As a self employed individual, setting aside money for taxes and contributing to the Canada Pension Plan (CPP) becomes your responsibility. Self-employed individuals are considered their own employer and the employee, so you also have to contribute to CPP at double the rate.
It is up to you to track business and personal expenses, income, invoices, and receipts. This can all be stressful, especially trying to figure it out on your own.
What is year end tax planning?
Year-end tax planning is the process of reviewing your financial situation and creating a plan to become more tax-efficient by the end of the year. Staying on top of your finances will help you maximize deductions, remain on track, simplify taxes, and (hopefully) lower your tax bill.
Who is a self-employed individual?
Self-employed people own their own businesses and work for themselves. Whether you classify yourself as a small business owner (sole proprietor), independent contractor, or freelancer, this all falls under the umbrella category of “self-employed”.
The CRA lists a number of factors to consider to determine whether you are an employee or self-employed including:
- Control: Payer cannot dictate the manner in which work is done, what work will be done, or when it should be done
- Independence: They work independently and no one oversees their activities
- Workload: They can accept or refuse work from payer at their discretion
- There is no implication of loyalty, subordination, or integration
What do you need to pay as a self-employed individual?
When you are operating as a sole proprietorship, you are responsible for:
- Your personal income tax – this is your net income (your total revenue subtracted from your deductibles including expenses)
- Canada Pension Plan contributions (CPP)
- Optional: Employment Insurance (EI)
Below, we’ve included 3 ways you can plan for the end of the year as a self-employed worker.
1. Don’t wait until the end of the year
It is tempting to leave figuring out your taxes to the end of the year or tax season, but delaying it can leave you scrambling and confused at the end. We suggest tracking your expenses and income on a monthly basis to make doing taxes more manageable.
When you receive a receipt, categorize it. Keep a folder with all your receipts and keep your accounting records for at least 6 years from the end of the last tax year. If the CRA wants to audit your business and they ask for proof but you don’t have these receipts or records, they can reject your claim.
Having a separate bank account and business card is a great way to organize your expenses and revenue.
We recommend reviewing your cash flow on a weekly or monthly basis to ensure payments are not missed and assess where the majority of your income comes from. This not only helps with accounting, but it is also a great way to assess the performance of your business. Are there opportunities to grow? What is working? Where and why are you losing money?
2. Utilize Common Self-Employed Tax Deductions in Canada
As a business owner, you can claim a lot of deductions which helps reduce your tax. The following list is some of the items you can write off on tax forms:
- Home office expenses
- Equipment and tools
- Advertising and promotional material
- Property tax
- Meals and entertainment
- Salaries, wages, benefits
- Vehicle expenses
- Accounting fees
- Gifts for employees for holidays
- Interest on loans
If your income is high, try paying for expenses by the end of the year or making donations. You can also contribute to a Registered Retirement Savings Plan (RRSP) to decrease how much you owe in taxes. You have until 60 days after the new year to make RRSP contributions.
3. Always file your taxes
It is common not to make money in the first year of business. However, even if you make zero profit, you should still file your taxes. Filing your taxes affects your ability to get GST, HST, tax benefits, tax refunds, and more. It also determines the contribution room.
Chances are if you didn’t make any profit, it is because you spent the first year trying to build up your business (inventory, equipment, tools, marketing, etc) and the expenses canceled out any revenue you made. However, work-related expenses may be eligible for a rebate, so it is good practice to file your taxes regardless of profit.
Keep in mind, even if you consider yourself a business owner, your income is viewed as personal income and must be included on your personal income tax return.
If you are a high-earning self-employed individual, consider becoming incorporated.
There is a risk you take on as a sole proprietorship. Your personal income is also your business income which means it can be used against you, and you can be held liable. There are many reasons why someone would want to incorporate their business, but it will depend on their unique situation and preferences.
Need help with tax planning?
If you’d like help to plan out your taxes for the end of the year, it is important that you use a professional tax accountant. Regularly keeping up with your income, expenses, and other financial needs is important to ensure your investments are kept safe.
At Soleimani Accounting, we specialize in providing professional accounting services for small businesses and corporations. From bookkeeping and accounting to tax, we are here to help your business thrive through sound financial advice and assistance. Get in touch to book a free 30-minute consultation.