20 Essential Tax Facts for Small Business Owners
Probably the most popular question posed to accountants and tax preparers (especially around this time of year) is what types of expenses are deductible. The short answer is that an expense is considered to be deductible if it has been incurred with the ultimate purpose of earning income. For example if you purchase a domain name with the intent of setting up a website to sell your goods or services, this would be a deductible expense. However, if the purpose of your website is simply a place to show pictures of your cat, this would not be considered a business and therefore not a deductible expense. Of course if your cat picture website starts to become popular and you decide that you want to actively build this business by advertising on the site or partnering up with cat product resellers, your non commercial hobby could then be considered a business. Since you now have the intent to build a business the income earned would have to be reported and expenses incurred to earn this income would be deductible.
7 Qualities of Highly Desirable Clients
When you are a business owner/freelancer, there are few things that are better than landing a great client. Ones that ask great questions, respect our work and make us feel happy to have chosen the entrepreneurial route. Conversely there are bad clients who have unrealistic expectations, are unimaginative and often just plain clueless.
Of course, as the service provider, it is also incumbent upon you to provide an exceptional service. Having a client is not dissimilar from being in a relationship and for both sides to get the most out of it, you must also be responsive, respectful, fair and transparent.
Why and How to Transition from a Sole Proprietorship to a Corporation
When starting your new business, often it makes sense to choose the simplest structure which is the sole proprietorship. This allows you to test the viability of your business idea and to see if the lifestyle and the related stress that goes along with being a business owner suits your personality and is in line with your long term goals. Alternatively, you might want to keep everything simple and not add any unnecessary complexity. Registering and maintaining a sole proprietorship is fairly straightforward ; many business owners don’t put much thought into the financial aspects of it until tax time (when the mad scramble ensues). Once you have a corporation, however, the level of complexity and commitment increases
Business Tax Deadlines for Sole Proprietors for 2021
While many businesses got a break from some onerous tax deadlines back in the early days of Covid, unfortunately there are no such extensions for 2021. Almost all tax deadlines are now exactly as they were in previous years and small business owners must adhere to them or risk facing penalties for late filing plus interest on any overdue balances. That being said, it is possible that a greater amount of taxpayer relief will be available this year if you can demonstrate financial hardship due to Covid.
I have compiled a list of deadlines for all unincorporated small business owners which includes sole proprietors and self employed individuals. You can also sign up to get a calendar of tax due dates (for sole proprietors) for your ongoing reference.
What is a Sole Proprietorship?
According to Canada Revenue Agency (CRA), the definition of a sole proprietorship is as follows:
A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest kind of business structure. The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business. If you are a sole proprietor, you also assume all the risks of the business. The risks extend even to your personal property and assets.
The simple answer is that if you are selling any type of product or service, on an ongoing basis, and you are not employed by another organization where you receive an employment income slip such as a T4, you essentially have a business. If this business in not incorporated or part of a partnership with one or more individuals, then you are a sole proprietorship.
Tips and Tools for Working from Home
Having a home based business has many advantages - there's no wearying commute to and from work, our sleep schedule is not beholden to an alarm clock and it allows us to work, if we so choose, when we are at our most productive or creative. An additional benefit is that expenses relating to our home office are tax deductible. Working from home can, however, also present a unique set of challenges. Given the proximity of distractions including our beds, fridges , tvs and perhaps worst of all, our computers, it requires a great deal of discipline and focus to actually get any work done.
Pros and Cons of Incorporating your small business
The decision to incorporate can be a difficult one that many small businesses face at some point in their lifetime and . Incorporation, literally, represents the creation of a new person. Whereas a sole proprietorship is an extension of one's self, a corporation takes on a life of it's own; it can give birth to subsidiary, marry via a merger and die with a dissolution. It has to file it's own tax return, can be sued and has a set of rules that govern it's existence. Below are some of the points to consider when deciding whether to incorporate:
Employee vs. Self Employed: Criteria and Considerations
For the majority of income earners, employment status is pretty evident. If you are going to the same place every day, have an assigned cubicle with a computer and a corporate stapler, and you have a boss that tells you what you need to do, chances are you are an employee. Conversely if you have several clients, use your own laptop, and are worried about where your next sale is going to come from, you are probably self employed.
There are, however, some workers whose status is not that apparent. For example you may work from home and use your own computer, but you report to one entity, where someone supervises and directs your work. In these cases a determination needs to be made as to whether you are an employee or self employed. It is not enough for the person paying you to determine your classification ; often, payers are biased as they may not want to take on the financial costs and responsibilities of having an employee (explained below). As such, when in doubt about your status, it is helpful to answer the following questions:
The Importance of Breakeven Analysis for Business Owners
When embarking on your new business venture, one of the first and most important concepts that you will be introduced to is break-even analysis which, very simply, is the amount of revenues you need to generate to cover your direct and indirect expenses. A good grasp of this is essential for business owners since even businesses with significant sales revenues can incur losses if they are not able to cover their costs. While break even analysis tends to be used more for businesses that sell physical products, it can also help to the determine the price for services
Revenue Canada Interest, Penalties and Payment Arrangements for Income Tax and GST/HST Returns
Whether you are an individual or a business in Canada, taxes are an inescapable part of your existence. All sources of income need to be calculated, tax returns needs to be filed and taxes owing must be paid. This is somewhat facilitated if you are an employee as your employer tends to take care of the majority of remittances. Self-employed individuals, sole proprietorships, partnerships and corporations on the other hand, must account for their income and expenses , determine taxes payable and remit the appropriate amounts. Additionally, businesses are also responsible for other filings including GST/HST and QST and payroll. A lack of knowledge, imperfect accounting systems and the business of running a business sometimes interfere with the timeliness of filings. The Canada Revenue Agency attempts to curb these tardy behaviours by imposing penalties and interest on late filings as follows:
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Should you Register or Incorporate Your Small Business?
When embarking on a new business venture one of the first decisions that has to be made is the type of legal structure best suits the needs of the new business. In Canada there are essentially two choices - business registration (sole proprietorship or partnership/unincorporated entity) or incorporation. Like many small business decisions, the answer in not necessarily straightforward and depends on the business owner’s specific set of circumstances:
Breaking Up with a (Likeable) Client
Many of us have clients who are annoying, cheap, stupid , high maintenance or some combination thereof. As a new business owner, we are often stuck with these clients because we need them. However, we look forward to the day when we will have the thriving business that we so deserve, and fantasize about the spectacular way in which are going to fire them (you can shove your business into your rear orifice etc.) This is actually a productive fantasy as can help to channel and concentrate anger. Of course, in the majority of cases, a firing should be conducted with slightly less vigour.
Private Health Service Plans (PHSPs) for Small Businesses and Sole Proprietors: How to Make Medical Expenses Tax Deductible
One of the perks of being an employee, in many cases, is that your employer will provide health insurance benefits. Whether they pay for all of the premiums or only a portion, this can help to mitigate the costs significantly. Although, Canadians do have the luxury of Medicare, this is often inadequate and as anyone who has ever waited in an emergency ward can attest, may require you to take days off just to have your condition diagnosed (if one wants to look at this positively, it can be a great time to catch up on the classics). While the discussion of our Medicare system is a discussion for another time and another blog, the point is that having health insurance of some variety can help make the process a lot less painful. If you are self employed or a small business owner, however, the cost of health insurance can be prohibitive as you do not benefit from having a policy covering a group of people (thereby spreading the cost which is essentially how insurance companies work). On a personal level, Revenue Canada does provide for a tax credit, but this is only beneficial if your costs exceed 3% of your taxable income (up to approximately $2,000). Additionally the federal credit reduces your income taxes payable by 15% of the excess of medical expenses over the three year threshold. Eg. if your taxable income is $50,000 and your medical expenses are $2,000, your net federal reduction to your taxes payable is$2000 –( $50,000X3%) = $500X 15% = $75.00. This is very small relative to the actual expenses incurred.
So, how can a small business owner or self employed individual convert their medical expenses into business expenses? The answer is to use what is known as a Private Health Insurance Plan or a PHSP.
How to Update Quickbooks for the 2011 QST Rate Increase
Update: 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 effective rate is actually 14.975% (and not 14.5%) . In other words the effective QST rate is 9.975%. The instructions below are equally applicable, except the new QST rate to enter is 9.5%.
On January 1st, 2011, Revenue Quebec will be increasing the QST rate to 8.5% (yay!), bringing the effective rate of QST to 8.925% andtotal sales taxes (GST and QST) to 13.925% (since the QST is actually charged on the net price + GST.) This will impact anyone who charges QST including small businesses and self employed individuals, and invoicing software and processes should be updated to reflect the change. Suffice it to say that there are no major changes in the application of the rates. For those of you using Quickbooks you will need to update the QST being charged on both sales and purchases.