Okey dokey. This is the second part of ‘showing you your money’.
In the last post I covered the basics of starting to freelance in animation and/or storyboarding. I talked about setting up your invoices and for you Canadians, a bit about the wonder that is the GST. At the end of that I mentioned you can’t spend that GST money.
So here’s a little advice about handling the cold hard cash. Of course, you don’t have to do it this way. This is just how I did things when I started out and it worked pretty well for me. And if you’re young, you’ll thank me in your forties. 🙂
Separate your cash!
The GST you collect isn’t yours and about a third of your income isn’t yours.
That’s right. You’re going to have to pay the tax man eventually. If you think and act like all the money you collect is yours, then you’ll be in big trouble, baby. There will be nothing worse then getting the news that you owe thousands to the government when you only have a few hundred in your bank account.
You may put off paying your taxes.
You won’t sleep at night.
You’ll get dark circles under your eyes and maybe develop a substance abuse problem.
I can’t let that happen. If you want dark circles and a substance abuse problem, just keep storyboarding. 😉
But pay your taxes! Because it will catch up with you eventually.
So what’s the solution? When I first started working, I set up two bank accounts. A chequing and a savings. The chequing account was mine and the savings account was theirs. You separate your money physically and mentally. All that money in your chequing account is to spend as you wish, without worry. Treat the savings account like it doesn’t even exist or that it’s not even yours and tax time will be a lot less painful.
I found that always putting one third of every cheque into the savings account had me covered for taxes. BUT there is some good news and another smart thing to do. I took a chunk of that money in the savings account and put it towards a retirement fund. In Canada it’s an RRSP, in the US I believe it’s an IRA (check out that FreelanceSwitch article again).
Why do this?
Well, on one hand contributing to a retirement fund is a fantastic tax write-off. And if you’re self-employed you need all the write-offs you can get. So doing this is an easy way to hack away at that tax payment. Second, that money you’re putting away for your future is still yours. You just can’t touch it for thirty or forty years. 🙂
But would you rather give all of that thirty percent to the government or would you like to hang on to some of it and watch it grow? Not too bad a deal for the freelancer. And if you’re young, you’ll thank me in your sixties. But you can start at any age. For the tax break alone, I find making a healthy contribution to my RRSP is always a smart thing to do.
So separate the money and from that money, invest in your future!
Get those taxes even lower!
So you’ve invoiced, hopefully gotten paid, socked some away in your non-account and now you have to face the tax man.
But wait! You can get that tax payment even lower by saving all your receipts. I mean everything. If you save every single one all the time, it will become second nature. Start asking for them when you take a taxi, buy bus tickets, whatever. Just get in the habit.
All those little pieces of paper will come in handy at tax time too because they are the bulk of your write-offs. Write-offs make the tax you have to pay lower.
Lower is good.
Now remember my disclaimer at the beginning of my last article? I am no accounting expert by any means. This is just a friendly little guide, OK? So on that note, for tax time I do recommend hiring an accountant. If you can find one that works with self-employed people, all the better.
Yes, it costs money.
But you can write them off too…it’s a business expense! And if you organize yourself throughout the year and before you meet with them, it doesn’t have to be an expensive thing. But that’s the key. Organize those receipts!
The accountant is not your bookkeeper. You just want to walk in there with all your ‘numbers’ and have them plug them into the right and legal places and get the heck out of there. Because they probably charge by the hour.
So this does not mean showing up with a shoe box full of little pieces of paper for them to sort through. They’ll probably laugh your ass out of their office.
You want to show up organized.
This can be a challenge for us artist types. But not for me because I’m a freak, remember? I have a file folder drawer in my computer desk. I have many files in it. I can find an old bill in 5 seconds flat.
File folders. Get some. Get many. They have portable file folder cases if you don’t have a drawer. Use them for:
- credit card statements
- cable bills
- telephone bills
- insurance bills and information
- GST info
- tax stuff
- anything else you need to keep safe and find fast
So this is what I do with the receipts. I have about 5 file folders for the receipts. The bigger heavy-duty kind that have accordion-type sides (because those little suckers try to escape). You don’t have to do this, but sorting through your underwear drawer at the last minute for all those little receipts may not be the best idea.
Then I label those five folders as follows:
- Travel (car, gas, bus, train, taxi, etc)
- Entertainment (business meals, business drinks, etc)
- Research (movie rentals & purchases, books, museums, etc)
- Supplies (computer, desk, chair, art supplies, stamps, FedEx, etc)
- Other (any thing that doesn’t go in those categories…just in case)
The key is to keep those files easily accessible so you will use them with ease. I will sometimes pile up the receipts in the same area on my dresser then sort through them once or twice a month and put them in their file. Whatever will make you do it all year long.
Find the system that works for you but have one.
Again, this may not be the best way. I’m sure other folks have other ways of doing things but it’s my blog and my advice, so that’s what your getting. 🙂 It’s worked for me for many years.
Now comes the math.
So before I trot off to the accountant, I have to spend the better part of a day going through all my invoices, receipts and bills over the past year. I add things up. I make a master list with all the totals. And that’s what I bring to the accountant.
My list of totals and any other documents I had collected over the year that need to be inputted onto my tax form (and that I kept in my ‘Taxes’ folder). This can include bank interest & RRSP forms, GST forms, charity receipts, any T4’s (some studios still might send you one), or anything that looks like it should be used for your taxes. (I know that sounds like a lame cop-out but I hope you get the picture.)
My master list includes the totals from my receipts I collected and are categorized (minus the GST, but talk to someone with more expertise about that stuff…I don’t want the responsibility). Plus the totals of other expenses and income:
- total amount invoiced over the year (minus the GST because that’s not yours)
- any other income like bank interest (ha, that’s a laugh)
- RRSP/IRA totals
- percentage of my rent because I have a home studio
- cable bill totals
- business long distance calls (or if you have a business line, all of it…don’t lie)
- any home/car insurance
- medical/dental (you’ll need a lot for a write-off…but bring it anyway)
- anything else that could be business related (the accountant will help)
And bring your previous year’s tax forms too. Fill out the tax forms with your accountant. Write out your painful cheque.
There could be other things about all this stuff, but my brain is starting to hurt.
That’s why it’s good to get set up with an accountant at least when you first start freelancing. If you feel you can do it yourself in the following years, more power to you. I’d rather eat glass so I prefer to pay someone for the peace of mind.
But that’s just me.
I hope this has helped out a few folks at least and that I haven’t bored the rest of you to death. I’m going to start digging into more ‘storyboarding technique’ kind of posts next. So get excited.
Again, if you have any financial tips or want to see me or Adrien write about something specific in the near future, post a comment below!
Or did I put you to sleep?