I'm talking to you!
Don't email me with your questions.
Update: This post is extremely popular and the comments are a wealth of information - make sure to read them. Please remember that these are just my experiences - I'm not a tax lawyer and and I cannot consult on your situation - so please do not call or email me with your questions. You should talk to an accountant, a book keeper or a tax lawyer. Or just call the CRA, they are pretty nice and have the answers your questions. Again, please don't email me!
The new year marks the beginning of a new fiscal year for many businesses so I thought I would share a few things I have picked up over the past few years. I've run my web consulting business as a proprietorship the past three years and have picked up quite a few nuggets of useful information along the way. These things seem simple and almost laughable now, but as a greenhorn I wish I had known these before I started.
These tips are best if you are thinking about running a sole proprietorship (a business that is owned and run by a single person) in Canada but are helpful for other outside of the country.
I'm putting this one first because its by far the most important thing you should do when starting a business. My first year I paid someone $50 to do my taxes and I really got what I paid for. I had my taxes reassessed three times and had to pay the government more each time. The second year around I paid around $700 for the fantastic services of Waterford Tax & Advisory who did an amazing job straightening everything out and giving me some fantastic advice which saved me tons in the long run. A good accountant will always be around to answer questions and give you advice. You can't afford to use a cheap accountant, trust me.
This is a no-brainer for taking care of estimates, expenses and invoicing clients. At $33 a month, this is one of the more expensive services I subscribe to, but it is worth every penny. At the end of the year I'm able to export a few reports and send them off to my accountant - no dealing with spreadsheets. My clients love Freshbooks too - I often get compliments on both how easy it is to manage invoices and how professional my invoices look like.
Starting a business, you are probably coming from a job where all your taxes are taken care of and at the end of the year, you get a nice little return from the government. Not so when you are on your own, take the time to educate yourself on what sort of taxes you need to pay in your area.
Personal Income Taxes: Running a sole proprietorship in Canada means you get taxed at the same rates as everyone else who isn't self-employed. There are both provincial and federal tax rates that vary depending on how much income you bring in. You can run your numbers for both at the CRA website.
HST: I run my business in Ontario, and I need to charge all my clients who live in Ontario 13% HST - your province or state will have something similar setup. If you are making more than $30,000 a year you will need to register for a HST number and start collecting.
So, the biggest lesson learned here is you need to pay a ton of taxes. As soon as you get a cheque, you should cut out anywhere from 35-50% (13% HST, 22-37% income tax) - depending on how high your taxable income is - and placing it in another account to pay the tax man at the end of the year.
The best thing you can do to reduce how hard you get hit by taxes is to expense every single dollar you pay to run your business. Again, this may seem like easy stuff to some, but its worth noting how this stuff works.
You only get taxed on net income, not gross income. So, if you get paid $1,000 for a project, but spent $200 on hosting for it, you will only be taxed on $800.
So, think of every little thing you use to run your business. Buying a new laptop, conference tickets + flights, printer ink, online subscriptions, software licenses... It all adds up quickly and can really help you reduce your taxable income.
As a business, you also don't have to pay HST. So any receipt you have that includes 13% HST, you will get that back from the government when you pay your taxes.
Max out your RRSP
This is a good tip for anyone around tax time. Up until the end of February, you can contribute to the previous years RRSP. Anything you contribute to your RRSP is not taxed, so you can treat it as a huge expense. The amount you con contribute depends on your previous years income, but it could be as much as around $20,000. In Canada, this money is meant to only be taken out at retirement, but there is a special clause that lets you cash it out, without penalty, when you buy your first house.
My wife recently quit her job to work independently beside me. While we are super happy with that decision, we lost the perk of health benefits. In Canada residents are covered for the big stuff like surgeries and doctors appointments, but not things like medicine, dental work and eyeglasses. Insurance plans are surprisingly affordable, starting at $60 for basic coverage. Kait and I went for pretty good dental, eye and prescription coverage and it was around $160/month.
One other thing, we shopped around on the net for insurance and we didn't find any good rates, only after getting in touch with a broker did we find out its much cheaper to have a human do it for you.
TL;DR : Hire a good accountant and explore every possible way that you can reduce your taxable income. Starting to run your own business can be confusing so hopefully these tips can help you.
Update: Check this comment for a lot more useful tips, thanks Martin
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