If you’re self-employed, it can be a trial to do your taxes. Self-employed taxes can be convoluted to understand, especially with what you can and can’t claim and what tax breaks you qualify for. That’s why we compiled this list of tax tips, so you can spend less time researching tax law and more time running your business (or taking a break – you’ve earned it!).
1. Little Known Possible Claims
You run a business. Like every business, your business has costs. But while you run your business, you are not your business – even if it does feel that way. While you are responsible for fronting the money for operating expenses, you’re allowed to deduct any money you put into your business on your personal return. This includes obvious expenses, like any product or equipment you need for your business to run, but also includes lesser known deductions.
When you repurpose something you already own for your business, you are able to claim some of the cost. If you operate out of your house in a home office, that home office counts as office space and can be deducted in the same way that rent or a lease is deducted for a “real” office space. This means you can claim a percentage of your mortgage and other home expenses as your office’s operating expenses. To calculate what percentage you can claim, measure the area of your home office and divide it by the total area of your house. If your home office is, for example, 15% of your home’s total area, then you can claim 15% of all your housing-related costs as operating costs.
The same goes for your car. If you drove 30,000 km annually, and 6,000 km of that were for business-related reasons, then you could claim 20% of your vehicle’s operating costs (like gas, insurance, and maintenance).
2. Income splitting
If you can include your family in your business, it could really pay off. By “employing” your family members, you can pay them wages, which can be deducted as payroll for employees. The best part is the money stays within your family, instead of being lost to taxes. The catch here is the work and pay must be justified. You can’t pay your son $1000 an hour to drive you to meetings, since that’s well outside what constitutes a reasonable pay for a driver. Likewise, you can’t pay your partner for cooking your meals, since that’s a personal matter and not a business one.
Your “employee” has to claim this as income on their taxes, but if the family member you’re paying has a lower marginal tax rate, you can save a nice chunk of cash. If they normally don’t work (a stay-at-home parent, high school or post-secondary student, or simply unemployed) and if you paid them less than $10,400 (for the year 2017), then they don’t have to claim any income; your family saves 100% of the tax.
If your business is large enough, you might already be considering incorporating for liability reasons. The main advantage of incorporation for legal purposes is that your company is liable, not you, which can offer personal protection in case something goes wrong. But you came here for tax tips, not legal advice, and incorporating is also an amazing way to save large amounts on your taxes.
An incorporated company has a much lower tax rate than a person does. The Canadian Small Business Deduction allows a small business to reduce the federal tax rate to 10.5%. In Ontario, the small business tax rate was dropped to 3.5% on the first $500,000 earned in the wake of the minimum wage increase. This results in a business tax rate of 14%, lower than a personal marginal tax rate of even the lowest income bracket. You can lower your marginal tax rate by leaving some money in your business instead of paying it out to yourself as income. This not only allows you to reinvest without having to deduct everything on your personal tax return, but by controlling your income you can save thousands, depending on how much your business makes.
If you’re self-employed and looking for other ways to save money, you should consider also contributing to your RRSP. This is an easy way to both defer your taxes and save for retirement. The deduction is equal to the amount of money you put in your RRSP, so calculating your deduction is easy.