Tax season is over, and I’m happy to report that I was left owing $1,800 to taxman. No surprise though, my income rose 23% over the same time last year. I was pretty impressed, hence for not being surprised that I’m owing. But, after ever tax season, I’m often wondering how can I improve for next year?
Self employment is the answer, and whether you choose to go full-time or part-time, self employment can be big help to help to elevate a healthy income.
Choosing what you do for self employment part-time or full-time is not as important, as long as it’s legal. You can offer a service or a sell a product, the choice is yours.
There are benefits to self-employment, which will be discussed in this post. Enjoy.
Anytime you run a business you’ll be entitled to claim a deduction for any expenses incurred to earn income from the business provided the amount is reasonable. The types of expenses can vary by the type of business, but there are some common expenses that are often claimed such as office expenses, rent, advertising and so on, and other expenses are unique depending on the type of business you own.
Here’s a quick list of things to consider to claim as expenses:
- Office Supplies
- Employee Expenses
- Home Office
- A portion of your mortgage interest
- Property Taxes
- Vehicles expenses such as oil changes and gas, repairs, car washes etc..
- And many other expenses depending on the type of business you operate.
There are three common tax structures to consider when starting any business: Corporation, Proprietorship and Partnership.
Let’s look at each option a little more in depth.
This is when you’re in business by yourself, for yourself. This is the simplest structure out the the three to use because it’s as easy as letting others know you’re in business. There is little government regulation, and it’s low-cost to set up of $75 to register a business name is very inviting. The drawbacks of a proprietorship include unlimited liability for the obligations of the business. In other words if your business get’s sued, you’re technically getting sued. At tax time, any income you brought in through your business is reported on your personal tax return (Form T2125). There are generally fewer opportunities for creative tax planning in you’re a sole proprietor.
A partnership arrangement is simply two or more partners carrying on business together with a view to creating profit. The benefit of partnerships can include a pooling of the skills of different individuals and perhaps access to more capital to start and grow a business. The partners are often jointly and liable for the obligations of the partnership. Unless you structure limited partnership, any hiccups by your partner or partners, you’re essentially on the hook. Any income at tax season, including losses is divided amongst the partners to be reported on their personal tax returns. Choosing your partners carefully is critical, and a written partnership agreement is a must.
A corporation acts as a separate legal entity and is treated seperate from you for tax purposes. Incorporating your business gives you additional tax planning opportunities. A small business corporation is often entitled to a “small business deduction” which results in the first $500,000 of active business income being taxed at just 11 per cent federally, plus provincial taxes, putting the average tax rate at about 15 per cent. This is probably one of the biggest benefits of creating a corporation. As a general rule, if you expect to incur losses in your first years of business, you may be better off operating as a proprietorship so that those losses can be applied against other income you might have. Incorporating generally makes more sense once you’ve grown in size and profitability.
Thanks for reading, and wishing you nothing but the best with your business endeavours.