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Tag Archives: accounting

All Talent Development Centre posts for Canadian IT Contractors relating to accounting.

Terrible Tax Advice Exists — Here’s How to Spot It

This post by Janet Berry-Johnson originally appeared on the Freshbooks Blog in March 2012

Terrible Tax Advice Exists—Here’s How to Spot ItHow do you know you have a great accountant? He has a tax loophole named after him… All jokes aside, tax is a complex subject and, despite decades of talk about simplifying the tax code, it just seems to get more confusing each year. After a decade of working in public accounting, I can’t count how many times clients came to me to ask about sketchy tax advice they’d received from dubious sources.

“My neighbor says Social Security income isn’t taxable.”

“My girlfriend’s dad told me I can deduct all of my vehicle expenses if I set up an LLC.”

“I saw an ad on TV that promised me a bigger tax refund than the competition.”

“I heard that paying taxes is voluntary.”

When you’re seeking out sound financial answers, be wary of the source. Next time someone offers their tax advice, look out for these 8 red flags.

  1. The Advice Sounds Too Good to be True

This kind of advice usually involves tax-free income or being able to deduct personal expenses.

According to the IRS, all income is taxable unless the law specifically says it isn’t. Life insurance proceeds, scholarships, gifts and inheritances, child support payments, welfare benefits and damages for physical injuries or sickness are all types of income that may not be taxable. However, there are a few situations where they might be. When in doubt, consult with a qualified tax pro.

Personal expenses are rarely deductible. Some common exemptions are home mortgage interest, real estate taxes, medical expenses and charitable contributions. They’re allowed as itemized deductions on Schedule A of your Form 1040. Other expenses for your personal residence or vehicle are only deductible if they are used for business. If a friend tells you he writes off all of his home or vehicle expenses, he’s practically telling you he’s committing tax fraud. Don’t take tax advice from a crook.

  1. The Advice Lacks Context

Above, we mentioned that certain types of income are usually non-taxable, but may be taxable under certain circumstances. The tax code is rarely absolute. When you read the code, you’ll see a lot of words and phrases like “generally,” “except under certain conditions,” “usually” and “in most cases.”

Most tax pros joke the answer to any question starts with the words “that depends.” Be wary of any advice that doesn’t take your unique situation into account.

  1. You Have Difficulty Understanding It

The tax code is complicated, but a good tax pro should be able to explain any basic rules, deductions and credits that apply to your return.

Remember: you are responsible for everything on your tax return, whether or not you paid someone else to prepare it for you. If you don’t understand something, ask! If you’re getting a much larger return (or owe more money) than expected, consult someone and find out why.

  1. There Might Be a Conflict of Interest

Look out for tax advice from people who are seeking to receive a commission or kickback. Some tax pros are also qualified to give financial advice but avoid taking advice that comes with an ulterior motive. The person might suggest you invest in a real estate venture that they hold a stake in or recommend financial products for which they receive commissions or referral fees.

Don’t be afraid to ask, “How will you benefit from this?” if you suspect the advice is not in your best interest.

  1. The Advice Suggests Taxes is Voluntary

No matter how many times these arguments get shot down in court, some people continue to claim that the payment of federal income taxes is “voluntary.” This claim is based, in part, on the fact that the IRS itself describes the way we file and pay federal taxes as “voluntary compliance.”

As the fact-checking website Snopes points out, “common sense dictates that if paying income tax were really voluntary, that tidbit of information wouldn’t be known to only a small cadre of tax protesters while millions of other Americans annually forked over considerable amounts of money they weren’t obligated to pay.”

As numerous tax court cases have shown, neither the obligation to file a tax return nor the payment of income taxes is voluntary. File your return and pay what is owed. Otherwise, you’ll soon find out just how mandatory paying taxes really is.

  1. The Advice is Referred to as a “Tax Shelter”

There are a few bonafide tax shelters such as those related to oil and gas exploration and development. However, most are at least bad deals from a business viewpoint, and at worst they violate tax law. Any business deal that needs to be structured as a tax shelter to be profitable is not a sound business deal. Good business deals show profits before tax considerations.

There are also tax shelters that promise you’ll receive $400 in deductions for every $100 you invest (or some similar “too good to be true” scenario). The tax authorities are constantly investigating such tax shelters. If you get caught avoiding income taxes by illegal means, you’ll have to pay back taxes, plus interest and some hefty penalties.

  1. Someone Promises You a Big Refund… Before They Look at Your Info

Every year during tax season, the commercials, ads and billboards that promise huge tax refunds begin to flood in. No accountant can get your refund faster or bigger than anyone else. You are entitled to the same refund, whether you prepare the return yourself or hire a professional.

Anyone promising they’ll get you the biggest refund may be padding your return with credits you’re not entitled to. Don’t fall for the hype.

  1. You Receive No Advice at All

Even if you normally prepare your own tax return, you may occasionally run into a new situation and need help. Major life changes, such as selling real estate, buying your first home, starting a new business or adopting a child usually means significant changes to your tax filing.

Don’t be afraid to seek out the advice of a professional. Even if you want to prepare your own return, most tax pros will be willing to sit down with you to answer questions and offer advice on your unique situation. The hourly rate they’ll charge may be well worth avoiding an audit—or paying a penalty for filing an incorrect return.

If you’re unsure, seek that advice from a certified and experienced tax pro. Look for someone with a credential, such as a CPA or EA. These professionals are well-trained, held to a code of ethics and required to maintain up-to-date knowledge.

At a minimum, all tax preparers in the United States are required to obtain a Preparer Tax Identification Number (PTIN). You can use this search tool available on the IRS website to find a preparer who holds a professional credential or voluntarily obtained a certain number of continuing education hours each year.

Getting professional advice is more expensive than getting advice from your skateboard buddy, but think of it as insurance: pay a small premium today to avoid an expensive disaster tomorrow.

About the Author
Janet Berry-Johnson is a CPA and a freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Parachute by Mapquest, Capitalist Review, Guyvorce, BonBon Break and Kard Talk. Janet lives in Arizona with her husband and son and their rescue dog, Dexter. Outside of work and family time, she enjoys cooking, reading historical fiction, and binge-watching Real Housewives.

The T4 and T5 Deadline is Approaching

The T4 and T5 Deadline is ApproachingWhether you’re an independent contractor who receives a salary from your business or a contractor who receives compensation through dividends, you’ll want to pay attention to this reminder.

The Canadian T4 and T5 filing deadline is the last day of February, which this year is Tuesday, February 28th. Sure there are still a few weeks and February feels like the longest month of the year, but if you’re like many others, procrastinating on accounting comes fairly easily. At the very least, take a minute to create a plan and schedule some time to get this task completed.

While we always encourage and strongly recommend you seek advice from an accountant, here are a few other resources:

Happy filing!

This CRA Mobile App Will Help with Your 2017 Taxes

This CRA Mobile App Will Help with Your 2017 Taxes2017 is in full swing! Most people are back from holidays (if they were fortunate to take them), projects are moving again, recruiters are calling, and tax season is approaching. As you start to look at your 2016 books and consider working on your taxes, you may be realizing that you could have done a better job at staying organized in that area (and hopefully you are setting a goal to keep up-to-date in 2017). Vice-versa, you could be super stress-free right now because you were well prepared at this time last year.

Regardless of your situation, a new year means a fresh start to get organized. We can’t help you with your 2016 taxes, but we can give you a boost for this year. The CRA created a mobile app that lets independent contractors create custom reminders and alerts for key CRA due dates related to instalment payments, returns, and remittances. Download the iOS, Android, or BlackBerry version, or check out all of CRA’s mobile apps here.

Contractor Quick Poll: When Will You Retire?

Independent contractors enjoy many benefits working for themselves. Unfortunately, there are also some downsides, including a lack of pension or employer RRSP contributions, as enjoyed by some employees of large corporations and public sector organizations. This doesn’t mean that you can no longer retire, or that you must wait longer to retire, but that you need to plan your finances differently to achieve your retirement goals.  In fact, the nature of your work also means that you may enjoy partial retirement much earlier than the average person!

That being said, we’re curious to know when most independent contracts plan to retire. In this month’s contractor quick poll, we’re asking how old you plan to be when you finally fully retire from work and start enjoying a quieter, less hectic life.

Accounting Basics for the Independent Contractor (Video)

Independent contractors are essentially a small business with one employee – yourself. For that reason, you need to follow all of the same accounting principles as any other small business. The good news is: it also means that any accounting tips and tricks for “small businesses” can be applied to your independent contracting business.

Especially if you’re just starting out as a freelance IT professional in the gig economy, the accounting side of the business can be intimidating. To help ease the stress, check out this video from Patriot Software that runs through some basic accounting tips for small businesses.

If you’re still unsure about these tasks, we strongly recommend you engage a professional accountant. Avoiding tax complications and properly planning your finances will be well worth the money you pay.

The Dreaded Project Gap

How Your Contracting Business Can Plan for Continued Financial Health

This post first appeared on the CA4IT Blog on February 16, 2016

The Dreaded Project Gap—How Your Contracting Business Can Plan for Continued Financial HealthAs an independent contractor, you know that your business relies on a consistent project load to maintain profitability. However, at some point, you may face a gap between projects. This situation creates many concerns, but with careful financial planning, these rare occurrences should have little, if any impact on your bottom line. By utilizing some commonsense tips, you can safeguard against any effects from project gaps or other unforeseen disruptions.

Tips for Minimizing the Impact of a Gap Between Projects

  • First and foremost, you should always have a plan in place for project gaps. If you are just starting your small business, you need professional accounting advice as to how to plan for downtime not just between contracts, but for all unexpected events that could disrupt your business, such as illness. Remember, your business relies on your ability to perform, so if you suddenly cannot work for any reason, you need a financial back-up plan. This can include a focused savings plan or an emergency plan to liquidate assets or scale down expenses.
  • Stay on top of every expense and think ahead for tax deductions. Tools like cloud-based accounting for small businesses let you keep track of every income and expense in real time so that you always know how you’re doing. The most powerful tool you have is information, and when you can see your business’s financial picture on demand, you gain the power to manage it proactively.
  • Use downtime wisely. Whether your gap lasts a few days or a couple of weeks, never look at this as vacation time. Brush up on your continuing education, or go after than certification you need. View every day as an opportunity to grow and refine your business.

As a business accounting service specializing in independent contractors, CA4IT believes that you need careful, conscious preparation for changes in your workload. We can help you plan for any scenario and fro continued financial stability. Turn to us for all of your accounting needs so that you always feel confident about your financial outlook. To learn more, contact a CA4IT representative for the best accounting help in your community.

Keep Cash Flowing – Avoid Invoicing Mistakes That Keep You From Getting Paid

This post by Janet Berry-Johnson first appeared on the FreshBooks Blog on August 30th, 2016

Keep Cash Flowing: Avoid Invoicing Mistakes That Keep You from Getting PaidRunning a business is a balancing act. You’re focused on providing top-notch services, keeping clients happy, paying the bills, preparing for tax time and juggling a million other demands to keep your business moving. As if that wasn’t enough, you also need to keep up with invoicing to make sure you get paid. We agree—billing is a time-consuming chore but it’s one of the most crucial functions of any business. If you neglect to do it right, it will affect your cash flow.

Invoicing isn’t just a matter of catching typos and ensuring it’s sent to the right client. A mere error on your invoice can result in delayed payments, miscommunication and loss of client satisfaction. Communicating the terms and promptly sending invoices are some obvious ways to ensure your billing is accurate and complete. Here are a few other invoicing mistakes you perhaps haven’t considered.

You Didn’t Upload a Logo (Or Don’t Have One)

If you don’t include your logo on each and every invoice you send, you’re missing out on a simple branding opportunity. We live in a visual world. Even down to the minute details—like invoicing—there’s no exception. Many people spend hours of their days on website design and business cards, but spend very little time thinking about how their invoices represent their brand.

Consider this: your invoice is potentially your last contact with your client, so it should reflect the same branding and attention-to-detail as your website and printed materials. Take the time to create a beautiful, clear invoice—your clients will appreciate it!

You Forgot to Add a Due Date

Many invoicing templates include the generic wording “Payment due in 30 days” or “net 30.” Those phrases seem simple enough: if the invoice is issued on July 30th, payment is due on August 30th—right? Actually, to ensure you’re actually getting paid on time, consider communicating the due date a little clearer.

Consider the situation from an accounts-payable perspective. First, your client has to locate a date on the invoice. They probably receive many invoices each month. After they’ve located the due date, they need to establish the payment terms, which may or may not be located near the invoice date. Maybe the payment terms aren’t included on the invoice at all. Then, the client has to calculate the due date based on these two pieces of information.

When you consider how many invoices an accounts payable department processes every day, it’s easy to see how a wrong due date may be entered. To make matters worse, many accounts payable systems default to the current date as the invoice date. The current date will always be later than the actual invoice date, so unless your client takes the time to enter the information correctly, your invoice will be paid late.

The solution? Make it as easy as possible for your client by providing a clear due date on each invoice. Consider writing the due date clearly at the top, and including additional payment terms below.

Adding this information in a prominent location will make it less likely that your client will enter inaccurate information in their accounts payable software.

You Sent Your Client a “Surprise” Invoice

Some people love a surprise, while others not-so-much. But no one enjoys a surprise invoice—rather, a charge they didn’t expect.

If your client is asking for additional work or it’s taking longer than originally planned, notify them immediately. Never send a surprise invoice without informing your client ahead of time. Perhaps your client expected to pay for your time, but didn’t know you’d be billing for expenses. Or, maybe you initially thought the project would take five hours, but it took 10 instead. Whatever the issue may be, don’t keep your client in the dark. Contact your client, outline the changes and have a conversation. Chances are they’ll appreciate you were forthcoming and explained the billing charges to your invoice. Remember: transparency is key.

You Failed to Follow Up

Ask most entrepreneurs what their least favorite task of their business is and most will say “collections.” Following up on accounts receivable is an odious chore, yet one that is absolutely crucial to the health of your business.

No matter how accurate and detailed your invoices are, you will occasionally encounter a client who doesn’t pay on time. Once a payment is past due, you have to choose between getting paid or potentially irritating the client and damaging your relationship.

That’s why it’s important to have a procedure in place for following up on late payments and to adhere to that procedure consistently.

Some business owners prefer to call the client  with a friendly reminder, others wait a week or two past the deadline. Either way, your initial contact should be a friendly reminder. In most cases, this reminder is all it takes to have your invoice paid promptly. Perhaps your invoice was lost in the mail or was redirected to your client’s spam filter. The customer reads your email or takes your phone call, is apologetic and sends the payment that day.

If you have customers who are chronic late payers, perhaps they need a little financial motivation to pay on time. In that case, you can set up Late Payment Fees to charge after it is past due. You can even enable or disable late fees for specific clients if you’d rather not apply the policy to everyone.

If you do choose to initiate late fees, clearly communicate it immediately. Remember, as we explained above, surprises are never a good thing when it comes to invoicing! Ultimately, billing is about getting paid and nothing is more important to optimizing your company’s cash flow than your invoicing process. Good invoicing practices keep revenue flowing into your business. No matter how many you issue, if those invoices are not getting paid, you won’t have the cash you need to pay your employees or purchase the products and services your business needs to keep going.

About the Author

Janet Berry-Johnson is a CPA and a freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Parachute by Mapquest, Capitalist Review, Guyvorce, BonBon Break and Kard Talk. Janet lives in Arizona with her husband and son and their rescue dog, Dexter. Outside of work and family time, she enjoys cooking, reading historical fiction, and binge-watching Real Housewives.

Is Now the Time for Incorporation?

This article was originally published on the CA4IT Blog on July 15, 2016

If you’re like many independent IT contractors, you’ve probably been operating your small business as a sole proprietor. While starting a business, you’ve been more focused on building your client base than your tax strategy. However, depending on your situation, it may be time to consider incorporating your business so that you can take advantage of potential tax benefits.

Incorporating a business in Canada has both advantages and disadvantages specifically for independent contractors. Here’s a snapshot of how incorporation could benefit you:

  • Potential for lower tax rate. This is one of the biggest benefits of incorporation, but you need to talk to your accountant to see if it would work for you at this point. You need to be making enough to support your living expenses and more in order to really get these benefits. The general rule of thumb is that, if you are spending all of your profits to live on, incorporation isn’t right for you yet.
  • Limited liability. When you incorporate your business, you protect your personal assets. Your home or vehicle cannot be seized for your business’s debt.
  • You could be eligible for the small business tax deduction, which would reduce your tax burden.
  • Reputation boost.New clients may perceive an incorporated business as more established and therefore professionally trustworthy. It will help provide more legitimacy, and give new clients confidence in your abilities.
  • Some provinces allow you to split income with your spouse or children, also lowering your tax burden.

While your accountant can better discern if you would benefit from incorporation, you should know that it does have some drawbacks. First, it has substantial start-up costs that you may not be ready to incur. Also, incorporation will significantly increase the amount of tax preparation and paperwork you will need to perform.

About CA4IT

Our CA4IT member firms have all of the knowledge, skills, and experience to help you decide if and when incorporating a small business is right you.  Contact us for a consultation and we will help you learn more about the best tax planning strategies for your future goals.

5 Tips for IT Contractors Who Hate Accounting (Video)

Accounting is a thorn in many independent contractors’ sides. After all, if you enjoyed bookkeeping, then you would have become an accountant, not a technology professional. Alas, keeping your books in order and accounting organized is an essential responsibility for an IT contractor. Not only does it keep the government happy, but being on top of it will help your business thrive and simplify planning for things like vacation, retirement, and salary.

If you’re still struggling to keep your money organized, have a look at this video from Ward Williams. They provide 5 quick and simple tips that can make an independent contractor’s life much easier.

Benchmarking and Independent Contractors

Are You Setting Your Business Up for Failure?

This post first appeared on the CA4IT Blog on June 3, 2016

Benchmarking and Independent Contractors -- Are You Setting Your Business Up for FailureFor those considering starting a business as an independent contractor, they face many decisions in the initial launch of their endeavors. However, some also jump in feet first with no real long-term plan for the growth and success of their business. They assume that they can utilize their professional skills and experience to build a brand one client at a time. While a successful independent contracting business truly begins with personal talent and motivation, you should also create a comprehensive business plan that has clear benchmarking built into it.

What is Benchmarking and Why is It Important for Independent Contractors?

While benchmarking sounds like a term business majors learn in college, it’s truly a principle that applies to any successful business model. Benchmarking is a measurement of the quality of a business’s policies, products, programs, and strategies, as well as a comparison of those to peers or competitors. When you incorporate the principles of benchmarking into your business, your goal is to determine what improvements you need. You also want to analyze how similar contractors achieve their high performance levels, and then use this information to adopt your own plan for success.

Benchmarking seems like commonsense, but new independent contractors often get so caught up in the everyday workload that they fail to take that objective step back. For example, have you reached the point that incorporating a small business makes sense for you, or are you too focused on building your brand or client acquisition? Unlike larger corporations, independent contractors wear all the hats. Therefore you not only must perform all of the day-to-day tasks for your clients, but you are also responsible for marketing, bookkeeping, and future planning. You have to look at the bigger, more long-term picture even if that’s the last thing on your mind right now.

Our CA4IT member firms believe that benchmarking, especially in terms of financial practices and tax planning, helps promote successful small businesses. Whether you need a partner in virtual bookkeeping, or want to know more about incorporating a business in Canada, we have the assistance you need to construct the most effective business model. Contact a representative today, and treat your business like the well-planned organization it needs to be.