Essential Tax Filing Tips For Self Employed Business Owners

Hello everyone. In today's tutorial, I'd like to share five things that every sole proprietor that is self employed small business owner needs to know about filing their income taxes. And as many of you know, the tax deadline is approaching. So it's a good time to brush up on your knowledge. And if this is your first time, then of course you want to better understand understand the process, whether or not you're doing it yourself or outsourcing to an accountant. My name is Ronica Cannon. I am a cpa, a CFA and the founder of Montreal Financial, where you can find lots of resources for your small business or if you're a solopreneur or self employed. Okay, so let us begin. My first tip is to determine whether or not you in fact need to report your your self employment or small business income on your tax return. And it is important to keep in mind that this video relates to sole proprietors, which is also another way of saying unincorporated business owners in Canada. If you were incorporated, then the tax reporting requirements are different. Okay, so if you, you have income from self employment of any kind, you could be a gig worker, you could be a freelancer, you might provide services, you might sell products, perhaps you have advertising income from a blog or from YouTube. All of these are taxable. So essentially if you earn income, if you have generated sales in any way for which you have not received a T4 that doesn't relate to employment income, you do have to report this on your tax return. And if you're not incorporated, then it goes on to your personal tax return. And that leads us to tip number two. So as an unincorporated business owner, you, you essentially have to report your sales and related expenses on a schedule called the T2125, which is a separate schedule on your regular personal tax return. So the tax return that you have filed every year, it is referred to as the T1. And on the T1 there are various schedules for different types of taxable events. If you are self employed or have a small business or an unincorporated business, as mentioned, then you have to complete form T 2125. And this is essentially the statement of business or self employment activities. You have to enter the information that is required on that form and this includes the name of your business, the industry code of your business, the type of services or products that you are offering, and then you have to enter your total sales for the year and your expenses by category. And so it is really important that you reflect these items correctly. You should be tracking your transactions either on a spreadsheet or by using accounting software, either is fine. But what you need from your tracking system is essentially a profit and loss statement. And a profit and loss statement is your sales less, your expenses by category, which will give you a net profit if your sales exceed your expenses, or a loss if your expenses exceed your sales. These items will then be transcribed onto the T2125. It has a very specific format that you have to follow on specific categories of expenses where you would slot in the amount. There's also another section and on the other section you can include expenses that don't neatly fit into any of the other categories. And in addition, and this takes me to tip number three, make sure that you understand your expenses, what categories they belong to. So common categories for expenses include things like office supplies, purchases you might have, bank charges, you might have training expenses, computer related expenses, Internet, telephone, utilities. There are a variety of expenses that might relate to your business. And remember, if you incur an expense that is ultimately used to earn business income, this is claimable with a few exceptions. I have lots of blog posts and resources on that that you can take a look at. So you can, you can certainly claim your expenses, but it is very important that you track them accurately. On the T2125, there are three sections that require some special attention, let's put it that way, and those three sections are your vehicle or your car expenses. So if you do use car for business, you do want to track all of those expenses and you can reflect those on the T2125. In this special section, I do have a separate video on how to deduct your car expenses. You can take a look at that. In addition to car expenses, you also have a separate section for home office expenses. And home office expenses can be claimed as long as you have an exclusive space that you use for your home office. You can designate that space. And then you can claim expenses relating to your home. Things like rent and utilities and insurance, property taxes, if you own your home, etc. And finally, the third special section is referred to as the capital cost section. So this means that if you have, if you purchase something like a computer or, or furniture, something that has a useful life that exceeds one year, this goes on to a special section on the T2125. You want to make sure that you track this carefully. And once you track it and you enter it onto your T215, the software that you use will automatically calculate the depreciation. You just have to make sure you choose the correct claim class and there's a lot on CCA capital cost allowance classes. Computers go into Class 50, furniture would go into Class 8. Those are probably the two most common classes for very small business owners. And so you just want to make sure that you.

Select the correct one so that the appropriate depreciation is charged.

And this leads me to the next tip which is should you do your own tax return or should you outsource it? And if you're going to do it yourself, how should you do it? So first of all, if you feel relatively comfortable with numbers, then it might be useful. I always highly encourage people to at least try it out and see if it makes sense to them because it is is fairly intuitive. And if you are planning to do your own tax return, I highly recommend that you use software. And software really makes the process easier. There's several softwares that you can use. TurboTax, UFile is a good software. There's Wealth Simple. These all take you through an interview process and help you with the entry into sort of the correct areas. So it is fairly simple to do. But again, you shouldn't feel a great deal of stress when you're doing this or have a, you know, a relationship with numbers that is difficult. And if that is the case, then you should certainly outsource it to an accountant. It is now end of March, so you want to make sure that you have your accountant lined up, but you still have some time. And that leads me to my final tip, which is on deadlines. So as a self employed small business owner who's unincorporated and entering information on the T2125, your deadline is actually June 15 instead of April 30, which is what it is for most Canadians. And so this is great. You still have a couple of months to prepare and complete your tax return. The one thing to keep in mind, however, is that if you file after April 30, Revenue Canada and Revenue Quebec will start charging you interest starting May 1st on any balances that you might owe. So your option is to pay the interest in case you file after April 30th. Or you could pay an installment, estimate how much you might owe in your taxes, pay an installment and then reduce the amount of interest that is payable. And it is also really, really important to file by the deadline of June 15, because if you do not file by the deadline, there is a fairly substantial penalty that is charged and this is just a completely useless expense. So you want to make sure that you do file that tax return. Even if you can't pay the amount owing, simply filing it will help you avoid the penalty. And then you can if you do have trouble paying it, you can work out a payment arrangement with Revenue Canada. You would want to call them look up CRA payment arrangements. Same thing with Revenue Quebec. You can certainly do that. And ideally if you can't file your cash return by June 15, then I recommend an estimate of the amount that you might owe and there's various calculators where you can determine what that is. Make a payment to both Revenue Canada and, if you're in Quebec, to Revenue Quebec and that will reduce the amount of the penalty and the interest because both penalties and interest are always charged on the amounts owing. So those are my five tips. If you have any questions, don't hesitate to leave them in the comments section. I will try to answer them to the best of my ability. I also recommend that you sign up for my newsletter because I send out a lot of useful information through that and I also have some books and webinars and courses that help small business owners and self employed people with their accounting and taxes. So I hope this was useful. Please like and subscribe and have a great day.