There are many employees out there to whom the promise of self-employment aka freelancing aka independent consulting (all of whom are ultimately small business owners) seems extremely appealing (particularly with a comfortable pair of pajamas). You might crave the feeling of accomplishment that is no longer possible at your current place of employment; you might want greater flexibility or feel that you are not being compensated enough for your skills or perseverance. Or you simply might want a change of pace.
While being self-employed can accomplish all of these goals, the transition itself is not as simple as it might seem nor is it the right decision for everybody. There are many factors that need to be considered and many mental and financial preparations that should be made prior to taking this potentially life altering decision.
For the third year in a row, the Quebec Sales Tax (QST) will be changing. Fortunately, the change is not to the rate, which effectively remains the same, but rather an effort to harmonize the QST with the GST. Consequently, the most significant change is the method by which the rate is calculated.
In the past, the QST used to be calculated on the total sale plus GST. As a result the published rate was 9.5% while the effective rate was actually 9.975%. The harmonization of the GST and the QST requires that the QST be charged on the sale amount only, without the GST. As such the published rate and the effective rate will both be 9.975%. This is illustrated below:
If you are running a business of any size, it is essential that you have a system in place that allows you to get paid. A system can range in sophistication from a handwritten receipt to a software generated invoice which is part of an entity wide CRM system. To meet this need there are countless invoicing solutions available and many billions of dollars are spent annually on setting up systems to meet each business’ unique needs.
Almost all accounting software geared to small business owners and freelancers have built-in invoicing modules that integrate with your accounting. This is very useful when doing your books as you don’t have to worry about entering your invoicing manually and it allows you to track your accounts receivable and deposits into your bank account. There are also invoicing solutions that are not full-fledged accounting systems; however they usually integrate with the more popular software.
Recently, a client received a notice from the CRA indicating that he had received a credit of $265. The explanation was simply that it was a hiring credit. Upon further research, we determined that the credit was a result of the provision in the 2011 budget that gave a credit to small business for hiring additional employees.
To be eligible for the credit, small businesses are not required to prepare any additional reporting. The small business hiring credit is simply calculated based on the increase in employment insurance (EI) premiums paid in 2011 over 2010. The maximum amount that any business is eligible to receive is $1,000.
Since the calculation is based on amounts reported on your T4 slips for 2010 and 2011, you are only eligible if the slips have been filed for these calendar years.
It appears that the amount of the credit is 100% of the excess of 2011 EI premiums over the 2010 EI premiums, up to aforementioned limit of $1,000.
The credit will not actually be paid out immediately, but applied to your payroll account.
New businesses (like my client) will receive the credit. Their 2010 EI premiums will be calculated at $0.
Note that since the EI credit should reduce your payroll expense, it will reduce your business expense and by extension, increase profits. The journal entry is as follows:
Dr. Payroll (EI) Liability
Cr. Payroll Expense
Once you receive your payroll statement from Revenue Canada indicating the amount of the credit, you may reduce the payroll liability owing to them by the same amount. You cannot, however, estimate the amount of the credit before you have received notification from Revenue Canada.
The deadline to file our tax returns is quickly approaching, resulting in slight feelings of panic for some individuals and small business owners. As someone who provides tax services for a living, I have found that (like with many things) the stress is far more manageable when you know exactly what you have to do (rather than a vague idea that documents need to be located and forms need to be filled in). One of the best ways to mitigate this stress is to prepare a checklist. If you are looking for a comprehensive tax checklist , David at The Tax Issue has prepared an excellent one and I recommend that you check it out.
The checklist below has some of the more common income, deductions and credits that the majority of taxpayers are likely to have:
There are three primary ways in which you, as an owner-manager, can withdraw funds from your corporation. You can pay yourself a salary, you can declare a dividend or you can borrow money from the corporation. When you borrow money from your own corporation the Canada Revenue Agency (CRA) has put into place strict rules as to when you have to repay the loan. This is essentially to ensure that the owner-manager does not avoid paying taxes indefinitely.
The basic rule for shareholders loans is that they must be paid in the fiscal year following the year in which the loan was taken. For example, if your fiscal year end is December 31 and you borrow money in 2011, then it must be repaid before December 31, 2012. Failure to repay will result in the loan amounts being included in the shareholder’s income in the year in which the loan was taken, which in this case would be 2011. The loan must also not be considered to be a series of loans and repayments eg. Repaying an amount at the end of 2011 only to borrow again in early 2012.
As of January 1st, 2012 the Quebec Sales Tax (QST Rate) which had gone up from 7.5% to 8.5% on January 1, 2011 will now increase to 9.5%. The effective sales tax in Quebec will go up from 13.925% to 14.975%. Since QST is calculated on the net amount + GST, the rate is not 14.5% but 14.975% . In other words the effective QST rate is 9.75%. Business owners will need to update their invoicing and accounting systems accordingly to ensure that the rate is properly reflected.
If you are using Wave Accounting, the update to the rates is fairly straightforward, with one little quirk. Since Wave, unlike Quickbooks, does not allow for the QST to be calculated on the GST, the effective rate has to entered manually. This is done as follows:
To update Quickbooks for the tax rate increase, please see “Updating Quickbooks for the 2011 QST Increase”. The procedure is essentially identical except for rates.
An accounting system can be an extremely powerful tool for business owners. When well-structured , according to the specific needs of the business, it converts raw data into a format that actually tells a story about your business and can allow for insights that are essential to optimum decision making (the magic of debits and credits). The balance sheet is a snapshot at a specific date, while the profit and loss is more of a narrative. It provides feedback on how your business is doing and communicates what you need to do in the future. Some of the information that can be gleaned is discussed below:
Working from home has many benefits for small business owners, but it also has several drawbacks. It can be isolating, can lead to laziness, a lack of discipline and may not be the most professional environment in which to meet people. And it requires cleaning up (try to get a coffee stain out of your living room carpet can cut into precious work time). Similarly a coffee shop can be noisy and distracting and is not usually conducive to longer work hours. On the other hand, renting an office can be expensive, formal and usually requires a committment whether you own it or rent it.
For those who want to have access to an office without incurring the costs, coworking can be a great compromise. Coworking allows independent workers, business professionals, artists etc to work in a shared space. Coworking spaces generally offer a social and collaborative environment and have several benefits as follows:
The US senate passed the Small Business Jobs and Credit Act, introduced on May 13, 2010, by a vote of 62 to 38. The vote included the support of two republicans - George Voinovich of Ohio and George LeMieux of Florida. The bill will go back to the House of Representatives where democrats are hoping it will be approved without delay. Some of the key provisions of the bill are as follows:Read More