The self-employed lifestyle holds great promise when you first embark upon it, however you quickly find yourself doing things that you would never have dreamed of. You are expected to take on role of salesperson, market researcher, accountant, lawyer and social media expert, while not getting paid for any of it. Your available funds do not allow for outsourcing and at times you are not even aware of what you don’t know. Luckily the internet provides a wealth of tips and tricks to make these tasks a little easier, and with a little discipline, some aspects of your self-employed existence can be made much simpler. Ensuring that you keep on top of your finances and tax obligations is one of those much hated, but absolutely necessary tasks for which it is essential to have a system in place, even if you do have an accountant.
Record Keeping and Organization
Ensuring that you maintain all your documents in an organized fashion is in some ways the most important task that a self-employed/small business owner should do. Have a system (paperless is fine) where you maintain all your invoices, bills, receipts, bank statements and government documents. Filing the documents so that they are easy to locate makes life much easier at tax time. Even if you are not one to organize your documents obsessively, at the very least throw them in a box that is clearly designated for your business. Organizing can then be done when necessary (which is ideally more than two days before your taxes are due)
Having a separate bank account and credit card for your business can be invaluable when trying to figure your financial picture, particularly if you do it once a year. It is also a great way to see your available funds and a quick way to calculate revenues and expenses in the absence of an accounting system. You don’t actually have to set up business accounts; just ensure that they are only used for business deposits and expenses.
For service based businesses, setting up a process to invoice your clients at a regular, periodic basis will improve your cash flow, reduce bad debts and help to reduce scrutiny from your clients when they receive their invoice 6 months after the service has been performed.
If you have the luxury of working from home, and this is your only office, you are allowed to deduct any expenses that relate to your office plus a percentage of expenses that relate to your total home like mortgage interest or rent, insurance, alarm, condo fees and utilities. It is important to keep all the bills and a record of the calculation if asked later. Repairs and maintenance can be deducted if they relate to your home as a whole (at the designated percentage) or the office specifically (100%), however if you renovated your kitchen, this is not deductible.
Cell Phones and Internet
Most of us use our cell phones and the internet for business as well as personally. These expenses are deductible to the extent that you can reasonably prove that they relate to your business. It is advisable to calculate personal vs business use and use this percentage when calculating the business expense.
If you use your vehicle to meet with clients or make sales calls, it is deductible. One caveat is that driving from home to your office is not deductible (not applicable if your office is at your home). If you lease your vehicle you are allowed to deduct up to $800 of monthly lease costs prorated for business vs. personal use. You are also allowed to deduct the same percentage of license, registration, fuel and maintenance costs.
Although Revenue Canada gives taxpayers a credit for public transit, if you use the bus and/or metro for business purposes, it may be more beneficial to claim it as a business expense if your marginal tax rate is high enough.
The self-employed and small business owners can sign up for private health services plans (PHSPs) which allow for your medical expenses as well as your spouse and dependants to be deducted against your business income. Keep in mind that there are restrictions regarding this kind of plan in Quebec.
For deadbeat clients and customers that do not pay, make sure that you reduce your revenues for these amounts (assuming they were included in your revenue calculations in the first place). Any future collections can then be included at the time of recovery.
Even if you do not have much or enough income to cover your expenses, make sure that you still keep the bills and reflect them on your tax return. Most expenses can be offset against other sources of income, while home office expenses can be carried forward to be offset against future business income.
Deadlines/Penalties and Interest
The deadline to file your tax return is extended for Self-employed workers and their spouses from April 30th for regular folk to June 15th. Any taxes that are payable, however, are due on April 30th after which you will have to pay interest on unpaid balances. If you do not file your taxes by June 15th, Revenue Canada will impose a penalty. As such, even if you can’t afford to pay your taxes, it is advisable to file within the deadline.
Unincorporated self-employed workers include their business income on their personal tax returns. Tax software like Ufile and TurboTax has made filing your own tax return fairly straightforward, particularly if your business is simple.
As always, having an accounting software to keep track of your business finances is extremely helpful. Excel sheets may be convenient, but they are not always accurate or pretty. And despite the seemingly unlimited number of articles advising self-employed business owners on their accounting and tax issues, it is usually a good idea to consult with an accountant to ensure that you are on the right track and not overlooking anything important.
Ronika Khanna is a Montreal accountant who helps small businesses and the self employed accounting and tax needs. To receive regular updates of articles pertaining to small business, accounting, tax and other topics of interest to business owners you can sign up here. You can also follow her on Facebook or Twitter.