Many people prefer working as freelancers or self-employed instead in a corporate. Companies also prefer hiring freelancers because they don’t have to handle the payroll and pension plans. Working as a freelancer, your gig has started paying you, which means it is time to file your income tax returns with the Canada Revenue Agency (CRA). Now, the question comes, do you need a professional accountant?
Do Freelancers Need a Professional Accountant?
A self-employed doesn’t need to have an accountant. It is what you prefer. Accountants are professionals, and you have to shell out some money to avail of their services. It gets you thinking of do-it-yourself (DIY) accounting. There are CRA helplines, accounting and invoicing software, and many accounting books to get you started on your tax filing as a self-employed or a freelancer. If so much is available, why consider hiring an accountant?
In this article, we will see some scenarios where professional accountants can help you save on the cost that comes with DIY accounting.
Freelancers Can Plan Taxes Efficiently
Working as an employee for a long time makes you an ace in your job, but accounting is a full-time job. Taxes are not something you do in April but what you do throughout the year. When you were an employee, your firm calculated your taxable income and deducted a certain amount from your salary towards advanced tax payments.
Now the onus is on you. A good practice is to set aside 25% of your income towards income tax payments to avoid the shock of a huge tax bill in April. And income tax is just one area. Check whether you are eligible for GST (Goods and Service Tax). If yes, you need to get a GST number and start charging GST to your clients.
An accountant can prepare a tax plan for you and keep you posted in advance about your tax liabilities to avoid late fees.
Get Your Accounts and Tax Deductions Right From the Start
It’s not just about calculating your taxable income but calculating it accurately and filing the returns correctly. Self-employed has to file Form T2125 Statement of Business or Professional Activities. Unlike personal income tax, you can deduct business expenses depending on the nature of your work from your taxable income.
For instance, you can deduct vehicle expenses if you are a consultant and have to travel to client locations. If you have converted 20% of your home space into an office, you can deduct 20% of electricity, rent, maintenance, and other expenses. The CRA has a whole list of eligible business expenses.
But claiming business expenses for a tax deduction can be tricky if you do not separate personal and business use and save the receipts of each and every expense. How? The CRA randomly picks individuals for self-assessment and filters accounts with business expense deductions higher than the industry average. If you are the chosen one, you have to present your accounts and documentary proof (receipts) of all the deductions you claimed.
If the CRA doesn’t consider those deductions a business expense, it will cancel them, and you will have to pay tax on a higher income. One year’s mistake could also lead CRA to assess other years, leading to a huge tax bill. Hence, it is important to get your taxes right the first time. An accountant’s fee is a small price to avoid these huge tax liabilities when you least expect it.
Check Your Sole Proprietorship For Personal Services Businesses (PSB) Rules
In 2022, the CRA ran a campaign to scrutinize sole proprietors who incorporated their businesses under the personal services businesses (PSB) rule. Companies hire freelancers because they don’t have to pay Canada Pension Plan (CPP) and other deductions. But some companies have rules that they only hire corporations. If you work for only one company as a sole proprietor and raise an invoice to get a payment, it doesn’t make you self-employed.
If the CRA has a reasonable doubt that you are working as an “incorporated employee”, it will cancel all your tax deductions and charge you a higher corporate tax rate. The PSB rules have many grey areas, and a professional accountant can help you determine whether you fall under PSB. And if you do, your accountant can guide you on the right way forward to avoid the tax consequences.
If your taxes are straightforward, you can file your taxes and prepare your accounts. But it is better to be right from the start and avoid coming into the eyes of the CRA.
Contact KSSP Partners LLP in Markham for Taxation and Accounting Services
A professional accountant can help you file your taxes accurately and help you through a CRA self-assessment smoothly with documentary evidence. We at KSSP Partners LLP can provide accounting and taxation services depending on your business need. To learn more about how KSSP Partners LLP can help you with accounting services in Markham and across the GTA, contact us online or by telephone at 289-554-5997.