit of your own research beforehand. Once you have your software, make sure — just as you update your invoice records — you update it every time you are paid, buy a new product, etc.
In the accounting world, this is known as bookkeeping, and not only does it make tax returns easier, but it allows you to track your financial progress and make decisions, such as extra spending, investments and budgets, accordingly.
This article has been edited
Russell Smith, founder and Managing Director of Russell Smith Chartered Accountants, began his accountancy business over a decade ago. Starting from the very bottom, he now has offices all over the UK and an expanding client base. Russell knows everything there is to know about accounting and the trials of being self-employed. Connect with @rsaccountancy on Twitter.