Tracking your self-employed income and expenses
You will need to track your income and expenses for your new business. Most businesses must use the accrual method, meaning that income that is earned in the calendar year must be included in revenue even if not received until after the year end. Similarly, any expenses incurred but not yet paid will also be reported.
For specific information on what expenses can be claimed, please see my Self-employed income and expense worksheets. In general, there are four main categories of expenses:
- Expenses that are 100% related to the business and will be deducted fully in the year incurred (e.g. stationery, business cards, travel).
- Capital additions such as computers, office furniture and musical instruments. These items will be depreciated using Canada Revenue Agency’s depreciation (capital cost allowance) rates. In the first year of business, you can add items that you have on hand and will be used in the business. The amount to use is the fair value at the start of the business.
- Business use of home: if you have a home office, part of the home expenses can be claimed (see below for more details)
- Vehicle: if you use your personal vehicle in your business, a portion of the operating costs of the vehicle can be expensed. If the vehicle is 100% business use, then you can expense all of the operating costs.
How to track income and expenses
For specific information on what expenses need to be tracked, please see my Self-employed income and expense worksheets. The best way to track your income and expenses is to use the method you are most comfortable with.
Download the appropriate “Self-employed income and expense worksheet” in PDF or Excel format. Add up your self-employed income and enter in the income section of the worksheet. Add up your expenses using the categories in the worksheet and enter the amounts in the appropriate section of the worksheet.
You can use a spreadsheet program such as Excel to track the details of your income and expenses and then summarize the amounts for the year. My “Self-employed income and expense worksheets” are available in Excel.
You can use programs like FreshBooks or QuickBooks Online to track your income and expenses.
Generally, books, records, and source documents have to be kept for a minimum of six years from the end of the last tax year to which they relate. If you keep paper records, use an envelope or file folder for each category of expense. When original source documents and records are in an electronic format, they must be kept in an electronically readable format. If you are only keeping electronic records, ensure that you have strong back up procedures.