Self-employment in Canada has many benefits, but it also has obligations, especially tax-related ones. Unlike salaried employees, self-employed people must handle their own taxes and maximize tax savings while following CRA requirements. These five Canadian self-employed tax recommendations can help you understand the tax process and maximize your revenue.
Keep Detailed Records of Your Expenses
Keeping accurate company cost records is one of the greatest methods to lower your self-employment tax burden. Deducting various business-related costs from your taxable income with the CRA can dramatically reduce your tax bill. These expenses include office supplies, travel, marketing, and even a piece of your home office if you operate from home.
Brands Insider stresses the significance of keeping financial records to lower taxable revenue and protect yourself from audits. All costs must be business-related per the CRA. Organizing receipts, invoices, and bank statements simplifies tax deductions.
Many freelancers underestimate the number of costs they may deduct. Tracking every expense, no matter how tiny, might affect your tax bill. Accounting software may also simplify and organize records.
Understand the Importance of GST/HST Registration
Canada requires businesses with over $30,000 in yearly income to register for the GST or HST. Your GST/HST registration lets you charge customers tax on your goods and services and submit it to the CRA. You can also claim input tax credits (ITCs) for GST/HST paid on business purchases.
Economy Insider reports that many self-employed people are ignorant of GST/HST registration benefits. Registering lets you use customer taxes to offset company expenditures. If you buy business supplies frequently, this can save you a lot. You can recover back taxes on company costs by voluntarily registering for GST/HST even if your turnover is below the threshold.
Note that GST/HST registration requires completing periodic returns and remitting tax to the CRA. If used properly, it can help you manage your taxes and lower your taxable income.
Maximize Your RRSP Contributions
As a self-employed person, you can contribute to an RRSP but not a pension plan. RRSPs allow you to contribute a part of your income each year, lowering your taxable income. Contributing to your RRSP lowers your annual tax burden while saving for retirement.
Your income and contribution room from prior years determine your RRSP contribution. This deduction can reduce your company income tax burden, thus self-employed people should take advantage of it. RRSP contributions are tax-deductible in the year they are made, which can dramatically lower your taxable income.
According to brands insider, preparing your RRSP contributions might help you save for the future and save taxes. Consult a financial counselor to establish the best annual contribution to keep under your contribution restrictions.
Deduct a Portion of Your Home Office Expenses
Many self-employed people prefer working from home for flexibility and cost savings. Fortunately, you may deduct utilities, rent or mortgage interest, property taxes, and home insurance if you use part of your house for business. The goal is to use the area for business operations including administrative duties and customer meetings.
According to economic insider, the CRA lets self-employed people claim home office expenditures based on how much of their house is utilized for business. One room in a five-room house can be used as an office, allowing you to deduct 20% of home expenditures. A portion of your electricity expenses, home insurance, and property taxes. The CRA lets you deduct home office maintenance costs like repairs and supplies if they’re business-related.
Keep detailed records of your workplace size and home-related costs to claim this deduction. The discount might be large, but you must use the area for business, not just convenience.
Set Aside Money for Taxes Throughout the Year
Self-employed people often forget to save for taxes. Self-employed persons pay their own taxes, unlike salaried employees. If you haven’t been saving, you may face a huge tax burden come tax season.
A tax savings strategy is necessary to avoid this. Aim to save 25%–30% of your income for taxes. This number is a decent beginning point but depends on income, deductions, and tax rate. Self-employed people often pay taxes regularly to the CRA to avoid a big one-time payment.
Brands expert advises proactive tax preparation to guarantee you have the money to pay your taxes without affecting your budget. Setting up a tax savings account might help you stay focused and avoid spending it elsewhere.
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