How to Save for Your Small Business Taxes
Hello All,
One of the complexities of being an unincorporated small business owner is that you (or your accountant) have to compile and calculate your revenues and expenses and report the result on schedule T2125 of your personal tax return. If you are profitable, then you must pay taxes. This amount, as some of you can attest to, can be disturbingly high.
Of course, the tax rates are largely the same (with certain differences relating to EI, CPP etc.) whether you are an employee or self employed. The difference is that as an employee, your employer calculates, deducts and remits your deductions to Revenue Canada and you rarely have a large tax bill at the end of the year (assuming no other major sources of income). But, despite similar tax rates , the psychological impact of seeing the amount of tax that you owe (especially the first time) can be deeply stress inducing .
If you would like to see the video version, check out my video below on 5 tips to help small business prepare for taxes payable:
The solution to this problem is financial discipline. This is easier said than done especially for small business owners/solopreneurs who often require cash flow for their operations, do not have time to implement a system due to more pressing priorities or are simply unaware.
Not paying your instalments though has financial consequences in the form of interest and potential penalties which are completely unnecessary.
It can be significantly less costly, and stressful, if you put a process in place and set a reminder to follow through. The process would look something like this:
Estimate Your Tax Liability: Start by calculating your estimated income for the year. I recommend this calculator which is simple to use and has a great interface. I also have a short video that shows you how to use it.
Set Up a Dedicated Savings Account: Open a separate bank account specifically for your tax savings. Each time you receive income, transfer a percentage of it into this account. A good rule of thumb is to save at least 30-35% of your income for taxes. Ideally, you use the calculator above to estimate your amounts owing periodically to refine the amount that you owe. Also, if possible, it is better to over allocate and have too much in the account at tax time rather than less.
Make Regular Installment Payments: The CRA provides installment reminders and suggests amounts based on your previous year’s tax liability. Ensure you mark these dates on your calendar and make the payments on time to avoid interest charges and penalties.
Take a look at this week’s blog post to understand how sole proprietorship instalments work.
Review and Adjust Quarterly: Regularly review your income and income tax calculations and adjust your savings rate and installment payments accordingly.
Stay Organized with Records: Ideally, have an accounting system (whether software or spreadsheet) the details all of your income, expenses, and installment payments. This will make it easier to file your taxes and ensure you don’t miss anything when filing your return.
Understanding, preparing and saving for taxes is an unavoidable reality of being a business owner. But with a little bit of discipline and structure, you can make this a little less painful.
From the Blog
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Articles of Interest
Bank of Canada to Cut Rates at twice more? This, according to a poll of economists in the face of lower inflation and a weakening labour market.
Is interest paid on borrowing deductible? This article delves into some detail on the conditions that must be present for the interest on loans to be deductible against investment income.
Webinar from CRA About Personal Services Business where it lays out the conditions under which your corporation might be considered to be a personal service business (that would then subject to a 44.5% tax rate (in Ontario))
A 6 Step Financial Plan from Wealthsimple with some common sense advice for Canadians.
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Wishing everyone a great labour day weekend!
Ronika
