The self-employed lifestyle holds great promise when you first embark upon it, however you quickly find yourself doing things that you would never have dreamed of. You are expected to take on role of salesperson, market researcher, accountant, lawyer and social media expert, while not getting paid for any of it. Your available funds do not allow for outsourcing and at times you are not even aware of what you don’t know. Luckily the internet provides a wealth of tips and tricks to make these tasks a little easier, and with a little discipline, some aspects of your self-employed existence can be made much simpler. Ensuring that you keep on top of your finances and tax obligations is among the most important of these tasks for which it is essential to have a system in place so that you can maximize tax deductions, minimize taxes payable and reduce amounts that you have to pay to CRA and RQ. Below are some tips and strategies to help with this process:
Record Keeping and Organization
Ensuring that you maintain all your documents in an organized fashion is in some ways the most important task that a self-employed/small Business owner should do. It is important to have a system , either using physical file folders or an “accounting” folder on your computer, where you maintain all your invoices, bills, receipts, bank statements and government/tax documents. Filing the documents so that they are easy to locate makes life much easier at tax time. Even if you are not one to organize your documents regularly, at the least take the shoebox approach by keeping them contained in an area that is clearly designated for business documents. Organizing can then be done when necessary (which is ideally more than a week before your taxes are due)
Having a separate bank account and credit card for your business can be invaluable when trying to figure out your financial picture, particularly if you only do it once a year. It is also a great way to see your available funds and a quick way to calculate revenues and Expenses in the absence of an accounting system. If bank fees are an issue, you don’t necessarily have to set up specific business accounts; just ensure that the account and credit card are only used for business deposits and expenses.
For service based businesses, setting up a process to invoice your clients at a regular, periodic basis will improve your cash flow, reduce bad debts and help to reduce questions from your clients when they receive their invoice 6 months after the service has been performed. There are numerous invoicing software available in the cloud, many of which are free. Alternatively, an invoice template can be set up in Word or Google Docs. If registered, you are required to reflect the GST and QST numbers on the invoice
CRA provides a list of deductible expenses with some detail on each one. Essentially, most expenses that are incurred to generate business income are considered to be deductible unless they are specifically disallowed. For example clothing expenses are generally disallowed. Professional fees incurred to buy a capital property (like a building) cannot be deducted as an expense and are instead added to the capital cost of the property. Expenses paid for in advance like a security deposit for rent are not deductible until actually used. There are also a number of specific rules with respect to meals and entertainment expenses.
Home Office Expenses
If you have the luxury of working from home, and this is your only Office, you are allowed to deduct expenses that relate to your office plus a percentage of expenses that relate to your total home like mortgage interest or rent, insurance, property taxes, alarm, condo fees and utilities. It is important to keep all the bills and a record of the calculation if asked later. Repairs and maintenance can be deducted if they relate to your home as a whole (at the designated percentage) or the office specifically (100%), however costs relating to specific areas of your home are not tax deductible eg. if you renovated your kitchen, this is not deductible.
Cell Phones and Internet
Most of us use our cell phones and the internet for business as well as personally. These expenses are deductible to the extent that you can reasonably prove that they relate to your business. It is advisable to calculate personal vs business use and use this percentage when calculating the business expense to deduct.
If you use your vehicle to meet with clients or make sales calls, it is deductible. One caveat is that driving from home to your office is not deductible (this is not applicable if your office is at your home). If you lease your vehicle you are allowed to deduct up to $800 of monthly lease costs which then has to be prorated based on business vs personal use. You are also allowed to deduct the same percentage of license, registration, fuel and maintenance costs.
Self-employed and small business owners can sign up for private health services plans (PHSPs) which allow for your medical expenses as well as your spouse and dependants to be deducted against your business income. Keep in mind that there are restrictions regarding this kind of plan in Quebec.since health insurance premiums paid by an employer are a taxable benefit which would offset the deduction.
For deadbeat clients and customers that do not pay, you may reduce your revenues for these amounts (assuming they were included in your revenue calculations in the first place) assuming there is significant likelihood that you will not receive payment. Any future collections can then be included at the time of recovery.
Even if you do not have much or enough income to cover your expenses, make sure that you still keep the bills and reflect them on your tax return. Most expenses can be offset against other sources of income, while home office expenses can be carried forward to be offset against future business income. Keep in mind, however, that ongoing losses will likely lead to an audit so it is even more important to have all you finances in order and well documented.
Deadlines/Penalties and Interest
The deadline to file your tax return is extended for Self-employed workers and their spouses is extended from April 30th (for regular folk) to June 15th. Any taxes that are payable, however, are due on April 30th after which you will have to pay interest on unpaid balances. If you do not file your taxes by June 15th, Revenue Canada and Revenue Quebec will impose a penalty. As such, even if you can’t afford to pay your taxes, it is advisable to file within the deadline and work out a payment arrangement.
Unincorporated self-employed workers include their business income on Schedule T2125 of their personal tax returns. Tax software like Ufile and TurboTax has made filing your own tax return fairly straightforward, particularly if your business is simple.
As always, having an accounting software to keep track of your business finances is extremely helpful. Excel sheets may be convenient, but they are not always accurate or pretty. Also, it is difficult to compile history from an excel sheet while with an accounting software you can analyse your business based on a variety of metrics including customer sales, sales by category, purchases by category and profit on different divisions. And despite the seemingly unlimited number of articles advising self-employed business owners on their accounting and tax issues, it is usually a good idea to consult with an accountant to ensure that you are on the right track and not overlooking anything important.
Tax Deduction for Home Office Expenses
The Many Hats of Self Employment
20 Essential Tax Facts for Small Business and Self Employed Owners
Ufile Tax Software for Small Business
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