Financial Tips for Freelancers: How to Keep Up with Quarterly Taxes

Financial Tips for Freelancers: How to Keep Up with Quarterly Taxes

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.

In fact, 23% of small businesses fail because they don’t have the right team behind their business and 29% fail because they ran out of cash.

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!

Is Incorporation a Good Idea for Your Small Business?

Is Incorporation a Good Idea for Your Small Business?

Are you a small business owner wondering if you should incorporate? Are you worried about costs and what will change about your business?

For most businesses, it’s actually not a question of “if,” but “when” to incorporate.

Incorporating a small business offers many potential advantages, as well as a few disadvantages. Whether the pros outweigh the cons depends a lot on your business’ individual situation.

With that in mind, let’s take a closer look at the advantages and disadvantages of incorporating a small business so you can determine what is right for you.

The Advantages of Incorporation

Limited Liability

Most people decide to incorporate their small business because it offers the advantage of limited liability. If you run a sole proprietorship, then you as the business owner must assume all the liability of the company. This means that as a sole proprietor, your personal assets, like your house and your car, can be seized to pay off any business debts.

However, if you incorporate your business, then you become a shareholder in the corporation. As an individual shareholder, your liability is limited to the amount you have invested in the company.

Furthermore, as a shareholder in a corporation, you can’t be held responsible for the debts of the corporation unless you’ve signed a personal guarantee.

Corporations Have Unlimited Lifespans

Did you know that even if the shareholders die or quit the business, or if the ownership of the business changes, the corporation will continue to exist? This is not the case when it comes to running a sole proprietorship. Thus, many people see this “immortality” as another advantage of incorporating.

It’s also easier to sell a corporation than it is to sell a sole proprietorship.

It Helps with Taxes

Once your small business becomes a corporation, you can figure out when and how you receive income from the company, which is a real perk come tax time.

If you’re incorporated, rather than taking a salary from the business as soon as it begins to generate income, you’re allowed to take your income at a time when you’ll pay less in taxes. You can also earn income from a corporation in the form of dividends rather than a salary, which can also lower your tax bill.

Lastly, if your business is incorporated, it may qualify for the federal small business deduction (SBD). The SBD is calculated at the rate of 10.5% on the first $500,000 of taxable income, which could lower your net corporate business tax to a much lower tax rate than what is applied to your personal income.

It’s Easier to Raise Money

There are more ways for corporations to raise money, which could help your small business grow and scale faster. Like a sole proprietorship, corporations can borrow and incur debt, but they can also raise money through equity financing. This means selling shares in the corporation to angel investors or venture capitalists.

Equity financing is a nice benefit in that equity capital typically doesn’t have to be repaid, and there is no interest on it. (However, you must remember that by issuing shares, you are reducing your percentage of ownership in your business.)

The Disadvantages of Incorporation

Added Paperwork

Once your small business is incorporated, you’ll have to file two tax returns every year, one for your personal income and one for the corporation, which means increased accounting fees.

Plus, corporate losses can’t be deducted from the personal income of the owner, as they can in a sole proprietorship or partnership.

It’s also mandatory for corporations to keep a minute book composed of the corporate bylaws and minutes from corporate meetings, the register of directors, the share register, and the transfer register. These are all corporate documents that must be kept up to date at all times.

It’s Not Always a Tax Advantage

Unfortunately, corporations aren’t eligible for personal tax credits. That means every dollar a corporation earns is taxed, whereas, if you run a sole proprietorship, you may be able to claim tax credits that you can’t claim as a corporation.

Less Flexibility in Handling Business Losses

If your business suffers operating losses as a sole proprietor, you can use the loss to lower your other types of personal income for that year. However, if you run a corporation, these losses can only be carried forward or back to lower the corporation’s income from other years.

Limited Liability Depends on Credit

While the main advantage of incorporating is limited liability, it can be undermined by personal guarantees and/or credit agreements. If a lending institution doesn’t feel that your corporation has sufficient assets to secure debt financing, they usually insist on personal guarantees from the business owner(s).

In this case, even though the corporation technically has limited liability, the owner still winds up being personally liable if the corporation fails to meet their repayment obligations.

It’s Expensive to Register a Corporation

Another disadvantage of incorporating is that it costs more to set up a corporation.

Why?

Because a corporation is a more complicated legal structure than a sole proprietorship or partnership, so it’s more costly to create. This includes the previously stated maintenance and related fees and increased accounting costs.

It’s Harder to Close a Corporation

Closing a corporation in Canada means you need to pass a resolution to dissolve the corporation, settle all payroll accounts, and send a copy of the Certificate of Dissolution to the Canada Revenue Agency. Then you must file your final tax returns for the corporation.

So Should I Incorporate My Small Business?

The answer is, well, maybe!

Now that you’ve read about the advantages and disadvantages of incorporation, it’s time to discuss your personal situation with your accountant and lawyer before making your final decision.

Here at The Number Works, we can help give you a much more exact picture of how incorporation might work to benefit your business and if all the trouble and cost of incorporation is worth it for you.

So don’t hesitate to get in touch with us today and let us get behind your success!

How to Start the New Year Off on the Right Foot with Your Accounting

How to Start the New Year Off on the Right Foot with Your Accounting

With the new year is upon us, it’s the perfect time for us to make resolutions to better our health, finances, or social situations.

But did you know that as a business owner, New Year’s resolutions offer you a fantastic opportunity to make some positive changes that will contribute to your future success? Especially when it comes to your finances and accounting!

So, if you’re looking to start the year right, here are some essential accounting tips that will help you tackle the daily accounting challenges of your business and get you on track for success!

Plan Ahead

As the old saying goes, “If you fail to plan, you’re planning to fail.”

As a business owner, planning your fixed expenses for the whole year, rather than a monthly basis, will help you start 2019 off on the right foot. Don’t forget to take seasonality and other potential downturns into account so you can be sure that your minimum expenses are always covered.

During your business’ peak sales months, plan to set more money aside. This will help you cover your expenses if harder times come later in the year. By getting a firm grasp on your company’s fixed expenses, you will have a clear view of your business’s future and how to plan for taxes appropriately.

You should also take this opportunity to plan for emergencies. Determine how much money you can set aside for any significant, unexpected expenses, such as losing a major client, economic downturns, or other crises. The amount of money that needs to be in your emergency fund depends on the minimum expenses necessary for your company’s survival. A good rule of thumb is to set aside at least six months worth of expenses.

But what if you can’t afford to save that extra money right now? In that case, it’s a good idea to make sure you have a line of credit set up with your bank so that if something unexpected takes place, you can use that money (with an affordable interest rate) to keep your business afloat.

Take Time to Review Your Business

Set aside some time to reflect on 2018 and determine how your revenue and profits compared to the previous year. Determine if your sales numbers are trending upwards or downwards. And ask yourself some critical questions such as, how much money did you have to spend in 2018?

Did you make a list of goals for 2018? If so, did you meet those goals? Taking the time to review 2018 should help you figure out how your company has changed over the past year. If your business hasn’t improved, analyze the figures to find out why and what you can do to see more growth in the new year.

Leverage Technology

It’s 2019, which means the days of tracking your expenses manually are over! If your business isn’t using computer software to help keep track of your finances, then it’s time to make the leap!

The good news is multiple technologies allow you to track all your expenses quickly and efficiently, so you can choose the one that will be a perfect fit for you and your company. By leveraging accounting software and cloud-based technology, you’ll be more informed about your business’ finances, saving you both time and money!

Switching to computer software or cloud-based technology will also help provide a near real-time idea of how your money is being spent, as well as the records to prove it.

Get a Head Start on Taxes

Not unlike how you should set aside money for emergencies, you should also set aside money to cover your taxes. I highly recommend meeting with your accountant at least twice a year – once in May and once in October. This way, you can get a sense of what your business’s taxes will look like in the coming year. Plus, understanding how your financial picture is evolving can help you keep up with how your business is growing and how much you’ll need to cover what you’ll owe.

By seeking professional tax planning advice, you’ll not only feel confident that your business is complying with federal and provincial tax regulations, but you’ll also ensure you’re getting all the deductions and credits your company might qualify for.

Hire a Professional Accountant

Every tip and trick I mentioned above will be made that much easier by hiring a professional accountant. Although it may seem like an added expense, hiring a professional accountant will actually save you money in the long run, plus your accounting fees are tax-deductible!

So, if you’re looking to make 2019 your best year yet, outsource your bookkeeping and accounting needs to The Number Works! You’ll receive all of the benefits of competent financial reporting without the headache of needing to onboard, train, and pay a full-time employee.

The Number Works is your one-stop shop for the best accounting in Hamilton and the surrounding Southern Ontario area. In fact, no matter where you are in Ontario, I can help your business seamlessly using virtual technology.

I offer a range of professional services including cloud-based bookkeeping, full cycle accounting, financial statement analysis, strategic planning, and taxes. Combine this with my passion for process, efficiency, simplicity, and helping small businesses succeed, and you’ve got the winning formula to help start the new year off on the right foot with your accounting.

So don’t hesitate to get in touch with The Number Works today and meet all of your business’s New year’s resolutions!

Getting Your Business Ready Well *Before* Tax Season

Getting Your Business Ready Well *Before* Tax Season

Did you know that a survey conducted by The National Small Business Association (NSBA) discovered that 33 percent of small business owners spend over 80 hours on federal taxes? That adds up to two full weeks!

Although getting your papers in order so you can file your taxes isn’t very exciting, it’s one of the most important things you can do for your business. Believe it or not, tax time doesn’t have to be a burden so long as you start to prepare well in advance.

So here are four things you need to know to get your business ready and help ease the stress of filing your taxes come April:

What Will My Accountant Need Come Tax Time?

As a business owner, there are no shortage of important forms and records that your accountant will need to properly file your taxes. Pulling all of these documents together can be one of the most time-consuming parts of their job if you aren’t already properly organized. And, as you know, accountants are usually paid by the hour. So if you want to cut down on accounting fees for your business, preparing well in advance of tax season can make a big difference on how many hours you’re paying for – and, trust us, your accountant will love you for being so organized.

Here’s a list of common business records you’ll need to give your accountant for tax season:

  • All of your business’ financial statements, such as income statements, balance sheets, and cash flow statements.
  • If your business has employees, your accountant will need your payroll information.
  • Your accountant will need the receipts from your travel expenses, advertising expenses, rent, utilities, office supplies, maintenance, telecommunications, internet costs, raw materials, shipping, etc.
  • If you have a company car, you’ll need motor vehicle expense information, such as your business’ use of the vehicle, operating expenses, vehicle driving log with business kilometres driven, etc. 
  • Having asset additions or disposals during the year, including land, buildings, vehicles, machinery, etc. is also crucial.

Lastly, your tax accountant will require your tax records including:

  • Last year’s Notice of Assessment
  • Amounts paid by instalments
  • A copy of your income tax return filed in 2017 (if you’re a new client)

Phew! So now you see why it’s important to get your business ready for tax time before you end up in a time crunch!

By preparing well in advance, you won’t feel the stress of having to gather all this information at the last minute. If you have any questions about these forms or receipts, your accountant will have ample time to answer them before they’re drowning in a mountain of paperwork come March.

How Can I Legally Deduct My Business Expenses?

This is where preparing well ahead of tax season can really benefit you and your business.

In order to maximize your deductions, you must have all your business-related receipts. In fact, the Canada Revenue Agency (CRA) requires that all of your business expenses be backed up by receipts, and you actually need to keep these receipts for at least six years, as the CRA can ask to see them again if needed.  

To prepare your business for tax season early, you should get in the habit of asking for a receipt after every transaction, no matter how small. Train yourself to look at your receipts when you first get them to ensure they clearly show what the purchase was for and that they include a legible vendor’s name and date.

As our experts here at The Number Works know, illegible or incomplete receipts are a hassle when it comes to accurate record-keeping, especially if you or your bookkeeper are trying to record what an incomplete receipt was for months later.

Creating a habit of checking all your receipts as you get them is a crucial first step to maximizing your business income tax deductions.

What Else Should I Do Right Now to Prepare My Business?

Get organized! Being as organized as possible will ensure a stress-free tax filing for both you and your accountant.

If you’re looking for a place to start, try creating a system where you clip groups of receipts together by type, using post-it-notes to show each category of receipt on the top. If your accountant isn’t wasting their time trying to figure out what the receipts are for, you’ll actually be saving money!

It’s essential that all your records are accurately summarized and tallied. Cheques, invoices, and business expenses should all be categorized and totalled. If you have a system where you sort all your information slips by type, you’re bound to save more time come tax season and, therefore, more money!

Ask your accountant what will make their job easier. Trust us, they will have lots of ideas! Together, you can find ways to better organize your records and documents based on the type of business you run. By figuring out potential problems with your accountant in advance, you’re sure to have their full attention and work out any kinks in the system well before it’s too late.  

Remember, your accountant is here to help by giving you tax planning advice such as how to maximize your credits or deductions or ways of restructuring your business finances to reduce your tax exposure. So don’t be shy to pick up the phone!

What Kind of Income Tax Return Does My Business Need to File?

It’s important to determine which form you’ll be filling out well in advance because the paperwork you will need can change based on how your business is structured. For example, if your business is a sole proprietorship or partnership, you must report your business income on your T1 personal income tax form because, in this case, your business is you. For a sole proprietorship or partnership, you’ll want the T1 income tax return package, which includes Form T2125 (Statement of Business or Professional Activities), for you to report your business income.

What if your business is incorporated? In that case, you will report your business income on a T2 corporate income tax return. By law, your incorporated small business is a separate entity, thus it needs to complete and file its own Canadian income tax return. However, don’t forget to file your own separate T1 personal income tax return. If your business is incorporated, then you as a person are a separate legal entity, and that’s why you’ll need to fill out both the T1 and T2 forms.

If your business needs to file a T1 return, your tax accountant will also need your relevant personal information slips and tax-related documents in addition to the business ones.

Some of these forms may include:

  • T4 slips (if you have employment as well as business income)
  • T4A commissions & self-employed
  • T5013 Partnership Income
  • T3 Income from Trusts
  • T5 Investment Income
  • RRSP contribution slips
  • Charitable donations
  • Medical and dental receipts
  • Child care information

How Can I Save Even More on Accounting Fees?

Another great way to prepare your business well before tax season is to start using cloud-based accounting software (if you haven’t already).

With current cloud-based accounting packages, you can have all of your accounting information in one easy to access place, and your accountant can even access it online at any time.

Not only will cloud-based accounting software keep track of your expenses and revenue, it can even do payroll and time and billing, as well as generate income statements, cash flow statements, and balance sheets as needed.

By switching over to a cloud-based system now, you’ll have ample time to get used to the new system and test out all its features long before tax season, making tax time even easier!  

The Bottom Line

So, what are you waiting for? If you want to make sure that all of your tax documents will be in order with every form filed on time, don’t hesitate to contact us today! Here at The Number Works, we’re more than happy to answer any and all of your tax-related questions to help you get your business ready well before tax time.