Home » Why Hiring an Accountant for Freelancers Is a Great Investment
Taxation and death. There is nothing more definite in life than these two truths, but when it comes to paying taxes, there are lots of things you can do to make the process as smooth as possible.
Yes, regardless of how little money they make, freelancers in Canada are obligated by law to file income taxes. Do you honestly believe the Canada Revenue Agency (CRA) won’t notice and will let it go?
Maybe, but if you get caught not disclosing your freelance income and failing to pay taxes, you risk facing severe fines and penalties. CRA refers to this as “underground income.” They focus a significant percentage of their efforts on locating people who fail to disclose their excess income.
Taxes – and the payment of them – are just one of the financial considerations that many freelancers overlook. Today we are going to take a closer look at more of them, and just why working with an accountant – although it will be an ‘extra’ expense – from early on in your freelance career can be a very smart move.
When you first start out, it’s simple to get excited about your work and ignore administrative tasks like bookkeeping and business registration while you’re servicing clients and seeing money pour in. However, there are some things you should to do right away. Registering your business can be one of those things.
As a freelancer, you must first choose whether you will conduct business under your own name or under a company name. You can skip registering as a business if all of your operations will be done under your personal name for the foreseeable future.
You might wish to take this into consideration if you want some legal separation between your personal assets, freelance income, and business. In addition, a legal business will often help you – and your work – look more serious and professional in the eyes of potential clients.
On top of registering your freelance business, you should open a business bank account. There are a number of very good reasons for doing this, including all the following:
Separate personal and business financial transactions: A business bank account lets you delegate signing authority if need be and helps avoid mixing up personal and business transactions, like business expenses and personal expenses for travel, meals, vehicle expenses etc.
Build credit for your business: A small business bank account helps you build credit, so you can apply for business credit cards, lines of credit, and loans or mortgages in the business’ name.
Prove you are the real deal: When you have a business bank account, your clients, vendors, and partners know you’re a serious business. It positions you in a more professional light while you’re still building your business’ reputation.
Save time and money at tax time: A business bank account makes it easier for you/your accountant to access financial information about your business income and expenses.
As far as possible, if it is an expense connected to your business, it should be paid for from your business account, and income you receive should be deposited there. The more you can separate your business and personal finances, the better position you will be in financially, on a personal level, if your business fails.
With no employer to so the maths – and the withholding – for you, you will need to figure out for yourself just how much you will need to pay in taxes, and have the money available when it comes time to do so.
Thinking about your tax bill on a month-to-month basis will help you avoid the shock of a massive payout when you file your freelance taxes. The rule of thumb is to set aside 25% of your income as you collect it, to have it ready and available for tax season.
Note that this money accumulates inside your business if you keep personal and business finances separate. You will also have to file Form T2125 Statement of Business or Professional Activities with your personal tax return, as your freelance income is reported separately from other types of income.
This is where many freelancers start to panic and make mistakes. Working with a tax professional and/or considering paying taxes year-round should result in good financial records. And you guessed it, filing taxes will be easier!
Taxable income is the simple calculation of your net income—the total amount of freelance income your business earned in the last year, minus all of your deductible expenses from the same year.
Expenses are tax deductions, which means it’s worthwhile keeping track of every deductible expense year-round. They lower the amount of taxable income you earn, which reduces your income tax payment.
So, which expenses are deductible during tax season?
Here’s a short list of some things that can be used to lower income taxes, but for a more comprehensive breakdown, you should contact us to discuss your personal situation:
As a freelancer working in Canada, you can deduct some of the costs of working from home and running a home office. This doesn’t mean that you can claim every expense your house incurs, but there are certain things you should definitely claim.
Home office deductions are based on the size of your home office. The more of your home you use for your business, the bigger a percentage you can use as a home office deduction.
For example, if your home office takes up 15% of the square footage in your home, you can claim 15% of the bills pertaining to your home as deductible expenses. However, if you own your own home, think twice, or talk to your tax professional before claiming more than 40% for your home office. again, working with an expert tax accountant will help a lot.
Guess what? As a freelancer, you have to take care of yourself, and that includes when you stop working and retire. Sure, you have access to the Canada Pension Plan, but the Canada Pension Plan isn’t enough to live on once you stop working.
Being self-employed means you’re not in a union with a pension set up for you or a company with an RRSP program. It’s 100% your responsibility to take part of your self-employment income every month and put some aside for retirement.
Whether that takes shape as an RRSP or another type of long-term investment, it’s all on you to take care of it. One thing to note about RRSP contributions is they’re a tax-deductible expense: They lower your taxable business income, so you pay less income tax.
One of the great things about working with an accountant for your freelance business is that they are also financial exerts, and will be able to show you how to build wealth for retirement in the best possible way.
Need help with freelance taxes or any other small business finance issue? Contact us today and let’s discuss just how we can help you.