by Yolander Prinzel
If you haven’t already, you have a very important choice to make about your business. Eventually, you’ll need to choose whether your business uses the cash or accrual method of accounting. “But wait” you’re thinking, “isn’t accounting, accounting, accounting? What is this cash or accrual method you speaketh of?”
Well my Elizabethan friend, it is basically the timeline in which you choose to report your income. No, that doesn’t mean you can pay taxes on today’s income in five years (wouldn’t that be nice) but it is an extremely important decisions for all businesses, but especially freelancer writers.
When you choose the accrual method, you must pay taxes on money you haven’t collected yet. As soon as you invoice someone, you’ve accrued an income that hasn’t been collected and you must pay tax on that income even if the client stiffs you for 6 months. Anyone who has ever worked for a print publication has probably just broken out into a cold sweat—get your hanky and wipe off that wet, salty fear because I’ve got a solution for you.
The cash method of accounting is probably a more palatable method for freelancers because with the cash method (or basis) you don’t pay taxes until you have money in hand. Ahhh…feel better?
Now, you’re a smart cookie, so I know there is something in the back of your mind nagging at you to find out who in their right mind would choose the accrual method. The answer to that is someone who needs a better idea of potential profitability for a loan.
The accounting method you choose will determine how your income statements look. Right now, for August, my income statement looks dismal because I’m on cash basis accounting and have received few payments on invoices. If I were on the accrual method it would look much better because my income statement would be able to show all the outstanding invoices as income and profit.
So while I can easily state that, in terms of actually paying taxes, it’s a hell of a lot easier to do so when you’ve collected the money you are paying taxes on, I can’t say there is no benefit to accrual basis accounting. I just don’t really see it for freelance writers.
Yolander Prinzel, ACS is a financial writer as well as a series 7, 66 and 2-15 licensed financial representative. With a decade of financial industry experience, she was the National Director of Marketing and the Director of Operations for The Compass Agency USA and has also been a trader for life insurance underwriter. No matter what you may think, none of her posts are advisory, they are simply informational. Only an advisor with close, personal knowledge of your financial situation can offer advice.