Ronika Khanna walks through five ways self-employed people can avoid surprise tax bills. Set aside 30-40% of income in a dedicated account, use a tax calculator to estimate what you owe, make CRA installment payments if required, and track everything in a spreadsheet or accounting software.
So if you have ever filed taxes as a self employed business owner, the amount may have been a little bit shocking to you. It certainly was to me the first time I filed my taxes. And the problem is it's not that you're paying more in taxes because the taxes for any business is exactly the same as any employee and is simply based on your income. However, as a self employed person, you're paying your taxes all at one time. So the tax liability seems much larger and the psychological impact is a little more disturbing. To avoid the shock and to mitigate the impact and to be prepared essentially for your taxes, there's a few things that you can do to make the whole process easier. Number one, it is important to understand and know what your tax liability is going to be and you should be tracking this during the year. In Canada, there are several tax calculators you can use. If you type in tax calculator into an Internet search, you can find several of them. My favorite one is the wealthsimple tax calculator. It does a great job. You can input your province and it tells you how much taxes that you will owe. Keep in mind it is an estimate, but it is close enough. I also have a video that can walk you through the process. The second tip that I have for you is that during the year you should estimate your average tax rate and put that amount aside in a separate savings account. So you would set up a separate savings account for your business. And every month or every week or however often you want to do it, you take an amount and put it into that account. It could be 30%, 40%, whatever you think is reasonable. And remember, more is always better. Also, if you're signed up for sales tax, I also suggest that you put the gst, HST and QST if you're in Quebec into the same account so that you are not spending that money and that you don't have to scramble at the last minute to put the amounts together. My third tip is to make regular installment payments. So if you're a first time business owner and you are filing taxes for the first time, you won't really have any installments to pay. Installments are only determined in year two and sometimes even year three. Assuming you owed more than $3,000 in tax in the previous year. There are several methods for calculation, but if you do owe installments, CRA will send you a notice telling you how much you owe. And keep in mind that if you are if your business is in Quebec and you're a resident of Quebec, the amount of taxes is actually reduced to $1,800, after which you will owe installments. Once you get those installment notices, make sure that you pay them by the due dates to avoid interest and also to make essentially a down payment to your tax liability, which is what installments are. My fourth tip is at least quarterly, you should review your income and make adjustments as necessary. For example, you might estimate that you will earn $75,000 in the year, but this amount may actually be higher. But you would only realize that towards the end of the year. I recommend that you again put that amount in your preferred tax calculator to determine how much you owe and make adjustments to the amount that you are going to save in that separate savings account and just to make sure that you have enough. And again, more is better than less. And my final tip is to ideally have an accounting system. I have a separate video about five reasons why every small business owner needs an accounting system. And your accounting system doesn't have to be super fancy. You can use a spreadsheet, either Excel or Google Sheets, or you can use accounting software if your business is a little more complicated. And I highly recommend that I am going to link to a post that I have and whether you should use accounting software or a sponsor spreadsheet. But keep in mind this helps you keep track of your sales and your expenses as well as your sales taxes. This allows you to estimate your anticipated profit, which is your sales less, your expenses. And then you can determine or certainly estimate what your tax liability is. And it also ensures that you don't miss anything. So you don't want to underestimate or overestimate either your sales or your expenses.
So those are my tips for managing and saving for taxes. This is really important and as mentioned, it really catches a lot of small business owners by surprise. So I highly recommend that you do this. Just to summarize, you you should 1 estimate your tax liability 2 you should set up a dedicated savings account where you transfer money that you anticipate that you will owe for taxes. Number three, make regular installment payments, especially when you receive notices from the government. Number four review and adjust your tax situation quarterly. And five stay organized. Have an accounting system. Whether it's a spreadsheet or accounting software. This is going to help you tremendously in terms of figuring out what your tax liability is. So that's all for this video. I hope it was helpful. If you have any questions, don't hesitate to leave a comment or if you have any struggles, I would love to hear about them. Please, please leave a comment. And if you found this video useful, please like and subscribe as that really helps me to make more videos. Have a great day.
