Freelancers enjoy a lot more freedom than salaried employees, but that freedom comes with a cost. It is important to keep meticulous records that document your invoices and receipts. Budget for taxes, otherwise you could end up with a large tax bill at the end of the year. Contribute to your registered retirement savings plan to save towards your retirement and lessen your tax bill.
Save Your Receipts and Invoices
Save every single receipt and invoice throughout the year. Whether you buy something in store or online, make sure you keep your receipt and file it away. When it is time to file your tax return, it is a lot easier to claim your expenses when you are organized.
The CRA requires you to provide receipts and invoices for expenses you claim. If you are audited, you need to provide supporting documentation to back up your claims. Without documentation, your claims are disallowed and you face penalties and interest.
Budget for Taxes
It is important for freelancers to budget for taxes. Unlike salaried employees, income tax and payroll deductions such as the Canada Pension Plan and Employment Insurance are not withheld at source. You need to contribute the employee portion and the employer portion of CPP and EI, which can prove costly.
A good year for business means a hefty tax bill. Make sure you budget for income taxes during the year. If your marginal tax rate is 30 percent, consider setting aside 30 percent of your earnings, so you are not left scrambling on April 30. If you owe $3,000 or more to the CRA in the current tax year and any of the last two tax years, you must pay your taxes by quarterly instalments going forward. Instead of paying your taxes all at once before April 30, you have to pay them quarterly throughout the year.
Contribute to Your RRSP
Freelancers do not enjoy the perks of a company pension plan. CPP and Old Age Security are only supposed to provide a portion of your retirement income. To help supplement your lifestyle in retirement, consider contributing to an RRSP. RRSP contributions lower your tax bill in the current tax year, and your money grows tax-free. You defer paying income tax until you withdraw the money when you are likely to be at a lower marginal tax rate.
Home Office Deduction
Freelancers who work from home can claim a home office deduction. Make sure your deduction is reasonable. Claim a percentage of your household expenses based on the size of your home office. For example, claim 20 percent of your household expenses if your home office takes up 20 percent of the square footage of your home. Examples of expenses you can claim includes heat, hydro, water, telephone, home insurance, mortgage interest and property taxes.