Being your own boss: A guide to self-employment and taxes
In recent months, we’ve covered auto expenses and office-in-home expenses, so I won’t go into too much detail on those, but I do want to address the brave people who have taken the risk of earning money their own way and become self-employed. That’s right, the people who set their own hours, work their own jobs, do-it-yourself and get paid directly from the source. You bill your own customers, use your own wits and found a way to pay your own taxes…right? Right, payroll, and getting a regular paycheck that had all those source deductions on it for income tax, CPP, EI, and sometimes even benefits. Did you forget about those? Unfortunately, many self-employed individuals forget about those things and how different their world in tax has now become. What they didn’t know is what might just sink their business. My goal here is to give these people a bulk of information without making it too long-winded or confusing. Of course, as always, if you have questions, feel free to give us a call or send us an email. Let’s see if we can tackle this new business of yours together.
1. Deadlines
The way you do business has changed and so have the deadlines that you need to know about. First up, April 30 is still an important date. This is the day your taxes are due. You don’t need to have them filed yet, but you need to be clairvoyant and pay the income taxes and CPP by this date. However, in 2020, you have a bit of a saving grace in that the payment due date has been moved to August 31 due to COVID-19, so we get to be a little less clairvoyant this year. You probably also noticed I mentioned CPP. You don’t owe just income tax, but also CPP if you made over $3,500 in net income (at about 10% of the income). This amount will cap around $5,500. The reason this is so high is because you are effectively paying it twice. Most people who had a job noticed a cap on CPP deductions of $2,748 in 2019. However, you are your own boss, and you need to match that amount from a company standpoint. Unless you are making installment payments for income tax, you probably owe the whole amount now too. Instead of having it deducted from your periodic paycheck, you keep all your money during the year, but have to turn around and pay it all by the deadline.
The next important date is June 15, as this is the tax filing deadline. This has not changed from previous years like the tax payable deadline. This is so that self-employed individuals have a bit more time to get all their records together. If I scared you on the thought of paying income tax and CPP already, you are probably gearing up to get as many receipts as you can find in the hope they will save you some money. You’ll want those receipts, but we’ll discuss that later on.
2. Income
You did a job, you billed a customer, say $100, and they paid you. Does this include GST, should it? Maybe you are selling products under a retail banner, and getting paid commissions on the products you sold – did you get a T-slip, should you? The biggest question is to know how to report income, and here are some general guidelines:
· Paid directly from customers/clients – Report Income by Invoices/Receipts
· Paid through an intermediary (company) – T-Slip for Income should be provided, T4A (commissions) or T5018 (contract)
Generally, if you are giving a customer an invoice to be paid to you, you are in control of how money is collected and it is being directly given to you to report independently. If you are using a company for the exchange of money, they are in control of how money is collected and will provide you with the paperwork for reporting income. With regards to GST, once you have over $30,000 of income in a given year, you are required to register for a GST number and continue to collect/remit GST on an annual basis. This needs to be on the full amount of sales/services, so if you have a GST number and only have $25,000 in income, you are still on the hook for remitting the GST (though it is possible to deregister GST in a future year).
3. Expenses
As I mentioned before, auto expenses and office-in-home expenses are crucial for self-employed businesses as they provide some much-needed deductions for using your vehicle and part of your home for running a business and earning income. Please check out those articles for more information on how to claim those. Here we will provide a list on the other things to consider. A common question you should ask yourself is “would I have incurred this expense if not for the business?” If you answer “no, I would not have had this expense”, then it is reasonable to believe it can be used as a deduction. Receipts and statements are very important for keeping track of these expenses, and software, such as Quickbooks can help sort them out and organize them well. There are many things you can claim in the course of running a business, so we’ll just go over the most common areas:
· Inventory – For Sale of Merchandise or Manufacturing, you will want to keep track of your purchases, cost of goods sold, beginning-of-year and end-of-year values
· Meals & Entertainment, Advertising & Promotion – Useful for dealing with customers, vendors, clients, or anyone you are looking to do business with in some form. M&E is claimable at 50%, while A&P are claimable at 100%
· Utilities (100% Business-related), Rent, Cell Phone & Internet – If you need a devoted phone line, fax or other utility that is fully invested in your business, or if you pay specific rent for the sole purpose of the business. Cell Phones and Internet usually require a higher rate than household by square-footage and can be claimed in part or in full depending on their uses
· Business Fees, Loan/Credit Card Interest – If you took out a business loan, line of credit, or use credit cards in part or in full for business, you can claim a portion of the interest and fees
· Wages, Sub-Contractors, Professional Fees, Health Plan Premiums – As you grow, you might need a little help. If you have professionals, such as lawyers or accountants, or contractors, you can claim their invoices. If you have employees working for you, you’ll can claim their wages, source deductions, and any premiums you pay on their behalf, or directly to them
· Capital Cost Allowance (Equipment, Large Purchases) – Some items such as furniture, computers, office equipment and machinery cannot be expensed in full, but over the course of several years. This is known as a capital item
· Insurance, WCB – Insurance for liability, content, commercial and worker’s compensation (WCB). Home and Auto may be related, but are dealt separately in Vehicle or Office-In-Home expenses
· Travel – Hotel, Accommodations, Flights, Car Rentals, or other travel-related costs for business
· Office Supplies, Postage, Courier & Delivery – Stationary, Pens, Paper, Printer Cartridges, are all tangible items for office supplies. Postage, Courier and Delivery costs should be separated from supplies when claiming the expense
· Office Expenses – While there is not much real difference between office expenses and office supplies, typically we find the intangible items (web services, computer software) are classified as office expenses, so long as they are not part of advertising or captured elsewhere
· Management & Administrative Fees – Managing business accounts, including bank charges and processing fees can be claimable as M&A
· Memberships, Dues, Licenses – Some professions require these fees, but others, such as a membership for retail warehouses, bulk discounts or organizations can be useful for business and claimable in part or in full
· Bad Debt – When prior period sales have been deemed uncollectible and need to be written-off, you can claim a bad debt expense to negate income previously claimed
When reporting these income figures, GST should also be considered. If you are collecting GST on invoices billed, you should be claiming Input Tax Credits from your purchases. However, it also depends on whether you are claiming the full expense or only part of it (such as 50% vehicle usage, 25% internet, etc.). In other cases, GST in not applicable, such as when paying interest, insurance or bank fees. Best to acknowledge both the expenses and the GST where applicable.
There are definitely other expenses that are claimable, but tend to depend on the type of business you have. Same goes for exceptions on how income is reported and the tax implications regarding it. Of course, if you get stuck and need some advice, you can always contact us at Zablocki & Associates, and we’ll see what we can do to help you clear it up.
C. Zablocki