Ways to Prepare for Tax Time

1. Keep good records

I know that dealing with the paperwork of your business is one of the least fun parts of being an entrepreneur, it’s boring, but it’s still important. Sitting down once a month and either inputting all your data into your accounting system or into an excel spreadsheet can save you months of headaches come tax time. I know this is hard and it’s the easiest thing to put off, but this will reduce your stress.

My recommendation is to book time with yourself, set it up in your calendar at the same time every month, say the 5th business day or first Wednesday (particularly if you dislike Mondays and don’t want to ruin your Friday) or whatever day works for you, but make it a recurring meeting. Schedule it in the morning and spend a few hours, then get your favourite meal for lunch, either take out or made at home and take the break to really enjoy it. Listen to your favourite music or podcast during your break and relax. Then get back to it. That way, at least you have something that you are looking forward to in that day instead of just boring financials. And if you can manage to do the work at your favourite local hangout, even better. 

2. Have a good system for your record keeping

This will be different for everyone. Some businesses will use an excel sheet and others will want to use a system like Quickbooks Online or WAVE. As long as you and/or your bookkeeper understand it, it’s a good system. Deciding on a system can take time, so while you figure that out, continue to keep things up to date. I recommend using a simple spreadsheet at the beginning. Many bloggers and small firms will have different versions available for download and some will be free, take a look at how they work and either build your own or pick one that makes the most sense for you and your business. 

3. Make sure you are saving the right amount for taxes. 

If you charge HST, make sure all of that money is automatically set aside.

Then determine how much you will have to pay in taxes. Unfortunately, this is a bit of a complicated formula for small business owners, particularly if you tend to need all the money you bring in for living expenses. Essentially, you need to estimate at the beginning of the year how much money you’ll make, how much you’ll spend on business expenses and then multiply the difference by your tax rate, making sure that you include income tax, CPP and EI if you decide to voluntarily contribute there too. That’s a lot of guess work!

To estimate how much money you’ll make it can help to begin with the previous year and figure out if you think you’ll make more or less based on your plans, same goes for expenses. It’s not an easy process, but remember that if you estimate too high, you’ll just end up with some extra money at the end of the year, always a bonus, and if you guess too low, you’ll just have to adjust when that income gets higher, which means that you might have to save more for tax at the end of the year. But overall, estimates can change and updating your savings rate shouldn’t be too hard if you had a decent guess to start with. 

My recommendation is that you start with this tax calculator to get the recommended tax rate. Then save that percentage of every payment that you get. 

Which brings us to… 

4. Keep all your money saved for taxes in a separate bank account

How you approach this will depend on your style with money. Are you the type to spend the money you have available? Or can you see all the money available and easily keep from spending the amounts you know are for specific things? For either option and anything in between you’ve got a lot of options, but here are a few that I’ve seen work well. 

• Keep all taxes in a separate account (or two, HST and Income tax) at the same bank you bank at. You can keep an eye on the balance regularly, but it stays separate and safe. 

• Keep all taxes in a separate account at a different bank, that way, it’s harder to access. This can be helpful for people who have a tendency to transfer funds between accounts to cover expenses and promise themselves they’ll pay it back later. Keeping the money at a separate bank makes this more difficult and will likely deter you from making the transfer. 

As a helpful hint, always keep this money in cash, it can be tempting to put this into the stock market or another investment in hopes of gaining a little extra cash, but those investments are volatile and while they may make money overtime, there is always a chance you lose money in the short term. Your best bet is a high interest savings account, so it will earn a little extra, but it will be safe and ready for when you need it. 

5. Pay your quarterly tax remittances

First of all, this is mandatory for many small business owners and you don’t want to get hit with fines for missing them, those add up fast. Second, it helps you keep track of your taxes and helps keep you from spending that money by accident. It’s not like you don’t know how much you owe, you’ve been keeping the money in a separate account after all (point 4 above), so every quarter send either that amount OR the amount estimated by CRA (usually ¼ of the taxes you paid last year). Either option is acceptable, but I recommend paying the CRA dictated amount if possible. It keeps everything cleaner and they’ll have less questions. The CRA has calculators to help you determine the amount to expect once you login into your accounts. So definitely start there if you don’t know where to begin.

6. Keep your personal and business money separate

It may not seem like a big deal now, but if you get 6 months or a year in, you just aren’t going to remember if that coffee was a business expense or not, and if you get audited, it’s going to be harder to support it as a business expense, particularly if you aren’t really sure. If you keep everything separate, you’ll be less likely to run into this particular issue. Plus, having a list of expenses will help you to determine which receipts to keep. Otherwise, you’ll end up with a never ending pile of EVERY cost from the year, whether it’s a business cost of the mac and cheese you got at 2 am after several drinks at your local wine bar. No judgment here, it sounds like a great night, but it’s also a LOT more receipts.