Being self-employed and in charge of your own income is amazing, but it takes even more discipline and attention to detail to manage your business finances on top of your personal finances. However, over years you’ll find systems and strategies that help keep you organized and avoid any extra stress at tax time. Here are some of the ways we suggest you handle your 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 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 the CRA in the event of an audit.
You can easily do this by having separate credit cards: one for business and one for personal. This will allow for separate accounts and well-organized records!
Use spreadsheets or software to keep track of income & 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 bank statements.
If you want, you can pay for bookkeeping software that integrates with your business accounts to manage the day-to-day business finances. This software doesn’t automatically calculate corporate taxes, but it should allow you to invite your accountant to view the records so they can grab all the numbers needed at tax time to prepare the business tax return. Avoid the headache, stay organized.
Likewise, you can use a payroll software to pay yourself from your company. This allows you to issue a formal T4 at tax time, but also ensures the correct amounts are remitted for income taxes and CPP to the government every time you pay yourself.
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. We know… it’s a lot.
If you’re earning more than $30,000/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 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.
If you have any questions specific to your business claim, please contact anyone of our CPAs so we can help: 1.800.461.1096