Top 5 tax mistakes self-employed Canadians make and how to avoid them
Making mistakes is part of life, and it’s most certainly part of business life. We all know that, and yet, none of us like making them. This is especially true when it comes to our finances. Somehow there’s an extra layer of shame added on when our money situation is messy, or we make a misstep in that area of our lives. As accountants, we have seen it all when it comes to financial missteps, and we’re here to tell you it’s very common. However, with some awareness and knowledge you can avoid these missteps before they even happen.
Before we dig into our Top 5, we’d like to challenge you to re-frame mistakes. We’d like you to give yourself some grace and think of them as missteps, and not something that defines you. Missteps provide us a fabulous learning opportunity if we are able to rise above the shame we may be feeling around them. In this blog, we will share the most common tax missteps we see and how you can avoid them.
1. Filing late
We don’t know a single business owner who wasn't caught off guard at one point or another by an approaching tax deadline. We get it, and we are here to talk you out of ignoring that deadline. The number one mistake we see people make when it comes to their taxes is filing late. Why is this such a big deal? When you file late, you are on the hook for penalties from the CRA. They start at 5% of the amount owing. If you have missed any of the previous two income tax deadlines, that amount doubles to 10%, which can be a significant amount of money depending on how much income tax you owe.
How do you avoid these penalties? It’s simple - file on time. Even if you worry about whether or not you can pay your tax bill, filing on time is always in your best interest. This is because late payments generally only result in interest being owed, whereas late filings also get hit with a penalty. Filing on time is the best way to avoid these nasty penalties.
How do you make sure you file on time? Start early! We always advocate that tax season is all year. By tracking your transactions and filing your receipts all year long you are setting yourself up to be able to file on time. Also, start thinking about getting your tax information rounded up in January of each year. That way you can dedicate time to it in small, manageable chunks rather than working against a deadline last minute.
2. Thinking your accountant will ‘take care of it’
So maybe you have been telling yourself you are not a numbers person and have decided to delegate that part of your business to a pro. Amazing! Accountants can add massive value to your business, not just at tax time but also on a more operational level. Sounds like a dream, right? You can finally stop stressing about the financial part of your business. Right? Sorry, wrong.
How come, you might be asking? As much as your accountant can be a valuable resource in so many ways, they are also counting on you to provide them with accurate information.
Your accountant, or tax filer does not have the responsibility to ensure the information you provided is accurate. The assumption is that this is the case. As businesses grow and additional stakeholders are involved, accountants may be engaged to complete a Review or Audit engagements. These types of engagements are much more thorough and require accountants to complete procedures that would confirm accuracy of information - a fact-checking exercise to put it in plain terms.
As a self-employed (sole proprietor), your accountant is not there to audit your information. That would be expensive and time consuming. So you need to make sure that you have a solid handle on your bookkeeping and the rules around sales tax, write-offs, and what not, to ensure that the info you provide is, in fact, correct.
Let’s just take a pause here….because we know that you might be feeling a bit uneasy right now after reading this last bit. You might be thinking, well where the heck do I learn how to do this stuff right? If my accountant doesn't take the time to teach me, then who will???
You aren’t alone in feeling this way. Through working with many self-employed individuals like you, we noticed that there was a HUGE opportunity for us to help educate business owners on these very important matters. You need someone to teach you how to make sure your bookkeeping inputs are correct - this includes everything from making sure your recording sales tax correctly, writing off expenses in the right way, and more. It’s not necessarily your bookkeeping itself that is the issue . It's a matter of recording them correctly and making sure you’re not missing anything or overlooking compliance requirements.
This is why we created our Solopreneur Tax Academy program. This is a program that teaches you how to make sure you are preparing your tax inputs correctly. Whether doing them yourself, or with the help of a tax preparer, this program has transformed tax season into an efficient, painless, and stress-free experience for 100 business owners and counting. And no, you don’t need to have an accounting background to take this program. We’re meeting you where you’re at. Regardless of whether or not you come to the table with zero knowledge, or a lot of it, we have created a program that will truly take the stress out of tax season and give you the confidence that the info you have in your books is bullet-proof.
Curious to know more? Check it out HERE.
3. Not collecting sales tax (GST/ HST)
If you recently started a business, you likely asked yourself, "should I start collecting HST right away or wait until the business is making more money?"
In Canada, we have a $30,000 small supplier threshold. This means that you do not have to collect GST/HST if you make under $30K of taxable worldwide revenue (of all your businesses) when evaluating your revenue over the last four consecutive calendar quarters. The third most common mistake we see is business owners not starting to charge GST/HST when they should. Once you cross that 30K threshold, you are required register, collect and remit GST/HST to the CRA for your taxable supplies. We also see business owners have started collecting sales tax without knowing they need to be registered, in this case you should call the CRA immediately to remedy the situation. The number to call is 1-800-959-5525.
The best way to avoid this common misstep is to really know your numbers, particularly your revenue. If you have a strong handle on what level of income you are producing, you will know if you are nearing that $30K threshold. Having a solid bookkeeping system in place is the first step to ensuring you can keep up to date on your sales figures. Ensuring you have a regular routine to input your sales figures into your bookkeeping system, and keeping your reports current is also key to making sure you are not exceeding this threshold unknowingly. This topic is so important and such a common misstep that we built an entire module around it inside our program Solopreneur Tax Academy.
4. Not setting up your finances from the get-go
Have you set up your business finances for success? When was the last time you sat down with your money and made sure it was well taken care of? The fourth most common mistake we see is not setting up systems and routines for your money right at the onset of starting your business. No shame or guilt here; in fact, this one is an easier fix than people imagine.
Start with separating your business and personal bank accounts. All business-related transactions (including subscriptions, office supplies, etc..…) should flow through one bank account or a dedicated credit card. Organizing your receipts is another quick win. Find a folder and make sure any business-related receipts go in there monthly. Finally, book a meeting with your money. Knowing what your money is doing will enable you to make intelligent business decisions and free up some of that mental space you are currently using.
5. Not saving for taxes
Tax season sneaks up on most business owners each year, and can often be followed by a surprise tax bill. Suddenly, you have to figure out where that amount is going to come from and how you are going to make those payments. It’s a stressful cycle that can be broken by simply saving for taxes throughout the year.
Think of tax as an expense in your business. You have to work that into your bottom line so that it stops being a surprise inconvenience and starts being something you saw coming and had the foresight to plan for.
Sound to good to be true? This is actually possible! You can estimate your taxes owing by using your previous year’s tax bill as a benchmark and adjusting it for your projected growth in the coming year. This way, when tax season rolls around, as it inevitably does, you will not be caught empty-handed.
If you are self-employed and operating as a sole proprietor, or if you are projecting higher or lower income than last year you can estimate your taxes owing using this helpful calculator.
The Bottom Line
Running a business is complex and full of learning. This can be especially true when it comes to your business finances. Ironically, even though money is the lifeblood of any business, we don’t spend much time talking about it and sharing our missteps. We hope this blog has armed you with the knowledge you need to avoid the most common financial missteps. The bottom line (and the good news) is that you can avoid all of them by setting yourself up for success.
Interested in learning more from us? Follow along with us through our social media accounts (find us on Instagram @growcpa) and sign up for our newsletter for more educational and fun financial content.
Wishing you success in your business,
- Martina + Ashli
Date published: June 7, 2022
Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.
