If you’re self-employed, you already know how stressful tax preparation and tax filing can be; keeping track of receipts, keeping up-to-date on the Canada Revenue Agency’s ever-changing tax policies, and trying to pay the least amount of tax.
Managing your taxes and navigating the tax process can be overwhelming for independent contractors, those working on commission, or who work seasonally.
Below are 7 tax tips that can make the process a little less daunting, help maximize your deductions, and help you save money.
Keep Track of Your Money
Being your own boss means keeping track of your income. That means knowing how much you make and what deductions you can claim as business expenses.
At the same time, you need to know where your revenue goes, who has been paid and who still owes you money.
When you work for someone else it’s easy to have a single bank account that you operate from. But when you’re self-employed, it’s imperative that you keep your business and personal affairs separate.
Incorporating is not just something reserved for large businesses. Incorporating your small business can help lower your corporate tax rates.
For example, in Ontario, if you incorporate your business you pay a tax rate of just 15% on the first $500,000 of annual income and 26.5% on anything you earn above that.
If, however, you register the company as a sole proprietorship, you pay the regular, personal income tax rate on all your profits. In Ontario, the tax rate is more than 50%.
You can also take advantage of tax breaks not available to unincorporated business, including capital gains exemptions when you sell the business and income tax splitting.
Incorporating your business can also protect you through limited liability. If you operate a business and think there is a chance you could get sued, incorporating might be the answer.
When you incorporate a business, it is a separate entity from the owner. The incorporated business is responsible for any liabilities, not the owner.
Incorporating your small business can help protect your personal assets from lawsuits, creditors, etc.
Check Business Expenses Carefully
Being self-employed means being able to take advantage of all eligible deductions.
Unfortunately, some people get quite liberal when it comes to claiming business expenses. And it can catch up with you.
According to the CRA, “You can deduct any reasonable current expense you paid or will have to pay to earn business income.”
The key word here, is “reasonable.” Trying to justify a personal expense as a business expense could result in an audit.
Take Advantage of Deductions
Having said that, there are a lot of “reasonable” business expenses you can claim, helping reduce the amount of taxes you must pay and keeping more money in your pocket.
Below is a partial list of some of the expenses your small business can deduct:
- Home office expenses (Internet, utilities, telephone, office equipment, computers, office furniture, etc.)
- Business startup costs
- Advertising and promotions
- Mortgage interest
- Repair and maintenance
- Interest on loans
- Property taxes
- Capital Cost Allowance (CCA)
- Business travel costs (flight, bus, train, ferry)
- Meals and entertainment (up to 50%)
- Accommodations for employees that are away on business for more than 12 consecutive hours
- Salaries, wages, benefits, and medical expenses
- Vehicle expenses and fuel costs
- Accounting and legal fees
- Gifts for holidays or special occasions (gift cards, gift baskets, etc.)
The list of eligible tax deductions is extensive, but there are also a number of expenses you can't deduct to lower your businesses tax obligation.
- Local travel (getting to and from work)
- Holidays and personal vacations
- Interest or penalties paid on your income tax
- Too much in gifts (the limit is up to $500 per year)
Keep all Records for at Least 6 Years
To keep the CRA happy, you need to keep records and copies of all your invoices.
Even though you don’t need to send your receipts to the CRA when you file your taxes, if they ask for proof of a deduction and you cannot provide it, they will reject it.
That’s why it’s important to have a separate bank account for your business and use a separate credit card.
In addition to keeping track of all your receipts, you need to keep that paperwork for at least six years. Why? That’s how far back the CRA can go if it decides to audit you.
For business expenses incurred in 2018, you need to keep them safely stored away until 2024. You can shred them after that.
Keep Emergency Funds
Being self-employed means getting used to inconsistent or unreliable cash flow.
Because income can vary from month-to-month, it’s a good idea to set aside enough money to carry you through the dry periods. This can help pay for expenses and taxes, which are not automatically deducted.
Don't Forget Your Taxes
Again, being self-employed, or a contractor, means you’re responsible for you own taxes.
Tax deductions are important, but so too is remembering to deduct the amount you owe in taxes when you get paid.
Paying taxes is unavoidable, so it’s better to sock the money away and be prepared than scramble at tax time to come up with what you owe.
To make life easier, set up a separate bank account where you can deposit income tax, PST or HST.
If you’re not comfortable with bookkeeping, tax preparation, or filing your taxes, work with tax professionals who are experienced working exclusively with small business owners, entrepreneurs, farm operators, and independent contractors.
FBC – Helping Self-Employed Canadians Manage Their Taxes
If you’re self-employed or an independent contractor, the tax professionals at FBC can help you maximize your tax deductions and save money.
FBC has worked exclusively with small business owners, farm operators, independent contractors, and entrepreneurs since 1952.
For more than 65 years, FBC has provided clients from across the country tax services with personalized tax service uniquely tailored to their individual needs.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.