If you’re self-employed, you are responsible for keeping track of your income and expenses. Unlike those who have an employer, self-employed individuals must pay their own taxes, so keeping accurate records of income and expenses can make budgeting for taxes simpler.
A self-employment ledger can help verify your income, along with bank statements and tax records. But how do you create a self-employment ledger? Fortunately, the process is relatively simple—we walk you through it below.
What’s a self-employment ledger?
A self-employment ledger is a document or record that self-employed individuals use to track and report their income and expenses for tax and financial purposes.
It serves as a record-keeping tool and can be important for calculating self-employment taxes, filing income tax returns, and managing one’s finances as a self-employed individual.
Here are some key components typically included in a self-employment ledger:
- Income: Self-employed individuals record all sources of income, including revenue from their business activities, freelance work, consulting, or any other self-employment-related income. This may include sales receipts, invoices, payment receipts, and any other documentation that verifies income.
- Expenses: Self-employed individuals track and categorize their business-related expenses, which may include rent, utilities, office supplies, equipment costs, advertising, travel expenses, and more. Keeping detailed records of expenses is important for calculating the net profit of the business.
- Dates: The ledger should include dates for all income and expense transactions. Keeping a record of when transactions occur is crucial for tax reporting and financial management.
- Description: A brief description of each income and expense item is usually included to provide context and documentation for each entry.
- Net Profit: The ledger should calculate the net profit, which is the income minus expenses. This is an important figure for tax purposes, as self-employment taxes are typically based on the net profit.
Self-employed individuals often use accounting software, spreadsheets, or dedicated ledger books to maintain their self-employment ledger. Proper record-keeping is essential not only for tax compliance but also for managing the financial health of the self-employed business. In some cases, maintaining a self-employment ledger may be a legal requirement to support tax returns and financial reporting here.
Getting Started With a Ledger
A ledger is a simple term for traditional bookkeeping—keeping track of expenses to calculate profit and loss. You can do this through any means you find convenient, although a spreadsheet or online accounting software is generally the simplest way for self-employed individuals to do this.
What are your options for creating a self-employment ledger?
- Use an online template or spreadsheet
- Track expenses and income using a manual spreadsheet on your computer
- Download accounting software
- Write down expenses and income by hand
The best option is the one you will consistently use, so choose the one that makes the most sense for you.
It’s also a good idea to track additional information about your profits and losses in the ledger. For example, in addition to the amount you were paid or the expense, you should put the type of income or expense, the date, and whether or not the income is taxable (or the expense tax deductible).
Why It’s Important to Keep a Self-Employment Ledger
Keeping a self-employment ledger is important for more than just your personal reference. It can help you verify income for taxes and loans. It can also help you budget appropriately for taxes and ensure that you track all eligible business expenses to help reduce your tax liability.
A ledger also provides a single place to track all your expenses, making it easy to see profits and losses at a glance to help you make business and financial decisions.
Using a ledger can also help reduce errors that could result in discrepancies on your taxes or earnings that could impact your loan eligibility. So if you use accounting software or a spreadsheet that automatically totals amounts for you, you can eliminate errors that may happen with a manual ledger.
Accounting software can even allow you to attach receipts or photos of receipts to your ledger in order to better track expenses and provide proof for taxes.
Do You Need a Self-Employment Ledger?
Although a self-employment ledger doesn’t qualify as proof of income, it’s still important to have one. Even if you are self-employed and only have income from one source, tracking your income and expenses will make organizing your finances, budgeting, and securing loans that much easier.
Not to mention a self-employment ledger provides invaluable information come tax time, especially if you receive income from multiple sources but may not receive 1099s from every source.
A self-employment ledger also makes it easier for your tax professional or accountant to help you manage your money, ensure you don’t overpay or underpay for taxes every year, and assist you with budgeting for estimated taxes.
Work With Our Tax Professionals
Scharf Pera & Co., PLLC works with self-employed individuals for tax services, including tax planning and preparation. Our team can help you reduce your tax burden and maximize your profits with the information from your self-employment ledger. Contact us today to get started.