As a freelancer or contractor in Canada, maintaining good financial records is crucial to keeping your business organized, compliant, and ready for tax season. Bookkeeping is not just about managing your income and expenses; it also ensures that you have accurate records to back up your tax returns and helps you make informed financial decisions. As we head into 2024, here are some best practices for freelancers and contractors to streamline their bookkeeping processes.
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Separate Personal and Business Finances
One of the most fundamental bookkeeping rules for freelancers and contractors is keeping personal and business finances separate. This means opening a separate business bank account and using a distinct credit card for all business-related transactions. Mixing personal and business expenses can create confusion, making it difficult to track your deductible expenses and increasing the likelihood of mistakes during tax season.
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Track All Expenses Diligently
Tracking expenses accurately is critical for freelancers to claim deductions and reduce taxable income. Tools like QuickBooks, FreshBooks, and Wave Accounting offer easy-to-use platforms for tracking expenses in real-time. In 2024, the Canada Revenue Agency (CRA) allows freelancers to claim various deductions, including home office expenses, vehicle expenses, and marketing costs. Make sure to record all business-related expenses and keep receipts as proof, either digitally or in physical form.
Tip: For home office deductions, freelancers must calculate the percentage of their home used for business purposes. Keep detailed records of utility bills, rent or mortgage payments, and home maintenance costs.
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Set Aside Money for Taxes
Freelancers and contractors in Canada are responsible for managing their own taxes. Unlike employees, who have taxes automatically deducted from their paychecks, self-employed individuals must calculate and remit their taxes themselves. A good rule of thumb is to set aside 25-30% of your earnings for tax purposes. In 2024, freelancers must continue to submit quarterly instalments if their net taxes payable exceed $3,000 in the current or prior year.
To avoid a large tax bill, set up a separate savings account dedicated to taxes. This will help you stay on top of your tax obligations and avoid unexpected financial stress when tax deadlines approach.
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Embrace Cloud Accounting Software
In 2024, cloud-based accounting software has become essential for freelancers and contractors. Software such as Xero, Zoho Books, and QuickBooks Online allow you to access your financial data from anywhere, automate invoice generation, track payments, and collaborate with your accountant in real time. With these tools, freelancers can automate tedious tasks like expense tracking, invoicing, and tax reporting, allowing them to focus more on their business operations.
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Invoice Promptly and Follow Up on Payments
Late payments are a common issue for freelancers and contractors, impacting cash flow. A best practice is to send invoices as soon as a project is completed, clearly stating payment terms and due dates. Standard payment terms are usually 30 days from the invoice date, but in some industries, shorter terms like 7 or 14 days may be more appropriate.
To streamline this, use accounting software that allows you to send automated payment reminders and track overdue invoices. Setting up a late fee policy can also encourage clients to pay on time.
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Prepare for Year-End Reporting
At the end of the fiscal year, freelancers are required to file a T2125 (Statement of Business or Professional Activities) with their tax returns. In 2024, having well-organized books throughout the year can simplify the process of preparing these reports. Make sure to categorize income and expenses correctly, reconcile bank statements, and ensure all invoices have been paid before finalizing your books.
FAQs about Freelancers and Contractors in Canada
- What deductions can freelancers claim in Canada?
Freelancers can claim deductions for home office expenses, vehicle costs, marketing, travel, internet, and business supplies.
- Do freelancers need to register for GST/HST?
Freelancers earning over $30,000 in gross income must register for GST/HST and collect taxes on their services. Registering for GST/HST allows you to claim input tax credits on purchases made for your business.
- How do freelancers handle tax instalments?
If your tax payable exceeds $3,000, the CRA requires quarterly instalment payments. These are due on March 15, June 15, September 15, and December 15.
Conclusion
By following these bookkeeping best practices in 2024, freelancers and contractors in Canada can maintain organized financial records, reduce their tax burden, and avoid last-minute panic during tax season. Leveraging modern accounting tools, staying on top of tax obligations, and keeping personal and business expenses separate are key to running a successful freelance business.
If you have any questions regarding Bookkeeping, feel free to contact finnection via email at info@finnection.ca or call us at (647) 795-5462
Disclaimer: Above information is subject to change and represent the views of the author. It is shared for educational purposes only. Readers are advised to use their own judgement and seek specific professional advice before making any decision. Finnection Inc. is not liable for any actions taken by reader based on the information shared in this article. You may consult with us before using this information for any purpose.