Dealing with money is always challenging – especially if you’re a freelancer.
Not only do you have to deal with normal questions like “Do I buy pizza tonight or save to buy a pizza oven in five years,” but you have other problems that employees rarely understand. Like “I can’t believe I forgot to set aside money to pay my income tax again” kind of problems.
So even though freelancing offers a lot of flexibility, which is a huge boon in this economic climate, there are also a lot of difficulties – especially if numbers aren’t your forte.
That’s why we’ve put together this little list, so you can figure out what you need to do to get the most out of your freelancing income, without freaking out during tax season.
No matter what kind of job you have, you have to do some budgeting. But if you’re an employee, your company does basic budgeting for you: by taking pension payments, income tax deductions, and employment insurance off your paycheques. When you’re a freelancer, you have to remember to do all that yourself. Make it easy by setting up automatic payments with your bank, or by setting a portion of your income aside as soon as it comes in. And remember, a good year for business means a big tax bill, so you’ll definitely want to budget.
Taxes can be confusing – especially if you’re a freelancer. Getting a handle on what you need to know and where to get your taxes done for free, such as Turbo Tax, can help you get the most out of tax season. If you’re a freelancer or self-employed, you need to file your taxes like a small business. That means you need to report your income, subtract your expenses, and then report the remaining amount as your income for the year. You’ll also need to submit a T2125 form, the Statement of Business and Professional Activities. This helps you calculate home and vehicle-related deductions.
When you’re working as a freelancer, there are a lot of things you can claim to help you save money on your taxes. Take your house as an example. If you work from home, you can claim a portion of your household expenses since it’s technically your office. You can also claim things like bank charges, travelling expenses, and car expenses – pretty much anything that helps you make money.
The thing with all those claims? You’ll need to be able to prove it. The Canadian Revenue Agency requires you to provide receipts and invoices for all the expenses that you claim – so if you want to take that coffee with business partner Jess off your taxes, you’re going to need to keep that receipt. If you lose your documentation, your claims won’t count and you’ll be forced to pay penalties and interest.
Since you aren’t paying into a company pension plan, it makes sense to set aside something for your future. But contributing to an RRSP can also help you save money now. Putting money towards an RRSP will actually lower your tax bill during the current tax season, which is always a good thing. Plus, your money will grow tax-free until you take it out. When you do, you’ll have to pay income tax – but by then you’ll likely be in a lower tax bracket, so you won’t have to pay very much.
Ultimately, the best advice you can get as a freelancer is to always keep tax season in mind.
Since you aren’t working for a company that does basic budgeting and taxes for you, you’ll have to do it all yourself. But the good thing about doing it yourself is you can maximize your deductions to give yourself the most money.
You can either use a free tax filing system, or opt for the online option that lets you decide what you want to claim – and walks you through the steps so you can actually understand them.