If you’re like most small business owners, your least favorite activity is getting ready for the tax filings.
Although taxes can be complex, some businesses make the process harder than it needs to be. By avoiding these three mistakes, you can decrease your fear factor at tax time.
Mistake #1: Waiting all year to catch up on record-keeping.
Most business owners get caught up in the day-to-day challenges of running their business. There’s never enough time to handle tax documents.
And so, you ignore the pile of bank statements and receipts until it’s tax time. By then, you’ve got 12 months of transactions to enter and categorize. You’re stressed and pressed for time — a terrible combination that can result in mistakes and missed opportunities.
Here are some ideas to avoid the last-minute nightmare.
• If you are keeping the records for your own business, book an appointment on your calendar and block the time to update your records at least quarterly.
• You might hire a bookkeeper/accountant, especially if your business is growing fast or you have many complicated transactions.
• Automate data entry. Many accounting programs allow you to synch the data from your bank, which eliminates the need to type in transactions manually.
Mistake # 2: Paying employees as independent contractors.
From the business owner’s perspective, employees are more expensive than independent contractors. You have to pay provincial and federal unemployment taxes, CPP, and workers compensation/disability premiums etc. You also have to withhold certain taxes from each paycheck and remit them to federal and provincial agencies. In some cases, you must also provide for additional benefits like health insurance and paid time off.
So, classifying your new hire as an independent contractor seems like a cheap and easy solution.
However, that may lead to fines and penalties down the line if the CRA disagrees with your definition of “independent contractor”.
Here some questions to consider before you think you are clear.
• What is the degree of control you exercise over the way the work gets done?
• Who pays for materials, supplies, and/or equipment used?
• Is the work temporary or permanent?
Generally, if you control the way the work is carried out or the product is delivered, including specific hours worked, the relationship is probably one of employer/employee.
However, the distinction is not always straightforward. Laws change, and you need to consider many additional factors. Talk to an attorney before you make your classification decision!
Mistake # 3: Mixing business and personal finances.
Mixing personal and business finances can lead to all sorts of complications at tax time.
For one, you could inadvertently claim a personal expense as a business deduction. Or you could do the reverse and miss out on a deduction because you used a personal card to pay for something business-related. Either way, you would be misstating your business income and paying the wrong amount in taxes.
Here are some best practices to ensure that tax time goes smoothly.
• Set up separate accounts for business and personal purposes.
• Get consistent about setting up deposits and transfers in a way that allows for clean accounting.
• Move funds from their business account to a personal account to cover living expenses. It does require an extra step, but it allows you to cover all personal expenses from your personal account.
Now, it’s your turn. What actions do you take to make tax time easier?