Canada’s gig economy is growing, and at a rapid pace.
Starting and running a small business is a major undertaking, especially if you’re self-employed. While securing and retaining clients will always be top priority, keeping your financial house in order does not exactly come second, either. Rather, they need to be thought about simultaneously.
Managing finances as a full-time employee is relatively straightforward. Most of us think of deductible expenses only a month or two before the Canada Revenue Agency tax filing deadline.
However, for the growing number of Canadians who are choosing to opt out of the nine-to-five grind in favour of flex work freedom, or in an increasingly common case, full-time folks taking on side gigs – managing finances and filling out taxes is the “not-so-fun” part. But it’s also not impossible – if you’re organized.
Keeping track of expenses, projections, and profits can feel like an overwhelming uphill battle to climb. Successful freelancers have a preferred financial advisor, software provider to guide them or simply take pleasure in keeping up-to-date on government policies and self-employment trends. That makes filing federal income tax online easier. First-time freelancers who haven’t yet invested in the right tools and services may struggle at the beginning.
If you’re a newbie, get to know these basic rules and before you know it, you’ll be well on your way to flex work freedom:
New freelancers often set up shop at home. Luckily, the CRA acknowledges “home office” expenses as a business deduction on your tax return. This means you can get tax credits for using part of your home as an office space. Deductible expenses include real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. Not all types of businesses can deduct all types of expenses, so take some time to understand the limits that apply to your business. Of course, your deductible home office expenses are limited to the space you’re using for business so you’ll need to determine the parts of your home you need to use to work.
If you’re using public transit or taxis to get to your clients, keep your receipts to deduct against business income. If you need a vehicle to run your business, you can receive tax relief on related expenses like parking, gas, maintenance, and insurance costs. If the vehicle is used for business only, expenses are fully deductible; if used for both business and pleasure, expenses are partially deductible. If you’re renting or leasing a vehicle, you can deduct payments to a certain limit. Tax software can automatically calculate this for you, but make sure to keep a logbook in the car to keep track of business mileage and transportation costs. If paperless is your preference, there are software tools to generate logbooks and download fiscal reports directly onto your smartphone.
Memberships & Subscriptions
Obtaining professional licenses, joining a union or association, purchasing news subscriptions, and attending trade conferences are key to establishing your network. They also help ensure you receive the continuing education and training that will keep you competitive and profitable. The good news here is that all fees associated with these activities are tax deductible. Choose carefully, however, because certain club membership dues (including initiation fees) are not deductible if the main purpose of the club is dining, recreation, or sporting activities.
Meals & Entertainment
When you’re a freelancer, spending time with clients and prospects is crucial. While money may be tight at the outset, keep in mind that meals and entertainment with clients or prospects are 50% deductible. So, don’t be afraid to treat your clients, and yourself (within reason, of course). When making purchases related to meals and entertainment, get into the habit of asking yourself if it’s for business or pleasure, and make sure to keep all receipts, statements and invoices separate.
Keep track of those you employ to help you run your solo show, and most importantly, how much you’re paying them. This includes lawyers, bookkeepers, IT personnel and marketers. Keep everything together, labelled and in one place so once it comes time to develop annual projections, status reports, or file tax forms online, you won’t be frantically searching for files on who’s who and who’s doing what.
Net Business Income
When filing your tax return, it’s important for anyone to be able to provide proof of any deductions or expenses claimed should the tax department come knocking. For those reporting business income, this is even more important since there are apt to be many expenses from various sources. Your income minus expenses, or net business income, is your proof that your business is viable and worth the time and potential risks.
Big dreams require hard work. Make sure your finances don’t get in the way.