Profit and Loss Statement for Self Employed

profit and loss

Are you self-employed? If you run your own business, operate as an independent contractor, sell your own goods, or perform gig labor, this is you. Self-employed individuals usually receive 1099-MISC forms rather than W2 forms at the end of the year — or don’t receive any forms at all. 

A self-employed person needs to record their income when they pay taxes every year, and because of that self-employed individuals may need their own profit and loss statement.

Do I Need a Profit and Loss Statement If I’m Self-Employed?

Note: A profit-and-loss statement is usually something that people associate with businesses. But a self-employed individual is actually very similar to a business; virtually indistinguishable, financially and legally. If you’re a self-employed individual, you still do need a profit and loss statement for very important reasons: paying your taxes, making decisions, and getting investors and bank loans.

Paying Your Taxes

Probably the most straightforward reason you will need a profit-and-loss statement is to ensure that you’re paying your taxes correctly. Let’s say that you have a 1099-MISC from Lyft or Uber for $40,000. That’s not how much you need to pay taxes on. Before you pay your taxes, you need to deduct your business expenses. You may have made $40,000 but spent $10,000 in gas and repairs. Suddenly, you only need to pay taxes on $30,000.

That’s simple. But most profit and loss statements are actually far more complex. A self-employed person may have five or six sources of income or more and a myriad of expenses that are relative to all of them. To pay taxes, they need to be able to enter this all into their records and see how much they actually made and how much they spent. So, a profit and loss statement becomes critical — it’s used to determine how much income was captured.

Many self-employed individuals need to pay their taxes on a quarterly basis or pay additional fines and penalties. That means that a profit-and-loss statement should be produced at least every few months. This also ensures that the individual doesn’t fall behind.

For Your Own Knowledge

How do you know that you have been paid for all your invoices? How do you know how much money you made in December vs. November? It’s your profit and loss statement. Your profit and loss statement is used to give you important information regarding your company’s performance.

Let’s say you have a business that does much better in the summer and poorly during winter. Your profit and loss statement is going to reflect this. It may be the only way that you can tell; it can be difficult to see trends like this if you don’t have the data to back it up.

Completing financial statements means you reconcile your books, which also makes sure that you aren’t missing anything. You’ll be able to see any payments that haven’t been made to you as well as expenses that may be growing over time.

Getting Investors and Bank Loans

One of the first statements a bank or investor will want to see is your profit and loss. They will want to see how well your business is actually doing and whether it’s doing better this year rather than the last year. If you need investments and bank loans, the best way to get them will be to have your financial statements in order. And you’ll need to start recording your banking information as soon as possible if you want to spend days upon days preparing these statements.

So, now you know that you do need a profit and loss statement if you have self-employment income. But that doesn’t make the process easy. Building a profit and loss statement (as well as a balance sheet and other financial statements) can be complex. 

How to Do a Profit and Loss Statement for Self Employed Income

It’s important to have a profit and loss statement. But most business owners aren’t also bookkeepers or accountants. A profit and loss statement isn’t the most complicated statement you’ll make, but it can still be complex, depending on your income and your expenses. 

Here’s what you need to know.

Choosing Different Types of Accounting Method

First, there are two major types of accounting methods: cash and accrual.

These have some major differences, but to put it simply, under cash, you record income when you receive it and you record expenses when you pay them. Under accrual, you record income when you send an invoice, and you record expenses when you receive the bill.

For most simple businesses, cash is more straightforward. But for more complicated businesses, accrual makes more sense, because bills may not get paid for days, especially on Net 30 terms. Accrual gives you a more accurate sense of what has really been earned or spent, but it’s also more complicated to book.

Differences in Self-Employment Income

Why is self-employment income different from regular income? 

Foremost, self-employment income doesn’t take taxes out. If you’re self-employed, you have to pay taxes both on your personal side and your business side; double taxation. And that does make your tax, income, and expense situation a little more complex than normal. Additionally, self-employed individuals do need to keep track more carefully of their income. They may have multiple income sources and a lot of different expenses. This necessitates the keeping of more detailed financial records than just a paystub. 

Independent Contractor vs. Business Owner

What’s the difference between an independent contractor or a business owner? Effectively, nothing. 

An independent contractor is usually someone who works for someone else (though not directly employed by them, on a contract basis), whereas a business owner is usually someone who sells products and services to others. But both an independent contractor can be seen as a business owner and vice versa, in terms of legal and financial issues. Thus, an independent contractor is really producing a profit and loss for a business — their business is them.

Of course, a business owner doesn’t have to complete their profit and loss statement themselves. They can always hire an accountant or a bookkeeper. That will take the load off them and make sure their financial statements are kept consistently up to date.

Recording Profit and Loss as a Self-Employed Individual

How are profit and loss actually recorded? 

Once a type of accounting is selected, a self-employed individual will need to enter their income and expenses into a ledger. In the old days, that ledger was on paper. Today, it’s usually a spreadsheet or accounting software.

Schedule C Self-Employed Individuals vs. Solo Corporations

There are two ways a person can really be self-employed. An individual may be a Schedule C self-employed individual; they haven’t formed any sort of corporation, they’re just making money as themselves. They will file under their social security number. Another way is that an individual could actually form a corporation, a sole proprietorship, or even a single-member LLC. In this case, the individual is a separate entity from their business, but the business is still owned by them. Their finances will be separate from their business (and they will be more fully protected legally and financially) but the bookkeeping will also be more complicated.

Allowable Business Expenses and Cost of Goods Sold

When recording a profit and loss, recording income is the easier part. The more challenging is recording expenses and costs of goods sold. First, the individual needs to be aware of all their expenses; anything business-related can generally be deducted as a business expense, as long as it is a legitimate business expense. Second, businesses need to keep track of the cost of their goods sold. If they buy something for $5 and sell it for $10, they pay taxes on the $5 difference, not the full $10 in revenue. Booking this is incredibly important, as, otherwise, the individual will pay far more in taxes than they are required to.

Other Important Financial Statements for a Self-Employed Individual

In addition to profit and loss, self-employed individuals should have a balance sheet (which shows all their assets, including cash accounts, and debts, including credit cards) and a general ledger report. A balance sheet is an at-a-glance representation of what the self-employed person actually has, while the general ledger is a full listing of transactions (the easiest way to check to make sure everything has been booked). Bank reconciliations should also be included, which shows that bank accounts have been properly reconciled and booked.

A profit and loss statement for a self-employed individual really isn’t any different from a profit-and-loss statement for a business. Ultimately, the profit and loss sheet is going to look very similar and will be used for the same things. 

Tools for Making Your Profit and Loss Statement

As an independent contractor or self-employed individual, how do you now begin creating your profit and loss statement? It’s the same way as most companies will make their profit and loss statements; through technology and expert knowledge. 

The Best Software for Recording Your Self-Employed Income

 

Many self-employed individuals use online software such as the online version of QuickBooks or FreshBooks. These software solutions are fairly easy to use and intuitive. For a self-employed individual or sole proprietorship, it will be a low monthly fee, unless there are very complicated issues such as inventory tracking. But some individuals may just be able to keep their income and expense tracking in Excel or Google Sheets, if it’s simple enough.

The advantage of using software solutions is that they can automatically pull transactions from your bank accounts or credit accounts, ensuring that you don’t miss anything. They also have built-in features that are designed to detect issues, such as accounts that haven’t been reconciled. This prevents you from potentially making mistakes with important documents such as your tax statements.

Best Practices and Habits for Self-Employment Income

 

For the self-employed, the most important thing is to book all your expenses. Keep all your receipts, especially in cash, and write down what they were for and why. This will also help you if you’re ever audited. If you’re audited for a genuine mistake, it’s not that big of a deal; but you need to be able to show your work. Self-employed individuals should get into the habit of entering in transactions as they occur and reconciling at least once a month, which will prevent them from falling behind. 

Working With an Accountant on Your Profit and Loss Statement for Self-Employed Income

 

Many people choose to work with an accountant if they are self-employed because it’s simple. When working with an accountant, the easiest method is to turn in receipts and bank statements. Phone apps can also be used to record your receipts and report them more easily. Other than that, the accountant will tell you what you need — but you should also be clear about which reports you’ll require if you have goals such as securing additional funding.

Sometimes, the easiest way to get started is to connect with a professional. They can give you the knowledge and tools you need to keep your records reconciled — or just continue to do it for you. Either way, a profit and loss statement is going to be critical for any business that wants to grow, and any individual who wants to keep track of their income, expenses, and necessary tax payments.

Key Takeaways: Profit and Loss Statement for Self Employed Income

  • Without a thorough profit and loss statement, it’s difficult to know how much you’re making — and that can complicate tax returns, loans, and decision-making.
  • Creating a profit-and-loss statement s more complex for self-employed individuals in many ways, because there are more moving parts and more to keep track of.
  • Using the right software solutions and consulting with a professional bookkeeper or accountant can help you create your profit-and-loss statement.
  • The most important aspect of building a profit-and-loss statement is to make sure that you start as soon as possible and keep up with it.
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