Tax Tips for Self-Employed Entrepreneurs

Whether it means going full solo or simply adding an income stream, being an entrepreneur is a dream come true for many Canadians. Free from the constraints of the boss and office politics, you can build something from scratch and call it yours.

Along with the many joys of entrepreneurship, though, comes the additional responsibility of determining your own taxable income on your personal return. Once you step outside the realm of the T4 income slip, it’s all on you. 

Luckily, you don’t have to retrain as an accountant (that’s what accountants are for) but there are a number of steps you need to take in order to ensure plain sailing.

Keeping track

To calculate taxes, you need to know how much you made and how much you’ve spent. This requires a continuous, systematic, and well-organized record-keeping system.

Particularly with expenses, being incomplete or disorganized can cause mayhem at year-end. Besides the stress of having to puzzle over months of statements to figure what happened and when, if a receipt is missing or cannot be adequately justified, this can lead to a higher tax bill. 

Standard practice is to have separate cards and bank accounts for personal and business finances and to gather and categorize your receipts on a monthly basis. And don’t throw your previous year’s records away, as you can be audited as far back as six years!

Working with deductions

Taking advantage of tax-deductible expenses is only good business sense. But it is also a highly complex topic. You do not need to be an expert, but should be familiar enough with the basics to know where the danger areas are and where opportunities for savings arise.

Business expenses, by and large, are what you would expect them to be. Goods purchased for resale, equipment rentals, office supplies, bank fees and insurance premiums – all can be put towards reducing your taxable income.

Outside of the obvious day-to-day business expenses, there are some categories that you might not expect to be deductible on your personal return, such as annual professional association dues, gluten-free products (=medical expense), and moving expenses. You don’t want to miss these!

Not everything is intuitive, however. Commuting expenses can’t be deducted, nor can clothing and business attire. Then there are expenses that are partially deductible. Client entertainment, for instance, can only be claimed at 50% of the total expense.

Furthermore, the law is always changing. That means it is best to be conservative, or better yet, work with a professional who knows the exemptions inside out. 

Keeping accurate records, as stated above, is the first step, as the devil is in the details!

Think monthly

While you only file your taxes once a year, it is good to think of it as a monthly payment.

The situation you want to avoid is being unable to pay an unexpectedly large liability, as this can incur hefty fines, not to mention stress.

Setting aside 25% of revenue for taxes (over and above other amounts you may be setting aside e.g. for an emergency fund) is commonplace. 

You can even enter the CRA as an online vendor with your bank, and make the instalment payments automatically towards the future tax year.

 

Preponing the pain of taxes requires discipline but is the least painful path in the long run.

You’re not alone

While the responsibility is on your shoulders, you do not need to shoulder the burden alone.

Particularly nowadays, tax filing is difficult for small businesses. Relief programs like CEBA and HASCAP have introduced a new layer of complexity during 2020 and 2021.

While programs like Quickbooks are great for automating the daily grind element of accounting, there is always an element of judgment required.

Filing taxes is an opportunity for a broader discussion around your business and finances, that will pay its own costs many times over. Working with an expert to develop a tax strategy will not only help you avoid errors but enable you to take advantage of opportunities. 

For example, hiring a family member to do record-keeping at a lower wage (hence taxed at a lower rate), is a valid way to lower your household’s overall tax bill, if done correctly.

And there are plenty of other opportunities. You just need to know where to look!

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