Bookkeeping for agencies and consultancies

How should different revenue types be recorded?

Most small agencies report tax on the cash method, so income is taxed when received. Management accounts can still show revenue in the month earned, which gives a truer picture of performance. See cash vs accrual accounting.

Why separate pass-through costs?

When an agency buys ads, printing or software for a client and bills them on, including those amounts in revenue inflates sales and depresses the margin percentage. Record them in separate accounts, so you can report both total billings and the agency's own fee income. Check that client funds held for media spend are not used for the agency's own costs.

Some agencies use separate bank accounts for client media funds, which makes the separation easy to prove.

How do you measure profit by client?

1. Tag revenue by client

   Using classes, projects or tracking categories.

2. Tag direct costs by client

   Freelancers, tools and pass-through costs.

3. Allocate staff time

   From time records, at a cost rate per hour.

4. Compare monthly

   Gross profit and margin for each client and project.

5. Act on the results

   Reprice, rescope or replace unprofitable work.

Review the results with account leads each month.

What is utilization?

The share of available staff hours spent on billable work. If a team has 1,600 available hours in a month and bills 1,040, utilization is 65%. Falling utilization with steady headcount usually means margins are about to fall, before it shows in the profit and loss.

Track it by person and by team each month, alongside realized rates: what was actually billed per hour once write-offs and fixed-fee overruns are counted. A team can be busy and still unprofitable if too many hours are written off.

Time tracking tools that feed both invoices and payroll make these numbers easy to produce.

How are freelancers handled?

Collect Form W-9 before the first payment, record payments by freelancer and client, and issue Form 1099-NEC for 2026 payments of $2,000 or more to US freelancers. Foreign freelancers working abroad give Form W-8BEN instead and generally need no 1099. Check that regular, full-time freelancers are not really employees. See how to pay contractors, paying foreign contractors and contractor or employee.

What does a client view look like?

A client pays a $12,000 monthly retainer plus $20,000 of ad spend billed at cost. Agency fees are $12,000, not $32,000. Freelancers cost $3,000 and staff time costs $4,800, leaving $4,200 of gross profit on the fees, a 35% margin. Seen as $32,000 of revenue, the margin would look like 13% and hide what the client actually earns the agency.

What are the common mistakes?

• Counting media spend as agency revenue, inflating sales and hiding margins.
• Spending client funds held for media buys on the agency's own costs.
• Recording retainers paid in advance as earned in the month received.
• Not tracking time, so client profitability cannot be measured.
• Paying regular freelancers without W-9s, leaving 1099s and backup withholding unresolved.

Which tax points matter for agencies?

Sales tax may apply to some services or digital deliverables in certain states. Owners of profitable agencies often consider an S corporation election, and the qualified business income deduction can be limited for consulting businesses above the income threshold. See sales tax on services, when an S corp saves tax and Form 8995.

This guide is general information. It is not tax or legal advice for your situation.