Tax do’s and don’ts for sole proprietors

If you’re a sole proprietor, your business and personal identities are considered one and the same, so you only have to file one set of taxes. That’s good news! Still, to save tax, stay organized, avoid penalties, and protect your future, consider these do’s and don’ts.

The do’s

Do deduct everything you’re allowed to. As a sole proprietor, you can deduct a lot of business expenses. Make a list of everything that applies to your situation, and keep all relevant receipts in one place so they’re ready for tax time.

Do keep business and personal banking separate. It makes it a lot easier to track incoming invoice payments and outgoing business expenses if you have a dedicated business banking account and business credit card.

Do set aside money to pay your taxes. Employers often withhold taxes from employees’ paycheques so everyone doesn’t face a huge tax bill in April. Try to do the same for yourself. If you regularly deposit a percentage of your business earnings into a business savings account, you can earn some interest and it won’t be as much of a struggle to cover quarterly installments and/or your April tax bill.

The don’ts

Don’t file your taxes late even if you can’t pay right away. Sole proprietors get extra time to file their taxes — until June 15 instead of April 30. However, if you owe taxes, that money is still due on April 30. Try to file and pay by April 30, but definitely don’t go past the June 15 date. If you do and you owe taxes, you’ll be charged a late-filing penalty of 5% of the balance owed plus an extra 1% for every month up to 12 months.

Don’t throw out records after you file your taxes. Keep everything related to your taxes for six years so you’re not left scrambling if the Canada Revenue Agency asks for supporting documentation.

Don’t forget you’ll need to create your own pension. As a sole proprietor, it’s up to you to save for your retirement. The good news is that contributing to a Registered Retirement Savings Plan (RRSP) earns you a tax deduction. Of course, just because you’re a business owner doesn’t mean you don’t have other goals, too. Consider how other registered plans can help you save tax-efficiently for everything you want in life.

Running a business can be thrilling, exhausting, and stressful — often all at once. But getting the basics right makes everything easier. Come see us to chat about other small business do’s and don’ts.

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