In this fast-paced world of freelancers, several writers, designers, and developers opt to go solo and be their own boss rather than work as an employee. While being your boss has its perks, many freelancers make the mistake of putting off accounting and bookkeeping. No matter how much you hate numbers, it would be best if you met your accounting obligation to avoid being out of cash, entering a debt spiral, and facing a significant tax bill in April.

The Importance of Accounting for Freelancers

You may be good at what you do as a freelancer and get regular work. However, the freelancing world is dynamic, and your clients can hit a pause button on your work anytime. Unlike salaried employees, freelancing income will have its highs and lows. Not every month will be a surplus. There could be periods of slowdown, but you must pay your bills.

As an income-earning citizen of Canada, you have to pay taxes and contribute to the Canada Pension Plan (CPP) to the Canada Revenue Agency (CRA). Accounting for the incoming cash and outgoing expenses can help you calculate your tax and CPP obligations. Maintaining your books of account regularly can get your finances organized, give you insights into the business’s financial health, stay tax compliant, and grow your business. 

Without much ado, let us look at some steps to get you started on accounting in your freelancing journey. As you grow, you can go deeper into accounting and use it to expand your freelance work into a full-fledged business.

Freelancers Guide to Get Started on Accounting

Invoicing

It all begins with accurately invoicing all business-to-business transactions. Making and maintaining a complete and compliant invoice is a legal obligation, as it can act as proof of payment when filing taxes. An invoice should mention all transaction details, which can be cross-checked with the service agreement and bank statement.

• Contact details: Name, Address, email ID, contact number, and GST number of both parties.
• Invoice Number: Every invoice should have a unique reference number that will be used in all documentation related to it. This can help track the invoice’s status.
• Transaction details: Invoice date, service provide, pricing, tax bifurcation.
• Payment details: The invoice should state the payment deadline, late payment penalties if applicable, and mode of payment.

A tip: It is recommended that you open a separate current account and make all business transactions there. This will separate personal and business transactions and help with bank reconciliation (we will discuss this step later).

Tracking Income and Expenses in a Ledger

The next step is to make a ledger to record all the income and expenses. For income, note all the incoming payments you receive from clients, whether through cash, check, or electronic transfer. While recording the transaction, mention the date, client name, amount, and other relevant details (such as invoice number). Against every transaction, you can specify the status of the supporting documents.

The same rule applies to tracking expenses. The only addition is categorizing them under relevant headings. For instance, electricity bills can be tagged under utility, subscriptions, stationery, and food under office expenses. You can tag them all under travel expense if you travel to meet a client via vehicle or public transport.

The expenses and income you track can be cross-checked with the bank statement to ensure you recorded every transaction correctly.

Maintaining Receipts and Documentation 

When you record a transaction, try recording it from the payment receipts and tax invoices. File all the receipts and documents date-wise and month-wise. Make a separate file for income and expenses. Also, keep all contracts or proposals duly dated and signed by the client and yourself safe.

Keep a backup of all these physical copies in a digital format and digital copies in a physical form. You can create a folder structure in the cloud or use several document management software. While reconciling your monthly ledger transactions with bank statements, you can check if the supporting receipts and documents are saved in the folder. You can add a note to any expense detailing the transaction. For instance, you can mention the kilometres travelled for the client meeting, the destination, and the purpose of the meeting.

These details might come in handy if you face a CRA inquiry. All documents should be kept for at least six years.

Making Regular and Timely Tax Payments

Being your boss, you have to calculate your income and apply the CPP and income tax deduction as a percentage of your income. This needs to be done monthly. For advanced tax, you can make quarterly payments before the 15th of June, September, December, and March.

If your income exceeds $30,000 in a single calendar quarter or the last four consecutive calendar quarters, you have to register for Goods and Services Tax. (GST) You can charge GST to your clients and claim input tax credit on any purchases or expenses you incur to get the work done.

The expenses you tracked and the documents you saved can help you deduct certain business expenses from your taxable income and reduce your tax liability. It is better to consult a professional accountant to help you prepare and file your taxes. They can better guide you on which expenses are deductible and help you set a process for valid documentary proof.

Financial and Cash Flow Management

Accounting for your transactions can help you stay updated on your cash flow. When you neatly put the transactions on paper and bifurcate them, you can see a trend and identify lean periods and periods of heavy workflow. This can not only help you determine if you can take on new clients but also analyze whether the pricing is worth the effort.

You can let go of clients where the returns are low for clients where returns are high. Since you know your monthly expenses, you can create an emergency fund (working capital) worth six to eight months of expenses for the lean months.

You can also set measurable goals, such as increasing your monthly income by 10% or saving 10% more annually for retirement. Better allocation of funds can help you manage your finances. 

Monitor Business Performance  

Accounting provides financial clarity about your business’s status. You can also record other qualitative and quantitative information, such as project completion times, customer satisfaction levels, and any other performance indicators that can help your business grow and become more efficient.

You can even test a new technology or process and see its impact on your business performance. Is it helping you complete projects faster, or is outsourcing some tasks improving efficiency? You can start as a freelancer and build your way to a full-fledged business owner with proper planning and strategy. Throughout your journey, accounting will be your facilitator in making informed, data-driven decisions.

Contact Glenn Graydon Wright LLP in Oakville to Help Freelancers with Your Accounting Needs

Talk to a professional accountant to help set up a bookkeeping and accounting process. At Glenn Graydon Wright LLP, our accountants and bookkeepers can provide services such as preparing books and filing taxes. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting expertise for freelancers, give us a call today at 905-845-6633, or connect with us online, to schedule an initial consultation.