Year-end tax tips for the self-employed
Start planning now to take advantage of your unique tax-planning opportunities.
If you recently started a new business, you have lots to think about, especially at tax time. While the tax filing deadline for self-employed individuals is still a ways off, if this is your first time filing your taxes as a small business owner (self-employed), there are some strategies to consider.
Choose a fiscal year-end
When starting your business, you can choose a year-end after December 31, so that you can defer tax on your first fiscal year until the calendar year in which the first year-end occurs. However, you will still have to pay tax based on a December 31 year-end once your first fiscal year is completed. Thus, you would be paying tax on more than 12 months of income when you first pay tax on your self-employment income.
There are tax implications to consider when choosing your year-end, so it’s best to check with an accountant or trusted advisor to determine what’s best for your particular situation.
Know your deadlines
Individuals and most business owners must file their income tax returns by April 30 of the year following the tax year for which the return is being filed. If you are self-employed, however, the CRA extends the filing deadline to June 15, but it begins assessing interest on your tax due on April 30. This may seem like a long way off, but we all know how fast time flies when you’re busy, and if your fiscal year-end is December 31, there may be time-sensitive tasks to take care of now.
Have a system for receipts
Staying organized while you're running a business can be challenging, but a little preparation can go a long way in helping you avoid major mistakes. Set aside some time to organize your receipts. If you don’t have a system in place for tracking receipts, now is a great time to create one so you won’t be caught scrambling at tax time. It can be as simple as keeping all business expense receipts in envelopes, one for each month of the year, or if you’re tech savvy you can use a phone app to take a picture of each receipt, categorize them and upload a report to your bookkeeping software.
You can use your business banking transaction records and credit card statements to confirm you haven’t missed any big expenses, but remember that the CRA will need the original purchase receipt. A credit card slip alone will not be sufficient in an audit.
Understand the deductions available
Did you know that you can deduct a portion of your vehicle maintenance as well as gas and mileage if you use your personal car for business reasons? That's just one of the many deductions available to you as a self-employed individual.
Remember to include “business use of home” expenses, such as a portion of your rent/mortgage, utilities, home insurance, and cleaning supplies. If you made any large purchases of equipment or furniture, these need to be identified as capital costs, so separate them into their own category.
Advertising, (including social media), unsold inventory, and insurance are all tax deductions, but figuring out what you can file can be daunting. Tax filing programs like TurboTax make it easier.
Self-employed individuals and unincorporated business owners may deduct premiums for supplementary health coverage, subject to certain restrictions.
Utilize the right tools
As well as tax filing software programs like TurboTax mentioned above, there is no shortage of tools to help you manage your business and drive revenue. For example, there are time management tools that cover almost every aspect of your workday to make every minute count. There are accounting packages designed specifically for small businesses to keep your books in order and help out at tax time. Note-taking apps like Evernote ensure you capture that next great idea.
Social media platforms help you maintain a presence on the popular channels. And expense trackers help you keep tabs on your everyday expenses so you don’t lose out deductions. It’s amazing how even the smallest expenses add up!
If your business has a year-end after July 6, it can declare a bonus to you at year-end, but pay it after December 31. The company can then claim a deduction in its current fiscal year, and you can defer personal tax on the bonus until the subsequent calendar year. Note that the tax on the bonus must be remitted to the tax department within six months of the company's fiscal year-end.
Pay salaries to family members
Family businesses provide special opportunities to split income with family members. Your business can pay a salary or wages to your spouse and children as long as the payment is reasonable for the work performed.
Ask for help
Effective personal and business tax planning can be a complex matter; be sure to take advantage of professional advice.