It’s the end of March, which means two things: Spring has finally arrived, and tax season is on its way.
Nobody likes filing taxes. But when you’re a freelancer, solopreneur, or startup founder, tax time is torture. Digging out crumpled receipts from the glove box of your car, frantically adding up everything you spent on online courses, and then kicking yourself for not filing quarterly like the responsible grown-up you keep telling yourself you’ll someday become….it’s exhausting.
And while nothing can truly take the sting out of tax season altogether, there are a few easy ways that you can reduce your amount owing and the size of the headache you’ll get this April. Here are just a few ways you can make taxes less painful this year.
It’s Not Dead Yet: How You Can Still Benefit from Income Splitting
The income splitting benefit of yesteryear may be dead and gone, but if you’re looking for a way to divide up your tax bill between you and your spouse, there’s still a way for freelancers and other self-employed people to do just that.
All you have to do? Is hire your spouse or children as employees.
Let’s assume that you earned $60,000 in freelance or business income last year. But for the entire duration of last year, your spouse was providing you with part-time administrative support for your business, and you paid your spouse a salary of $20,000. This would reduce your net income to $40,000, which reduces both your taxable rate and your total amount payable.
If you do choose to hire a family member in order to reduce your tax bill, though, just make sure you follow a few simple rules so you don’t end up getting audited.
When hiring a family member to work for you, you have to be able to prove that said family member actually did work for you. It’s not enough to just claim, for instance, that your sister did your books from January to September. You have to keep employment and payroll records proving you hired your sister to do your books, or, in the case of an independent contractor arrangement, you have to hang on to her invoices and have a copy of her freelance contract on hand.
If you’re hiring immediate family, you also have to make sure that you are paying your spouse or family member an industry standard rate that is appropriate for the nature and amount of work they are doing. You can’t give a spouse or immediate family member preferential treatment on salary – you have to pay them the same rate that you would pay someone who wasn’t related to you. So you can’t, for example, pay your spouse $40,000 a year just for cleaning your office 5 hours a week.
Small Amounts Add Up: Remember to Record These Micro-Expenses
A bottle of Windex for your home office. The cheque printing fee your bank dinged you last month. The mileage you incurred visiting a client. Small expenses like these are some of the more frequently forgotten deduction items that freelancers and other self-employed people incur. And while each one of them may not seem like a big deal, over time, they can add up.
The CRA’s rule of thumb is that you can deduct from your income tax any expense that you incurred in order to run your business or conduct business activity, provided you can prove that you spent that money.
So while it may not seem worth your trouble to hang onto your receipt for the $1.83 you spent on a pack of pens for the home office, keep in mind that every deduction counts for something. The CRA can also be a little particular about expenses, and the more receipts you hang onto, the less likely you are to get audited.
Need an Accountant? Skip the Mall Pop-Up Shops
Every tax season, tax preparation services all around the country set up booths in malls hoping the prominent physical position will net them more business. And while there’s nothing wrong with going to one of these services if you’re an employee, self-employed people are far better off hiring an accountant. Professional accountants will be very familiar with the special deductions and expense rules that govern freelance businesses, and will be able to help reduce your tax bill by the maximum possible amount.
The mall pop-up shops are great for employees on a payroll who have fairly simple and straightforward tax returns, but if you’re running a business of any kind, you’ll want to hire an accountant with experience filing self-employed returns.
Tax time as a freelancer, solopreneur, or startup founder can be rough. But by planning ahead, keeping great track of even the small expenses, and going to a professional accountant with experience in self-employment income tax, you can minimize your tax bill and have more money to toss into growth next year.