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The Most Common Accounting Mistakes Made by Independent Contractors

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The wonderful thing about working for yourself is that you get to be the boss. You don't have to deal with nosy supervisors constantly looking over your shoulder and micromanaging, you can set your own schedule, manage your workflow, and take vacations whenever you choose, and in some cases, you can even work from the comfort of your own home. No wonder so many people want to be independent contractors! Of course, there are drawbacks as well. You may have to hustle for work and take whatever jobs come along just to pay the bills, there could be times where you have no work and no prospects, and of course, you are solely responsible for managing the finances of your business. This can be a little scary, especially considering the learning curve involved in running your own professional operation. And there are all kinds of mistakes you might make while trying to keep the books. Here are just a few common ones that are fairly easy to avoid.

  1. Thinking you don't need accounting practices. Every business needs accounting practices, no matter how small or large the operation. Yours is no exception, despite the fact that you only support a staff of one. From the minute you start earning income, you need policies in place to govern where that money goes and how it is used on behalf of your business (including paying your personal salary). No matter how simple your finances are you need to have practices in place to track them accordingly.

  2. Errors in data entry. This accounting mistake is understandably common. Working with numbers is not as easy or intuitive as working with words, and look how many typos people make when drafting something as simple as an email. But if you take the time to check and double check your entries you should be able to catch and correct your mistakes before they can damage your accounts.

  3. Failure to use contract. Even if all you do is demand a work order from your clients and send them an official invoice, these documents serve as a contract for work, and more importantly, payment. A failure to use at least a basic contract could result in non-payment from a client without the possibility of legal recourse. And this is definitely bad for your finances.

  4. Filing taxes annually. Hold the phone just a minute. You are required by law to pay annual income taxes and it is important that you do so if you don't want to face federal prosecution for tax evasion! That said, you could also opt to pay quarterly estimated taxes, something that many self-employed professionals fail to realize. But contractors do not have the luxury of an incorporated entity to withhold taxes from their pay, which means they may face a major payout when it comes time to file their taxes. So if you want to avoid this unfortunate (and potentially massive) expenditure once a year, consider filing and paying smaller portions on a quarterly basis. If you overpay you may get some money back instead.

  5. No budget. Whether you're dealing with loan payments and accounts receivables finance rates, you're trying to track your monthly recurring charges, or you want to know how much money you have coming in during an average month, a budget can help you to track your income and expenditures. And without it, you will be unable to plan for your financial future as self-employed entrepreneur.

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