I’ve had to claim income from Money After Graduation since 2011. Initially, I worked as a sole proprietor and claimed my freelance and blog income as “other income” when I filed my personal income taxes. In 2015, I incorporated my company and put myself on my payroll, which meant now I issued myself a formal T4 for tax time. While I let an accountant handle my business income taxes, I still choose to file my personal income taxes myself.
I love being self-employed and in charge of my income, but I will admit, it takes even more discipline and attention to detail to manage my business finances on top of my personal finances. However, over the years I’ve found the systems and strategies that help keep me organized and avoid any extra stress at tax time. Here are some of the ways I handle my business finances:
Dedicate a specific bank account to your business finances
The most important thing you can do as a freelancer or business owner, is separate your business finances from your personal finances. Open a business bank account and make sure all business-related income and expenses run through this account. Because you can’t claim personal expenses as business expenses, it’s imperative that you always know which is which. Keeping your business and personal finances separate makes it easier to manage both, and avoids any potential negative findings by Canada Revenue Agency in the event of an audit.
Use spreadsheets or software to keep track of income and expenses
Depending on the size of your business, you might be able to keep track of all your business finances in a spreadsheet. You want to keep a detailed record of income and expenses, and regularly verify that these amounts are correct by comparing them to your business bank statements.
I pay for bookkeeping software that integrates with my business bank accounts to manage my day-to-day business finances. Not only does it help track and categorize expenses, it readily produces essential reports like profit & loss statements or item sales. It doesn’t automatically calculate my corporate taxes, but it does let me invite my accountant to view my records so she can grab all the numbers she needs at tax time to prepare my business tax return for me. A lot of headache is avoided by simply being organized.
Likewise, I also use a payroll software to pay myself from my company. This lets me issue a formal T4 for myself at tax time but also ensures I remit the correct amounts of income taxes and CPP to the government every time I pay myself. I do this to avoid a big bill for these expenses at the end of the year. If you’re not regularly submitting your income taxes and CPP to the government, make sure you set up a savings account and set aside at least 30% of your business income for taxes. As a freelancer or small business owner, even a small tax bill can catch you off guard. Make sure you’re saving more than you think you need to, and you’ll find it’s probably just enough.
Prepare for tax-time year round
In addition to keeping your finances organized and recording all your business transactions, there are other important tax considerations as a freelancer or small business owner.
If you’re earning more than $30,000 per year, you will need to collect and remit GST or HST depending on the province in which you do business. This also lets you claim any GST or HST you pay on purchases for your business. You have to know how much you’re making to know if you need to charge clients and customers GST or HST, so this is yet another reason to take meticulous care of your business finances.
Take advantage of tax credits for the self-employed
One of the major advantages of being self-employed is you’re in charge of your income, and many of your expenses, so you can optimize them to minimize taxes. The general rule of thumb is that if you spent money to earn self-employed income, then it’s a business expense.
If you work from home, you can claim a portion of your household expenses like rent and utilities as business expenses. All you need to do is dedicate a specific area or room of your home to your business, and make sure to keep track of your household expenses. If you use online software, like TurboTax, to file your personal income taxes, you will be prompted to enter in the square footage of your home dedicated to your business, and any related household expenses. It will automatically calculate how much you can claim.
This year, I set up a Health Spending Account for my business, which lets me claim up to $3,000 per year in health-related spending as business expenses. This includes everything from my private health insurance premiums to out-of-pocket dental, vision, and prescription costs. It’s almost always preferable to pay for things with gross revenue rather than net income, so I was thrilled when I learned I could make my contact lenses and massages count as business expenses! If you can’t set up a Health Spending Account, remember your health expenses that are greater than 3% of your personal net income or add up to $2,237 are tax deductible. Just another reason to be diligent about tracking and managing your expenses!