Are you a freelancer?
As a self-employed worker, there are many perks to being your own boss. You can work from home, make your own hours, and take on the types of work that you enjoy doing. But even if you work in your PJ's or start your day well past 9 am, that doesn't mean you aren't juggling dozens of complex tasks during your day.
Freelancers take on the role of salesperson, market researcher, lawyer, social media expert, accountant, and often, all of the above. This can make you even busier than your 9 to 5 counterparts! So it's no surprise that accounting can easily fall by the wayside for freelancers. However, one of the most common reasons businesses fail is due to a lack of proper accounting.
So, if you love rocking your own business, but you aren't thrilled when it comes to crunching numbers, here are five crucial accounting tips for freelancers that'll make running the financial part of your small business a breeze:
1. Organization is Key
As an accountant, I cannot overemphasize the importance of organization! All your documents, books, and records should be kept neat and organized where you can have easy access to them. You need a system where all your bills, invoices, receipts, government documents, and bank statements, are kept well organized and secure. If you keep your records appropriately filed throughout the year, your life will be that much simpler once tax time rolls around.
2. Accounting Software Will Help
Sure, Excel spreadsheets may be convenient, but they're not always accurate or easy to read. That's why I always recommend using professional accounting software like Xero. When you use accounting software like Xero, it tracks all your deductible expenses and saves your receipts as proof for tax time. And here's the best part: not only is Xero affordable, but it's going to save you money in the long run!
This tip also works with tip #1 since accounting software, such as Xero, enables you to take photos of all your documents and receipts and upload them for safekeeping. You'll stay organized, and everything will be safe and secure in the cloud. You can even use accounting software to create a digital filing system, so nothing ever gets lost.
3. Keep Your Business Bank Account Separate from Your Personal Account
One of the best ways to streamline your accounting as a freelancer is to ensure you have a separate credit card and bank account for your business. This will allow you to paint an accurate financial picture of your freelance business because your personal expenses won't get mixed up with your business expenses (The CRA doesn't like that!) What's more, a separate business account is an excellent way to see your available funds and quickly calculate revenues and expenses.
Bonus Tip: If you're just starting your business and you're running a sole proprietorship, you don't have to open an expensive business account. You can actually use a personal checking account strictly for business, along with another personal checking account that's used for your day-to-day transactions unrelated to your business.
4. Know Your Deductible Expenses
One of the best parts of freelancing is deducting your business expenses to reduce how much you owe come tax time. Of course, if you try to deduct anything and everything, the CRA will likely flag you for an audit. So, to make sure you're deducting what you're legally allowed to, you need to learn how deductions work.
For instance, if you work from home (and it's your only office), the CRA permits you to deduct any expenses that relate to your office, plus a percentage of costs that relate to your entire home, such as home insurance, your mortgage interest or rent, any alarm fees, condo fees, and utilities.
Plus, if you can reasonably prove that it relates to your business, then you can also deduct cell phone and internet costs. Figure out your personal and professional use, then use the professional percentage when determining the business expense.
Always keep these calculations safe and secure and make sure you keep any bills, just in case the CRA requests to see them.
If you're looking for a full list of expenses that you can deduct, we'd be happy to review it with you here at Canadian Cloud Accounting.
5. Prepare for Tax Season Well in Advance - the most important of all accounting tips for freelancers
As a freelancer, tax season is every season. You're your own boss, which means no one is taking care of taxes for you. It's part of your job to keep track of how much you owe, and it's your responsibility to have enough money on hand to pay your taxes.
A good rule of thumb is that, if you are self-employed, your taxes amount to approximately 30% of your income. That means every time you get paid from a client, take 30% of that income and put it in a separate bank account. That way, when it's time to pay your taxes, you'll already have the money ready to go.
However, every freelancer is different. Depending on how much money you make per year, you might have to file quarterly taxes and pay GST or HST as well.
The Bottom Line
By using these five crucial accounting tips for freelancers, your freelance business is sure to take off because one of the best ways to grow and scale your freelance business is to stay on top of your accounting.
But here's a bonus tip: if this seems overwhelming or you don't have time to crunch numbers, it's a good idea to hire a professional accountant! At Canadian Cloud Accounting, we offer a range of services that will help any business succeed. So don't hesitate to get in touch with us today to find out how we can help your business stay on track financially and free up your time to do more of what you love - running your business!