If you are self-employed, filing your returns can be such a dreadful affair. It gets more complicated since you don’t have the T4 income slip that the employed have. We’re here to make life a little bit easier for you. We’ll share some tips to help you get your taxes right.
Keep Track Of Income And Expenses
It’s important to always know and keep a record of how you spend your money and the income you receive. There’s a lot that you can claim as a business expense so keeping those receipts is important for tax purposes. The moment you start bringing income, always know how much you made, how you spend it and how much can be claimed as a business expense.
Separate Personal And Business Affairs
Perhaps the most challenging thing for self-employed individuals is keeping their personal and business expenses separate. Taking this important step will help you in managing your cash flow. The amount of income you get may change month after month. Additionally, your expenses can grow over time which means you must set aside some income to keep your business moving during the slow months and be able to pay taxes.
Incorporate Your Business
Running a business as a sole proprietor has its advantages. However, incorporating can come with significant tax benefits. One of the main reasons why we encourage entrepreneurs to incorporate is that it protects them from financial losses in the form of lawsuits. If you are running a business that could result in being sued, consider incorporating as a way of protecting yourself.
If you are planning to incorporate for tax benefits, ensure your business has grown enough to a point where you don’t need to take money out of it regularly to survive. You should be making roughly $70,000 in gross revenue every year for it to make sense to incorporate and gain tax advantages. This is because when you incorporate, you will pay taxes at a rate of 20% of corporate profits which is significantly lower than the 40-45% paid on personal income.
Deduct Expenses Based On CRA Guidelines
The CRA only allows you to deduct expenses that you must incur in order to earn business income. These expenses may vary from one self-employed individual to another. For instance, a popular musician may deduct the cost of dressing and hairdo as part of the business expense if he/she is required to appear on TV frequently. Go over the CRA guidelines to determine what kind of expenses are reasonable in your case. Remember that for some expenses such as food and entertainment, you are allowed to write off 50% of the cost.
Keep Receipts For At Least 6 Years
The CRA can deny deduction if you do not have the supporting documents to show for it. That’s why it’s important to keep a record of receipts and invoices for at least 6 years just in case the taxman comes knocking. You can write a few notes at the back of the receipt as a reminder of what the expense was for.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.