Small business owners, entrepreneurs and independent workers are a smart and resilient bunch. Those who have owned or managed their own business know what a challenge it can be just to keep the lights on. In spite of their courageousness, however, few small business owners have the same confidence when filing their taxes.
Perhaps it’s because there’s so much on the line, or because tax forms are often tedious, or because they feel less in control than they do with their day-to-day business operations. Whatever the reason, it’s not uncommon for small business owners to feel less than confident when filling out their annual tax forms.
Daunting as it may be, there are a few ways to ensure you’re being thorough and meeting your legal obligations while still reaping all of the eligible benefits. Here are six tips that can help small business owners file their taxes with confidence.
1. Stay organized
Keeping organized records is vitally important to ensure a smooth tax season. Even if you’re not the best at staying on top of all the paperwork and admin throughout the year, it’s never too early to start.
Knowing exactly what’s coming in and what’s being spent on the business will help save time and money when it comes time to file. Be sure to keep employee payment records and business expense receipts logged and organized to help simplify the process.
It’s also vital to stay on top of important dates to ensure you never miss a deadline. While sole proprietorships and qualifying partnerships who are self-employed have until June 15 to submit their T1 package, income taxes must still be paid by April 30 in order to avoid a penalty. Check with the Canada Revenue Agency (CRA) for alternate filing dates depending on your business structure, and always double check with your accountant.
2. Decide whether or not to incorporate
Businesses that are not incorporated are treated as a sole-proprietorship by the CRA and may follow a relatively straightforward set of tax rules. Any income earned is taxed as salary, and there are no eligible deductions related to business expenses. At the same time, non-incorporated business owners may opt-in or out of Employment Insurance, with many considerations on both sides of the coin.
For those that are incorporated, however, things can get a little more complicated. If you decide to pay yourself a salary, you’ll be required to deduct income tax and CPP premiums from your reported salary, but you’ll also able to take advantage of deductions, business tax credits and other perks. There are many ways of structuring your payments within a corporation, so it’s advisable to speak with a professional accountant.
3. Employ your family
According to the Canadian Income Tax Act, it’s perfectly legal to pay your spouse or teenage child a salary and deduct this amount as a business expense, so long as the salary is reasonable and they’re performing real work.
In other words, a six-figure payout for administrative tasks might raise a red flag, but a reasonable salary for close family members is accepted and can help reduce a business owner’s tax burden.
4. Know your deductions
Generally speaking, any money spent during the year that helps generate an income could qualify as a deductible expenditure. In straightforward terms, this means you will only pay tax on your total income, minus eligible expenses, thus reducing your tax burden.
Some of the most common deductions include business management expenses (such as licensing fees, membership dues, marketing fees and bank fees), business insurance premiums, vehicle and travel expenses, as well as meals and entertainment. For a full list of deductions consult the CRA’s online list.
5. Take advantage of tax credits
Federal and provincial governments offer a range of tax credits to small business owners for certain expenses. The Apprenticeship Job Creation Tax Credit, for example, reimburses tradespeople up to $2000 for two years after hiring a new recruit to their apprenticeship program.
The Scientific Research and Experimental Development (SR&ED) program similarly provides a refund of 35 per cent for expenditures made in the effort of providing education or training to employees. Make sure you’ve considered all applicable tax credits before filing.
6. Keep personal and professional taxes separate
Though they may feel heavily interconnected to the average small business owner, many fines and penalties issued by the CRA can be traced back to a business owner failing to draw a firm line between the two. Be sure to keep business and personal expenses and incomes separate to avoid any issues in the future.