You’ve probably seen your self-employed and freelance clients get a little stressed out during tax time. An increasing number of Canadians are entering the freelance economy, and whether they’re full-timers or just have a side gig, many balk at the prospect of self-employed taxes. You can help your clients prepare even when tax season is still many months away.
Pay Attention to Changing Tax Laws
Changes to Canadian tax law don’t just happen in March and April. You can stay on top of new tax legislation throughout the year, and alert your clients as soon as possible to any changes that might affect them.
For instance, for the 2018 tax year, the price of fares for ride-sharing services like Uber will have GST or HST included. If you work with a client who drives an Uber to supplement their income, let them know now, so they can determine how much GST they need to deduct when it comes time to file.
Teach Clients How to File
Those who are filing as self-employed for the first time are probably going to notice an increase in paperwork. Most self-employed individuals in Canada need to file Form T2125, which is designed to let self-employed people record income and expenses (among other figures.)
Full-time freelancers usually don’t get a T4, so pay special attention to line 104 for "income not reported on a T4 slip." Your client also needs to know their industry code. This is the six-digit code that indicates to the Canada Revenue Agency the field or industry where they work. Many new freelancers have never encountered industry codes before, but thankfully, they’re pretty easy to look up.
Make Sure Your Clients Are Financially Prepared
One of the biggest hurdles that new self-employed workers face is the change in their tax bill. While your clients may be used to receiving a tax refund upon filing, it’s relatively common for freelancers to owe money at the end of the year because tax isn’t automatically deducted from their income the way it is from an employee salary.
A good rule of thumb is to set aside 25% of total income for taxes. It’s better to have a little bit extra set aside than to be caught unprepared and have to go into debt just to pay taxes.
Discuss Expenses and Record-Keeping
For new freelancers, keeping track of deductible expenses is practically a full-time job. You can aid your clients by getting to know the nature of their work, and helping them understand what they can and cannot claim. For example, a client who’s self-employed on a full-time basis and works out of an office in their home can claim part of their rent, that is, a percentage of annual rent equal to the percentage of their home the office takes up. But a client who only freelances part time, or is self-employed but works outside the home, won’t be able to claim this amount.
Accurate and thorough record-keeping is one of the most important parts of being a successful freelancer. Make sure your self-employed clients understand the importance of keeping receipts and records for all of their expenses, not just the ones they plan on claiming. In the event of an audit, having receipts on hand for both your business and everyday (nondeductible) expenses is a good way to prove your deductions are reasonable. Saving everything lends to your client’s credibility.
The gig economy is in full swing, and this means plenty of work for accountants who work with freelancers. With your expertise, you can help guide newbie freelancers toward an easier, calmer tax season.