Tax time is no one’s favourite time of year. I’m pretty sure not even accountants like it. BUT it is a fact a of life especially for independent contractors (IC) or self employed (SE) practitioners since you’re responsible for paying your income tax (and sometimes HST/GST/Sales Tax) to the government.
Yes, it’s more work than just having your paycheque handed to you with taxes already deducted BUT there are some great benefits (like deductions) afforded to you as an IC/SE.
Because it is no fun for anyone I’m going to skip some boring drawn out intro and cut straight to the point.
I want to:
1) Make this process as painless and seamless as possible (you and your accountant or pseudo accountant/mom) will thank me
2) Give you what you need to be sure you are making the MOST of the benefits you do get (ie: deductions)
3) Maybbbeee make it so you get some small glimmer of satisfaction being so organized (or is that just me?)
THE PROCESS:
Get yourself organized:
No matter what point you’re at in the year, it is never too late to get this going so just do it and thank me later.
1. Get a big accordian file folder and some sticky labels. Make labels for the categories outlined in this Deduction List Here.
2. When you get a receipt stash it in here or print it and put it in the correct folder
3. Once a week, once a month, or if you’re like me, once a year the week before I meet my accountant, fill in this expense tracker with an itemized list of your expenses. (While this may seem like a real hassle and waste of time ir will make it very easy for your accountant and also much more painless if you ever end up getting audited).
*** Note: if you want to be techy 2.0 or a clean living zen master, go paperless with one of these apps: Xpense Tracker or Expensify. You can photograph and categorize your receipts plus automatically pull expenses from credit cards and things.
If you use a practice management software, they may have something similar or integrate with a more comprehensive expense tracker like Quickbooks.
If I ever get my butt in gear I SO want to set-up Xpense Tracker for myself. It would be a bit of work upfront but would just make life a lot easier. Maybe next year I’ll do it…maybe. Be better than me and do it for yourself now!
4. When it comes time to actually file your taxes for the quarter or the year, you’ll need to have the following documents (all that apply to you)
FROM LAST YEAR:
– Last year’s Notice of Assessment
– Last year’s tax summary (good to check for consistency)
THIS YEAR’S INCOME:
– T4 or T4A
– Tips or gratuities (from your own estimate or tracking)
– T4E employment insurance
– Any other income from Pensions, retirement accounts, school (ie: scholarships or bursaries)
THIS YEAR’S SAVINGS & INVESTMENTS
– RRSP contribution slip (from the previous year March-Dec or this year’s first 60 days)
– Sales of business or real estate
– Investment or trust income (foreign or local)
– Interest you paid on a loan to invest in a NON-registered savings account
Now, I did say there were some benefits to being SE or IC practitioner. That is the expenses or deductions portion of taxes.
The government understands that it takes money to make money and as a self-employed practitioner you are going to incur some expenses to run and maintain your business. You’ve got business expenses yo!
Deductions are those expenses you incur in the tax year.
YOU ONLY PAY TAXES ON THE NET INCOME!
That means you DO NOT pay taxes on income you made that then had to go to business expenses. That is why it is SO important you keep every teeny tiny receipt for something that could be associated with running or operating your practice.
Why would you want to pay taxes on money that went back in to operating your business and you didn’t get to keep? That’s just crazy talk!
The more expenses, the lower your Net Income AKA your taxable income, which means the lower your taxes.
What can you deduct? Check out this list of deductions HERE.
That’s it!
I hope this makes you feel a bit more organized and less like you want to hide under your covers come tax season.
Maybe a small glimmer of satisfaction?
If yes, let me know on our facebook page! I LOVE hearing about people as crazy as I who get a little rush out of lists, spreadsheets and pure, unadulterated organization!
A few final notes (because I always have more to say):
– I highly recommend you get an accountant and particularly one that works with other practitioners in your field. It may have been fine to do your own taxes when you were a student or getting an easy pre-deducted paycheque from an employer but to me there is just too much at stake once you’re self employed to be doing this on your own. Plus, why spend the time?Accountant’s are not that expensive and hey, bonus – they count as a business expense. Get yourself organized, know what expenses to keep and track them…and then leave the rest to the pro’s.
– I am NOT an accountant. I happily hire one each year to keep me in check. Please consult an accountant or tax professional before making tax decisions or filing. Everything I’ve written here is intended to help you get your shit together easily and quickly (remember I work with minimal effective effort). This is not the end all and be all. There may be other deductions available to you or not available to you
– I am in CANADA so everything I’ve written here is with Canadian Tax principles in mind. They’re similar in the US but not exact so see my point above and consult a professional!
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