How to Handle Tax Time with Ease

Living the Life

How to Handle Tax Time with Ease

Apr 5, 2016 | Living the Life

How to Handle Tax Time with Ease

Apr 5, 2016 | Living the Life

Back in 1789, Benjamin Franklin astutely observed, “In this world nothing can be said to be certain, except death and taxes.” This still rings true today, and nobody knows this with more certainty than someone running their own small business. With tax filing deadlines looming for those living in the US (April 18) and Canada (April 30), we’ve compiled a list of helpful tips, reminders and advice for solo and small businesses – both north and south of the border.

Although there are many tax advantages that come with being self-employed, there can also be pitfalls if you don’t know and abide by the rules. In order to enjoy the benefits, you need to ensure you comply with the applicable tax laws in your region. In addition, you may have tax obligations beyond just the federal income tax and your payroll taxes. These can include self-employment tax, quarterly taxes, as well as the Goods and Services Tax/Harmonized Sales Tax (GST/HST) in Canada.

When it comes to taxes, knowledge is power. You can navigate what seems like an endless myriad of rules, regulations and legislative amendments with the right knowledge, resources and professional counsel.

Common questions

Typically, consultants have the following questions when it comes to their business taxes:

  • What can I deduct as a business-related expense?
  • How should I pay myself (e.g., dividend or salary) based on the type of company I have (e.g., sole proprietorship, corporation, etc.)?
  • When should I incorporate in the future and what form should that take (e.g., LLC, S-Corp, etc.)?
  • (If you’re in Canada) – Should I be charging GST/HST? And if so and I’ve collected GST/HST from my clients, when is the deadline for filing those returns?

The answers to these questions will determine the full scope of taxes you will need to pay, when to pay those and the type (and extent) of tax deductions you can even consider pursuing depending on the kind of business you have.

Important reminders

There are many taxation requirements that you need to be aware of particularly when it comes to the tax rules and regulations of the jurisdiction in which you operate. To help you steer your way through the tax season with less angst, we have compiled a number of tax tips along with some practical business advice as follows:

  • Plan for more than the federal income tax – In the U.S., the federal income tax is likely the largest tax obligation but not the only one. Remember to account for federal self-employment, Medicare, state (where applicable) and local taxes.
  • Charity does not always give back – Do not assume that everything you do for charity can be claimed as a charitable deduction. The value of your times or services donated to a charity, tuition payments and the cost of raffle or lottery tickets purchased in support of a charity are not eligible for a charitable deduction. Check the tax publications to see what activities qualify.
  • Track expenses along the way – Don’t horde receipts and put yourself in a position where you then have to go back in time to account for your business expenses after the fact. You don’t want to stumble upon receipts from six months ago and wonder where they came from or how they were associated with the operation of your business. Keep track of your business-related expenses as they happen and file them right away so that you’ve got everything organized and ready for your accountant when tax season comes around.
  • Simplify your process – Find ways to make it easier for yourself. There are numerous apps and online software programs for tracking your financials and expense items, such as MileIQ (mobile app for business mileage), Xero (lets you download bank and credit card transactions for reconciling purposes) and Expensify (for organizing and managing your expense records).
  • Watch your deadlines – In addition to being mindful of general tax filing deadlines for personal income taxes, it’s imperative to also pay close attention to the tax filing deadlines related to your business’s fiscal year-end if you are incorporated. This becomes even more critical if you are doing cross-border business, which may further impact the deadlines for reporting your business income from a foreign country.
  • Know the Difference: Employee vs. Independent Contractor – It’s important to ensure that you’re operating your business in compliance with the definition of what constitutes an independent contractor in the eyes of Uncle Sam. If you’re an independent contractor then your earnings are subject to the Self-Employment Tax. For example, you don’t want to put yourself at risk of misclassifying any business relationship you may have with a subcontractor.
  • Use the correct forms – Make sure that you use the right forms, particularly if you are using subcontractors who fall under a 1099-MISC.
  • Don’t forget your home office deductions – Be sure to keep in mind home office deductions and how you can get the maximum benefit from them (e.g., on home maintenance costs such as utilities, etc.).
  • Keep separate bank accounts – For practical purposes, it’s a good idea to have a bank account that’s solely designated for your business so that you can keep your personal and business finances separated.
  • Retain your records – Make sure to maintain proper records and keep your documents and information on file for the prescribed number of years required, should you ever be audited. (For example in Canada, you need to retain your income tax records for at least six years.)

Another great resource (for those operating in the United States) is the Small Business and Self-Employed Tax Center on the IRS website where you can access numerous online tools, such as videos, webinars, small business forms and publications. In Canada, the Canada Revenue Agency offers a comprehensive checklist for new small businesses, along with further tips covering a range of topics related to self-employment and small business ownership in its various forms.

It’s important, however, to always consult the services of an accounting or tax professional when it comes to tax advice and the accurate information you need to proceed. Properly fulfilling your tax obligations and meeting the required deadlines will help you reduce your liabilities as well as avoid incurring stiff penalties and interest charges – so you can safeguard your assets.

Do you have any advice or tips for helping small business owners validly reduce their taxable income and save money? Please feel free to share your experiences (or cautionary tales) in the comments section below.

 

Image courtesy of Free Digital Photos | everydayplus

Written By Kerry Bezzanno

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