The deadline for self-employed Canadians or owners of unincorporated small businesses to file their 2013 tax return without incurring a late-filing penalty is June 16, 2014. That may seem far into the future but your business year end is December 31, so preparing now is not starting too early. And even though you don’t need to file until mid-June, if you owe money, interest will start to accrue on May 1, 2014, so getting organized now can save you a few dollars.
If you are filing your first self-employment return this year, here are some tips for making it go smoothly:
- Self-employment can range from opening your own business, to being a work-at-home consultant to being a contract worker with a particular company. For example, there are students with contractors who do not deduct income tax, CPP or EI from their earnings. They may not have received a T4 slip, but the income still has to be reported on a tax return. In many cases, the student did not earn enough to actually pay income tax but, if you earn more than $3,500, you will pay the employee and employer portion of your CPP premiums.
- You may think it is easier to just enter your income on Line 104 as Other Employment Income, but you should complete the T2125 Statement of Business Activities form as part of your tax return. This form allows you to deduct reasonable business expenses you incurred to earn your income. If you just write a number in Line 104, you cannot deduct expenses.
- You are allowed to claim reasonable business expenses that help you earn income, so collecting receipts for legitimate costs is worthwhile for when you prepare your tax return.
- As a general rule of thumb, self-employed Canadians should save 30 to 40 per cent of their income for tax purposes. You should have an understanding of how much money you earned and the potential tax bill. If you are facing a sizable tax bill, you are not allowed to carry forward or split income between years. You are required to report all the income you earned in the calendar year.
- If you want to draw a salary from your business, you need to incorporate, but this is a big step with many implications. Incorporating just to minimize income taxes may end up costing you more money in the long run.
Again, I cannot stress enough the importance of keeping good records when you are self-employed. Filing your tax return is much easier when you are organized, and you will thank yourself for good record keeping when it is time to file your return.