As a contractor, you should operate with the mindset that you are running a business where your skills are the service and product. Your professional skills are obviously impeccable – but too many contractors focus too little on the ‘running a business’ part. And contracting bookkeeping is central to that.
What is bookkeeping
Bookkeeping is keeping track of your business: recording financial transactions, producing invoices, keeping track of payments and receipts. It’s not quite the same thing as accountancy, which tries to make sense of the information you have on your books – figuring out how much tax to pay, how to arrange your business to maximise your income, spotting areas of opportunity or wasted effort.
But without accurate contracting bookkeeping, it’s much harder for an accountant to come up with solid advice. So do you do it yourself, or pay someone to do it?
How to do your own bookkeeping
Yes, everything. That means dates, amounts, work done, sales you make and costs you incur. People tend to be more excited by the amount they will get paid, but keeping track of expenses is just as important when it comes to doing your tax.
Set up a system
If you have a simple business, you can use a spreadsheet. As you progress, you’ll find that you want to understand your finances more, and it can pay to use an accountancy software package.
Budget for tax
You won’t know the exact amount of tax you’ll need to pay until you file your tax return, but you can arrive at a rough estimate. So make sure you keep that money aside.
Keep your business transactions in a separate bank account
Make sure your business transactions take place separately from personal transactions. If, like many contractors, your fees are routed through a personal service company, you need to be sure that your fees are paid into the right place. Taxing a company on the profits generated is more efficient than being taxed as an individual.
Claim all business expenses
Yes, all of them. The small expenses add up. If you’re doing DIY bookkeeping, consider getting a smartphone app which will allow you to record expenses more easily when you are away from your office.
The risks of DIY contractor bookkeeping
The pain of filing your tax return or business accounts each year is nothing compared to the trauma of an HMRC inquiry. Early in your contracting career, it’s easy to assume it won’t happen to you, but the longer you keep going, the more likely it is. And at that point, if your books aren’t in order, the process will become much more arduous. So keep your records as though you are preparing them to show to a tax inspector – and hold onto the paperwork for six years afterwards. That means invoices, bank statements, receipts and all your accounts.
When to hire a bookkeeper
If you are confident, organised and have a simple business, then there’s no reason why you can’t do your own books. For those who find bookkeeping a distraction from the main business of providing your clients with excellent value for money, it can be more efficient and safer to hire a bookkeeper.
Bookkeepers can be found on relatively modest terms, ranging from £10 to £15 per hour. You can also find online bookkeeping services, or your accountant may offer you a bookkeeping service.
One thing to consider is the volume of transactions. How many invoices do you generate, and how much money do you make? If you have a few, high-value transactions then your bookkeeper won’t need to do much – if you have lots of small ones, they will end up being more expensive.
ContractingWISE is here to offer our expertise and experience in contracting. Take a look at our guide to spotting a good contractor accountant.