Being a freelancer has its benefits, and I think the benefits heavily outweigh the downside. But the downsides can be a challenge to figure out.
One downside that has been getting me lately is how to manage certain areas of my finances as a freelancer. In particular:
- If I bill a client $50 for a WordPress theme up front, and then when I purchase the theme, I use a 10% off coupon, how to I account for the use of that coupon?
- If I bill a client $1,000 for my work, but while I’m doing the work for him, we find out he needs a $75 plugin, which I pay for and he reimburses me, how do I account for that? What if he doesn’t reimburse me and I just include it in the cost of the $1,000 project?
- For the year 2013, I billed clients in January, February, and April without having a separate bank account. I did have an LLC since Jan 15th, but all checks were written out to me, personally. Let say I made $10,000 for those three months. How should I now account for the $10,000?
- What if a client accidentally sends his payment to my personal paypal account instead of my business paypal account? What do I do with the accounting side of things, and what is the best way to move the money from my personal paypal account to either my business PayPal account or business bank account?
- How do I account for PayPal fees?
Those are some of the questions I’m dealing with right now. I’d love to know if anyone out there has any direction on one or two of them.
Maybe I need to hire an accountant…I don’t know.
1. don’t use coupons for client expenses. Use them for when you buy stuff yourself.
2. let them know up front there will be expenses, and get approval for a ballpark figure. Then on the final bill, tack on any themes, fonts, etc. that you had to purchase.
3. it doesn’t really matter what account the money goes into, it just matters how you account for it at tax time. What’s most important is, are you keeping track. But yes, get an accountant ASAP.
4. same.
5. raise your rates
Thanks Dylan. I really appreciate the advice.
1. Really? Even if you can save 10-20% and either pass that onto the client or keep the discount yourself?
2. So if I do that, and he pays me an extra $75, so $1,075 in total, I deposit the full $1,075 into my business account then “pay myself”, would I pay myself $1,075 and account for it as $1,075 of income and $75 of expenses? Or would I need to “pay myself” two separate payments: $1,000 of income and $75 to reimburse for my purchase of the theme. Ideally, I will use my business account to buy the theme, but in this particular case, I used my personal bank account so need to reimburse myself.
3. Good point. I need to put together a spreadsheet or something. I’ll work on finding one (still need to file taxes, and hopefully get some pointers on how to track things for this year).
5. And simply count those as expenses I assume. Issue with PayPal is that it isn’t a fee that I paid by taking money out of my account, it was a fee I paid *before* the money arrived in my bank account. So harder to account for.
I was in a similar situation a few years back. I can’t stress enough how important getting your fiancees straightened out with an accountant is. When tax time comes around, you will be so thankful.
I wrote a post on similar items, its for Canada but most of the stuff will apply. http://wesbos.com/sole-proprietorship-ontario/
If I bill a client $50 for a WordPress theme up front, and then when I purchase the theme, I use a 10% off coupon, how to I account for the use of that coupon?
1. Consider the wordpress theme a cost of doing business. You can bill your client for $50 extra worth of products/services. What you paid for them doesn’t matter. If you want to charge them $300 for the theme or $0 for the theme, it doesn’t matter.
If I bill a client $1,000 for my work, but while I’m doing the work for him, we find out he needs a $75 plugin, which I pay for and he reimburses me, how do I account for that? What if he doesn’t reimburse me and I just include it in the cost of the $1,000 project?
2. Just as above, the $75 is your own expense. If you buy a hamburger from restaurant and cheese costs them an extra $1, they either add it onto your bill or they absorb the cost themselves, either way, when they buy the cheese its their expense.
For the year 2013, I billed clients in January, February, and April without having a separate bank account. I did have an LLC since Jan 15th, but all checks were written out to me, personally. Let say I made $10,000 for those three months. How should I now account for the $10,000?
Since you are int the states and I’m in Canada, it will be different, but the one thing here is that you should run out and get a good accountant to straighten this all up for you. If you have an LLC, you should be billing as an LLC, not an individual. You will most likely have to claim that income as personal income and thne everything going forward from today onward will be bill as an LLC.
What if a client accidentally sends his payment to my personal paypal account instead of my business paypal account? What do I do with the accounting side of things, and what is the best way to move the money from my personal paypal account to either my business paypal account or business bank account?
Again, ask you accountant, but I would just move the money from your personal account into the business account. As long as you books add up at the end of the day you are okay.
How do I account for PayPal fees?
They are an expense, a cost of doing business. At the end of the year if you earn $1,000 but paid $200 in paypal fees, you only get taxed by the IRS on $800.
Awesome Wes. Thanks a lot.
I read your post. If only everyone could mesh brains and get their collective wisdom together so all common questions were already answered immediately. Some day 🙂 But the web has definitely contributed to that very type of thing, just like this post and your response. Cool stuff.
1. Thats a good idea. Then if I feel that it is worth my time to search for and use a 15% off coupon, I can do it and reap the benefits for my effort and time in finding it.
2. What if the $75 was paid from my personal bank account. How should I reimburse myself? Two separate payments, one of $75 and one of $1,000, or just one single payment of $1,075 and “write down” that part of it was for income and part of it to reimburse a business expense paid for with my personal account. (Separate question from what I originally posted I guess, but I just thought of it as I read your response.)
3. Yeah, I have no idea how to do this. I should probably get an accountant…though I’ve been holding out as much as I can, trying to not get an accountant…but sounds like it might very well be worth it.
4. True. Just need to track it. In the article you wrote, you mentioned you use Freshbooks. Do you still use it? From your experience using it, could you clearly account for this type of thing in Freshbooks? (Currently using Invoiceable.co for my invoices (free), Toggl.com for my time tracking (free), and Mint.com/written record to account for my finances…its been ok, but still think about switching from time to time.)
5. As I mentioned on my other comment: “Issue with PayPal is that it isn’t a fee that I paid by taking money out of my account, it was a fee I paid *before* the money arrived in my bank account. So harder to account for.”
Thanks again, this has been really helpful. I’m already three months into the year, and I want to get this all figured out so I can run things smoothly and not have a headache come tax time next year.