Being your own boss. Working as much you want, when you want. Building something from the ground up that’s truly yours. There are many things to love about being self-employed.
Taxes, though, aren’t one them. Whether you’re an entrepreneur, a freelancer or an on-demand worker, filing your return is more complicated when you don’t have a T4 income slip. So Global News talked to CPAs, tax lawyers and self-employed taxpayers themselves to get the lowdown on do’s and don’ts.
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Here’s what they had to say:
Keep track of your money
Tax prep when you’re self-employed begins the moment you start bringing in income. Step one is knowing how much you made and what you can claim as business expenses.
Most people with regular jobs can afford to set up automatic transfers from their chequing to their savings account and live happily ever after within that budget, said Amanada Mills of Toronto-based Artbooks, an accounting firms that specializes in assisting freelances working in the arts. But, “as soon as you have freelance income, your intimacy with your money becomes unbelievably close,” she added.
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On the revenue side, you’ll need to know who has paid you and who still owes you money. On the expenses side, you’ll have to keep personal and business affairs separate.
Then there’s managing your cash flow. Income can vary widely from one month to the next, as can expenses, when you’re self-employed. You’ll need to set aside enough cash to carry you through during periods when business is slow and to pay for taxes, which aren’t automatically deducted.
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Consider incorporating
There are two reasons to incorporate, according to Toronto-based tax lawyer David Rotfleisch: One is limiting liability, the other is deferring taxes.
“If you’re doing something that may result in being sued, then you should incorporate to protect yourself,” said Rotfleisch.
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From a tax point of view, the time to consider incorporating is when your business is “profitable enough that you don’t have to take every penny out to live,” he added. A rough threshold for that is $70,000 in gross revenue, he added.
Your corporate profits will be taxed at about 20 per cent, a much lower rate than the 40-45 per cent you would pay on your personal income, until you decide to pay them out as dividends. The nice thing is that you decide when to take that money out. Unlike in an RRSP or TFSA, income earned by investing passive profits is taxed, but you still have more money to invest thanks to the lower tax rate.
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When deducting expenses, be reasonable
The CRA’s phrasing when it comes to business expenses is: “You can deduct any reasonable current expense you paid or will have to pay to earn business income.”
The key word in there is “reasonable,” said Mills. Attempts to portray what are really personal expenses as business costs may well trigger an audit, she said.
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Still, you’d be surprised what may count as legitimate business expenses. For a rap singer, said Mills, it may be the cost of getting dreadlocks. For Valerie, 42, a Toronto-based lifestyle writer and cookbook author, it’s the price tag for the kitchen equipment she has to purchase in order to test recipes and set up food photo shoots in her kitchen. For artists who are frequently asked to appear on TV, it may be the price of a new dress, hairdo or manicure.
The key is to make sure the expenses fit CRA guidelines. You can write off half the cost of a latte you purchased during a business meeting, because the CRA allows for a 50 per cent deduction of food and beverage costs as part of the price of entertaining clients, employees and colleagues. But claiming a latte you consumed while typing away on your laptop likely won’t cut it, even if you were working, said Mills, because that’s not a type of expense the CRA contemplates.
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Collect all receipts and keep them for at least 6 years
“You need to keep records and copies of all invoices, otherwise CRA will deny the deduction,” said Rotfleisch, who is also a CPA.
In this respect, using separate credit cards and bank accounts for personal and business-related transactions makes the bookkeeping much easier, added Rotfleisch.
During the course of the day, you may want to scribble a quick note on the back of receipts to remind yourself about what the expense was for, advised Howes, the writer.
If you use your car for business, you should keep a log of fuel and maintenance costs for personal and business use, said Rotfleisch.
And keep all your paperwork for at least six years. That’s how far back a CRA audit can go. This means you’ll have to wait until the end of 2022 until you can safely destroy your 2016 return.
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Don’t forget the HST
In addition to claiming your business income, you’ll have to start paying HST on your gross revenue as soon as it exceeds $30,000 a year. Unless you’re making $1.5 million or more per year — and congratulations if you are — you’ll have to file your HST return once a year, usually when you send in your income tax return.
Pay taxes as often as possible, file once a year
That’s the motto at Artbooks, the Toronto tax preparers, said Mills. Paying income taxes every month is like having an employer deduct payroll taxes from your pay, and it avoids having to foot a gargantuan tax bill at the end of the year. All you need to do is set up the CRA as online vendor through online banking and figure out which tax bracket you’re in.
If your cash flow swings so much that setting up regular income tax payments isn’t feasible, you should at least pay the HST every month, said Mills. While small businesses can elect to file HST returns every quarter, Mills didn’t see a reason to take on the extra paperwork.
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