Are you a new entrepreneur, small business owner or freelancer? Even if you are employed and earning money from a side gig like dog walking, ridesharing, or content writing, you are a business owner and must report your income. The way taxes work for employees, business owners and self-employed is different. Not knowing about taxes is not an option, as the Canada Revenue Agency (CRA) may not consider it a valid reason for not filing and paying taxes on time.
This article will familiarize you with the tax laws that apply to small businesses and self-employed as tax season begins.
Types of Taxes That Apply to Small Businesses
As a business owner, you do several new transactions for the first time, and new types of transactions attract a tax. The following are some of the basic taxes all business owners need to know:
- Sales tax (GST/HST/PST)
- Payroll tax
- Personal income tax
- Corporate tax
- Property tax
Each of these taxes has to be filed and or paid separately. Let’s start with sales tax.
As a business owner or freelancer, you sell goods and services for which you generate a bill and get paid by clients. As a sale has occurred, you may be required to collect Goods and Services Tax (GST) or Harmonized Sales Tax (HST) from your customers and remit it to the CRA. However, your sales should be $30,000 or more in three consecutive months or four consecutive quarters. You may also have to see whether sales tax applies to your goods and/or services and what is the applicable tax rate.
Even if you have not crossed the $30,000 sales threshold, you can voluntarily register with the GST and claim an input tax credit (ITC). ITC is the GST you pay to buy goods and services for your business, which you can deduct from the GST collected from customers. Suppose you collected $2,500 in GST from customers but paid $1,500 GST in the business expenses incurred. Your total GST bill will come to $1,000 after claiming ITC. You may not be able to claim this ITC if you are not registered with the GST.
Remember, depending on your business requirements, you must file your GST returns monthly, quarterly, or annually.
As a business owner, you may hire employees at some point. As an employer, you are responsible for adding your employee to the payroll, paying wages, deducting mandatory deductions like employment insurance (EI), Canada Pension Plan (CPP), and both employer and employee contributions, and remit it to the CRA. You must also deduct the federal and provincial income tax based on the employee’s salary and remit it to the CRA by the 15th of the month after paying the staff.
As an employer, you must give your employees T4 and T4A tax slips by the end of February. Payroll is a process. You can outsource it to a professional bookkeeper as your employee count grows.
Personal income tax
If you are a full-time freelancer or an unincorporated business, business income is the net profit after deducting business expenses. You are required to report your business income in the T2125 form along with your T1 personal income tax return. As you are your employer, you are required to remit both employer and employee CPP contributions to the CRA. Moreover, you must pay advance tax by the 15th of every quarter end (March, June, September, December) based on the estimated income for the financial year.
But if your business is incorporated, it is a separate entity. You must withdraw money from the company as a salary or dividend. You can deduct this salary or dividend as a business expense. But you will have to add it to your personal income and accordingly file your personal income tax returns.
The corporate tax comes into the picture when you incorporate your business as a separate entity. Incorporation has many benefits. But it also comes with significant legal, administrative, and accounting expenses, as corporates must keep their records updated.
If you are a Canadian-controlled small business, you may be eligible for the small business deduction, under which the first $500,000 is taxed at 9% corporate tax. The CRA offers many other benefits to incorporated businesses. You must file a T2 corporation tax return under the company’s name over and above the T1 personal income tax return.
In Canada, you pay property tax if you own a residential, commercial, or industrial real estate property. The property tax rate ranges from 0.5% to 2.5% and is based on the size and value of the property and the province. If you are working from home or self-employed, you can deduct property tax as a business expense when calculating your taxable income.
These are five basic taxes every business owner should know about. There may be other taxes like excise duty if you deal with export-import. Some taxes and tax deductions may be specific to your business. Even though it is your first year filing taxes as a business, seek the help of a professional accountant to avoid any misses and delays.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with All Types of Tax Filings
A professional accountant can help you organize your payroll, invoices, and accounting system and ensure you file all types of taxes promptly and correctly. To learn how Edelkoort Smethurst CPAs LLP can provide you with payroll, accounting, and tax filing services, contact us online or by telephone at 905-517-2297.