More than a quarter of all Canadians struggle with their finances. Those who are self-employed often struggle more as their income can fluctuate from month to month.
Many self-employed individuals and small business owners become overwhelmed around tax time. Unsure of the rules and their options, some will ignore the financial obligation to pay taxes and bury their head in the sand, while others try their best to manage but often leave savings and incentives on the table. However, there is no better time than the present to make positive changes in how you manage your contract or self-employment income and business expenses, and how you can make the most out of the tax breaks available to small business owners.
Myth: I must pay taxes on my business’ total sales, regardless of expenses.
As a business owner, you have access to far more deductions and credits than a salaried employee, including expenses. The taxes you pay are only on your business’s net profit earnings after deducting those expenses. Examples of expenses that a self-employed individual can deduct include your health-insurance premiums, office equipment, work travel, dues, marketing costs, and home office expenses. It is always wise to hire a professional for advice on business taxes. After all, what might make you a successful painter, doesn’t necessarily make you a great money manager. Hiring a professional bookkeeper or accountant will be money well spent – and another expense that can be deducted!
It is also a good idea to consider using a management tool, such as QuickBooks, to track your business expenses so that at tax time, you aren’t scrambling to get everything together for the bookkeeper or accountant before the tax filing deadline. These tools can typically scan receipts and store them, track mileage, manage documents, and reduce the likelihood of human error. It will keep you organized and ready to address your tax return each year. It will also provide you with an idea of how well your business is doing at any given moment.
Myth: There is no way to prepare for a massive income tax bill
We often see individuals who had a plan to pay this year’s tax bill in instalments from next year’s income seek our advice when their income wasn’t high enough to do so.
There is no guarantee you will be earning enough in the following year to pay for the previous year’s tax bill. It is a good idea to set aside money each month for the income tax you will likely need to pay each year. Keep those funds in a separate account or an account that isn’t set up on your online banking so that the funds aren’t easily accessible until the moment you need them. If you don’t know how much money to set aside each month, a professional can help you calculate the monthly amount.
Tip: setting up a budget to track your irregular income is a way to stay on top of your business and personal finances. A personal budget allows you to focus on what you can afford rather than what you cannot afford. One budget strategy for those with fluctuating income is the holding account method. All your self-employment income is deposited into one account. Then, you pay yourself the same amount from that account each month based on what you have calculated you will need to meet your personal financial obligations. During months of higher income, the holding account will have a larger balance. During the leaner months, the account balance will decrease; however, the amount you pay yourself will not vary from month to month.
Myth: Tax laws can’t be imposed on small businesses
Traditional lenders such as credit cards companies and banks are required to sue you before they can take your wages or seize your assets. However, Canada Revenue Agency (CRA) has no requirement to take legal action before they can garnish your wages or assets. If you ignore them, they can seize all the funds in your bank account until they are paid in full. They can also register a charge against your home which requires their debt to be paid when you refinance or sell. So, when it comes to income tax debt, it is essential to be proactive and know your options.
Myth: It’s okay to wait to pay your income tax debt
The Canadian Income Tax filing deadline is April 30th of each year, unless you are self-employed. For self-employed individuals, the tax filing deadline is June 15th. However, it is important to note that any balances for taxes owing must be paid by April 30th, regardless of whether you are self-employed. Penalties for amounts owing and not paid to the CRA by April 30th is 5% of the amount owing, plus 1% interest monthly after that. If you do not file your tax return or file it late, you may miss out on receiving government benefits, GST refunds, Canada Child Benefits, and Old Age Security, to name just a few. These benefits are based on your tax return so you may not receive them unless you file your taxes each year.
Myth: A consumer proposal or bankruptcy does not include income tax debt.
If you owe money to the CRA, there is only one way to “make a deal” with them when it comes to unpaid taxes, and that is with a consumer proposal through a Licensed Insolvency Trustee. A proposal will stop collection action (even after it has commenced) and interest charges. In addition, a proposal will result in an affordable payment plan to settle your debt entirely. If a proposal is not possible given your circumstances, tax debts can also be dealt with through a personal bankruptcy proceeding.