It’s tax season! While most of us appreciate that taxes are important for maintaining social goods like our health and education systems, filing taxes can be stressful for freelancers. Faced with piles of invoices and receipts and the prospect of owing money we haven’t accounted for, paying taxes can seem like a daunting organizational and financial challenge.
But getting organized to pay your taxes can also be empowering and help you take better control of your finances, both personal and professional. Armed with the right information, you can reduce the amount of taxes you owe and make strategic decisions about managing your finances. Tax season is a great time to implement longer term practices that will help you not only when filing your taxes, but that will also ensure the success of your business long term. To that end, here are the CFU’s top five tips for tax time.
Tip #1 Plan ahead, budget and organize for success
Most workers in Canada will have to file their taxes by April 30th, though self-employed workers have until June 15th. That said, it is important not to procrastinate. In fact, you should be using the systems that will help you file your taxes year round.
It is important to find ways to track all of your income and expenses, and have the paper (or electronic) trail to back this up. This can be as simple as using an Excel spreadsheet and a filing system for organizing invoices and receipts by month or project. Alternatively, you may want to consider investing in software like Quickbooks, Freshbooks, or Sage 50 Accounting. If your operation is large enough, you might also hire an accountant or bookkeeper. You will pay more for a bookkeeper as they will work for you on a monthly rather than annual basis, but the time you save could be worth it.
To avoid surprises at tax time, you can estimate how much you will owe on each piece of income. Depending on your tax bracket and province of residence, most freelancers should plan on putting aside 30% of their income for taxes. Many freelancers suggest putting this in a dedicated bank account to help separate this from daily inflows and outflows.
Tip #2 Write it off! Home office, vehicle maintenance, business meals and more
Most freelancers know that they can write off business expenses, but the line between business and personal expenses can be fuzzy for the self-employed. Knowing what the CRA considers legitimate business expenses can help you both maximize what you write off and avoid trouble if audited.
You can claim up to 25% of your rent as home office space, and 25% is the standard that most people use. However, note that technically the CRA calculates how much you can write off based on the percentage of space your office takes up in your home. The square footage includes only clearly dedicated office space, so your couch or kitchen table don’t count.
If you do a considerable amount of driving as part of your business, you can log the distance travelled for work-related tasks and claim vehicle maintenance as a business expense. However, as most self-employed people will use their vehicles for both business and personal use, you do need to keep records of how much of your mileage was accrued for business purposes. This is extra work, but could yield rewards if you are logging a significant amount of kilometers.
If you’re paying for business meals with clients, you can write off 50% of the meal cost. Again, it is expected that these meals be logged clearly and that you can justify the relevancy of the meals to your business. Business meals are one of the categories monitored most closely by the CRA, so you need to be vigilant about this.
For other expenses, you can compare the expenses you plan to claim with others working in the same industry at the same income level. This can help you determine if your claims will seem reasonable to the CRA. Complete instructions for how to access this information are included at the bottom of this post.
Tip #3 Consider if incorporating makes sense for you
You might consider incorporating if your business is big enough to pay you a salary or you frequently hire people. Incorporation can make doing your taxes simpler, as your company finances will be clearly separated from personal finances. The costs of incorporating may not be as large as you think, and it can be a beneficial step if your operation is growing.
Tip #4 Contribute to RRSPs and TFSAs
Contributing to a Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA) can help you put money aside for the future while also minimizing what you need to pay in taxes.
RRSPs are designed for retirement. They allow you to put money away tax-free, to be accessed when your income is lower. Because the money in an RRSP can be accessed at any time, RRSPs also serve as a useful safety net for freelancers and others with precarious incomes. You can put money aside in an RRSP when you are having a good year, and draw on it at times when business is slow and you are in a lower tax bracket. That said, saving for retirement is crucial for freelancers, so make sure you aren’t neglecting this function of RRSPs.
You won’t receive a tax break on money deposited in a TFSA, but you also won’t get taxed on earnings in the account. This means that you can earn interest through investments without paying tax on the interest, helping you avoid significant additional taxes.
Tip #5 Consider long term financial planning
This tip is really to help you with the long term financial success of your company, not just taxes. Thinking about putting money aside for taxes, retirement, investing in your company, and saving for slow seasons can help you determine what you realistically need to make in a given year. Taking the time to think through your long term goals can help you set realistic rates and make decisions about how much work you need to take on. It will also help you feel empowered when making business decisions.
Bonus Tip: The CFU is here to help
If you are not already a member, consider joining the Canadian Freelance Union. In addition to advocating for the rights of freelancers, we offer support and educational resources on a variety of topics of importance to freelancers (including taxes and financial planning). We also offer the opportunity to connect with other freelancers so that we can share tips and information and make freelance life easier for us all.
How to access financial data about others in your industry:
Go to: https://www.ic.gc.ca
Locate the “Most Requested” section and click “Business Intelligence”
Click “Financial Performance Data”
Click “Create a Report”
Choose your revenue range, province/territory, distribution by Total Revenue, Value in Thousands of Dollars, Industry (to find your industry code, visit Statistics Canada).
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