How to calm the stress of tax time when you are a freelance couple
Freelance couples should schedule time to regularly review financial information and make joint decisions (Getty Images/ LaylaBird)
Filing taxes can be a daunting task for any self-employed person, but it can be especially stressful for freelance couples. With multiple sources of income, shared expenses, and various deductions to consider, it’s easy to feel overwhelmed.
Here are some expert tips and strategies from CPAs that should make the process easier for both you and your partner.
1. Get to know the tax system
While you don’t have to be a tax guru, it’s beneficial to have a basic understanding of the tax system to navigate your obligations and maximize tax savings. Start by learning how the tax filing system works for self-employed individuals, including reporting business income and expenses using a T2125 and making quarterly tax instalments. Self-employed people also adhere to different tax filing deadlines.
“If one spouse is earning freelance income, it means they are self-employed,” says FCPA Colleen Gibb, co-founder of the accounting firm Gibb-Widdis. “As such, the couple has until June 15 to file their tax return. However, if any taxes are owing, they must be paid by April 30 to avoid interest charges.”
With a little awareness, freelance couples can better prepare for the tax-filing season and potentially save on taxes. In particular, Gibb says many freelancers are not fully aware of what deductions they can claim, and as a result, often miss out on money-saving opportunities.
“Consulting with a CPA to determine which expenses can be claimed as proper deductions from freelance income is an excellent initial step,” says Gibb. “Alternatively, reviewing the Self-employed Business, Professional, Commission, Farming and Fishing Income Guide provided by the Canada Revenue Agency would be a useful step to take.”
2. Get organized—and on the same page
If you and your partner have vastly different approaches to organizing business income and expenses, it’s time to get on the same page to avoid tax time snags or delays.
“The biggest problem we see is people not tracking their expenses carefully and properly,” says CPA Bob Gore, founder of Robert Gore & Associates Chartered Professional Accountants. “The problem is people who don’t have a systematic way of keeping track of their costs that may be entirely or partially business-related.”
Establishing a record-keeping system can be as simple as storing documents in folders with divided slots, using shared Excel spreadsheets, or accounting software. Whatever works—just agree to a system and stick to it.
“Organization is key,” says Gibb. “Find what works best for both of you.”
3. Sync your schedules
Once the record-keeping system is set up, Gore says to make record-keeping a “good habit” that’s done routinely—and together. For instance, you and your partner could designate the first Friday of each month as a day for categorizing income and expenses.
“This practice also allows you to watch your spending patterns, which is a component of good financial planning,” says Gore.
4. Flag your shared expenses
Identifying shared business expenses helps ensure that each partner claims the correct amount on their tax return. This is particularly relevant for home office expenses, such as utilities, insurance, mortgage interest, property taxes and more.
“For freelancers working out of the same home office space, it’s important to keep track of these expenses,” says Gore. “Do it as a joint effort so that you’ve got the numbers, because each partner may be able to claim a percentage of those home office expenses in their business.”
For business-use-at-home expenses, Gore cautions against prorating expenses during the bookkeeping process—the pros prefer to see the final figures and calculate the proration at the end.
“As an accountant, we don’t like to see clients prorate the expenses before they give them to us,” says Gore. “We’d rather see the totals and do the probations because the schedules and the tax return expect to see it that way.”
5. Separate your business transactions
You may be sharing a life with your partner, but it’s generally best for freelance couples to keep their business transactions separate.
“Open a separate bank account for your freelance business,” says Gibb. “Deposit all income earned to this account and pay all expenses out of this account. For money to live on, simply transfer it to your personal account.”
For tracking expenses, many business credit cards provide annual reports on total spending on expenses like gas, meals, entertainment, office supplies, and so forth.
“That way, all your freelance information is easy to find,” says Gibb. “If you are ever audited, you only need to provide that bank account and that credit card as they will have all your business transactions.”
6. Be proactive with tax planning
For managing variable income, keep a close eye on your cash flow and be diligent about putting aside money for taxes throughout the year.
“If you are keeping a spreadsheet or using a program, total up your income and expenses each month to see what you have made, year-to-date,” says Gibb. “Using software is easier because if everything is entered properly, as you can run an income statement to determine your year-to-date net income.”
Once you surpass $15,000 in earnings, start saving a chunk of your income to pay your taxes. As a general rule, Gibb recommends that self-employed couples save roughly 30 per cent of their earnings.
“Some freelancers even transfer this money to another account, so they will not spend it,” says Gibb.
7. Communication is key
With so many moving parts involved with running a business, Gore recommends that freelance couples schedule time to regularly review financial information and make joint decisions.
“Set up monthly meetings,” says Gore. “That way, the meeting can be short, but if there’s damage control to be done, it’s not such a big deal to get things tidied up.”
Keeping the lines of communication open helps avoid financial mishaps or misunderstandings down the line—and may lead to big wins at tax time.
8. Ask an expert
Taxes can get complicated. If you run into hurdles or just have questions, reach out to a chartered professional accountant (CPA) for expert advice. It can be especially helpful to get independent expert advice if you and your partner don’t see eye-to-eye on a business or tax-related matter. Visit the website of your provincial or regional CPA body to access a CPA directory.
MORE TAX TIPS
CPA Canada also has a wealth of personal tax information you can access on a range of subjects. Plus, discover this year-end checklist for prepping taxes, check these tax tips for filing as a sole proprietor or a self-employed individual, and find out how a CPA can help entrepreneurs set up a successful small business.