How To Stop Yourself From Getting Nailed With A Big Tax Bill

Kelowna accountantAs a local Kelowna accountant, tax advisor as well as a business advisor, I have the unfortunate duty of telling clients that they owe money to the government. If you’re self-employed, you need to take a few extra steps than an employee has to in order to ensure that your taxes are paid and, as we all know, it doesn’t come deducted off your “paychecks” bi-weekly.

1. Setup A Savings Account for Taxes

My first suggestion to any business owner on this topic is to setup a tax savings account for themselves and the business at their bank. This needs to be a savings account that you do not touch because as you progress through the year, you might be tempted to withdraw money throughout the year.

Related: How Do I Know If I’m Paying Too Much Tax?

Thoughts of a new car or paying down that mortgage may seem tempting and even logical at times but the bottom line is that it’s not your money. You are saving it to pay to Revenue Canada at the end of the year and as that bank account grows, so does your tax bill.

2. How Do You Know What To Put In The Savings Account?

As a tax advisor, I estimate what your taxes are going to be based on what you earn and your associated expenses with the business. I’ll calculate out a percentage of gross revenue that needs to go in that savings account. Not net income but gross.

Let’s assume that we have a business with a 13% tax rate, it’s a professional corporation with limited expenses and HST is being charged on their products and services. On their gross sales, they will have to pay the government the HST they collected (12%) and they are going to have to pay corporate taxes on that money which is about 13%.

Because of this, my recommendation to my clients is generally to save 25% of their gross sales into the tax savings account and remember that it’s not your money.  You have to pay taxes when you are profitable, this is a good thing.

3. When You File For HST Return

When you file your HST return and have to pay your HST (which will probably less than 12% due to deductions from HST you paid on business expenses) you take that money out of your savings account to file your year-end tax return. At that point, we calculate how much you owe in taxes and you pay what you owe from that savings account.

Related: Are Accountants Critical To Your Business Success?

At the end, there will hopefully be something left and THAT is your tax refund. You create your own personal tax refund rather than expecting Revenue Canada to send back money to you. This is the way self-employed individuals can create their own “tax refund” with a tax savings account.

Have you ever been surprised with a big tax bill? What would you have done differently? Leave a message in the comments below.

 

Leave a Reply

Your email address will not be published. Required fields are marked *

* Copy This Password *

* Type Or Paste Password Here *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Free Report Opt In Message

Connect with Me

RSS Twitter Linkedin email

Our Latest Tweets