Being a freelancer comes with so many benefits. You’re in charge of your own schedule, you can work from home, choose your clients, and you’re even in charge of paying your own taxes!
Ok, so that last one isn’t the most fun. But it’s important!
When you’re a freelancer, taxes are a bit more complicated as most freelancers pay their taxes throughout the year instead of just in April.
So, should you pay your taxes quarterly, or once a year?
The answer is… both!
If you’re a freelancer who owes $3,000 or more to the CRA in the current and previous two tax years, you must pay quarterly-estimated tax payments. In general, payments are due on March 15, June 15, September 15, and December 15. Phew, that’s exhausting!
At The Number Works, we understand how hectic it can be to file your taxes once a year, let alone making payments four times, so here are our best tips for freelancers to help you pay your quarterly taxes without any headaches:
1. Put Money Aside for Taxes
The best way to stay stress-free come tax time is to budget for it.
Unlike salaried employees, income tax and payroll deductions, such as the Canada Pension Plan and Employment Insurance, are not withheld at the source. This means that, as a freelancer, you’re responsible for paying all of your income taxes while simultaneously contributing to the employee portion and the employer portion of CPP and EI.
It’s a lot to keep track of. That’s why it’s essential for you to set aside money each time you get paid to cover your quarterly income taxes. For example, if your marginal tax rate is 30%, you should set aside 30% of your earnings from each invoice.
We recommend taking 30% of each payment you receive and putting it in a separate bank account. This way, you’ll have enough money saved to cover those quarterly instalments every time tax time rolls around.
2. Keep Your Payment Options Simple
Did you know the CRA gives you three options to calculate the amount of your quarterly tax instalment? The first two options base your instalments on your 2018 taxes or an estimate of your 2019 taxes. But, be careful! If you underestimate your 2019 taxes, the CRA will charge you interest based on a higher instalment than was needed.
That’s why the third option is our favourite. With this option, the CRA calculates the amount of your instalment and sends you that calculation as a reminder. The total for the year will equal your previous year’s instalment base. By paying the amounts shown on the CRA notice, you won’t be charged any instalment interest, so long as you pay on time.
The CRA should send you two reminders. One in February for the March and June instalments, and one in August for the September and December instalments. Keep in mind that even if you don’t receive a reminder, you still have to pay. In this case, call the CRA and confirm the amount you owe.
The CRA also has a calculation chart for the current year that will help you determine your taxes, credits, Canada Pension Plan contributions, and Employment Insurance premiums, so you can figure out how much you owe.
3. Opt for Automatic Deductions
Did you know that if you fail to pay your quarterly taxes in full, the CRA charges interest on the deficient amounts as if you owed the money? Yikes! And if this interest charge adds up to more than $1,000, the CRA will add an extra fee on top of that. Bottom line: Always pay your quarterly taxes on time!
And the best way to make sure you don’t forget to pay your quarterly taxes is to set up automatic payments from your bank account directly to the CRA.
If you’ve followed our first tip and put 30% of your earnings into a separate account, you can grant the CRA permission to debit this account automatically. It’s the best way to have a stress-free tax time.
4. Hire a Professional Accountant
Sure, freelancing comes with its fair share of perks, but it also takes a lot of work. You have to find your clients, market your services, and plan everything in between. So, it’s probably safe to say that accounting isn’t at the top of your to-do list.
It’s clear to see why having a professional accountant on your team is the key to success. Not only can a professional accountant help you by properly managing your cash flow, but they can also stay on top of your quarterly taxes for you.
Plus, investing in a professional accountant can save you money in the long run by maximizing all your tax deductions and avoiding late fees. A professional accountant will ensure that your quarterly payments are noted on your annual tax return so you get credit for them and don’t accidentally pay them twice. It’s well worth the cost.
If you’re looking to hire a professional accountant or need help reviewing your quarterly taxes, contact The Number Works today! We love helping freelancers build a thriving business and giving peace of mind to all our clients. Knowing a professional accountant is in charge of your books is priceless, if not tax deductible!