Tax Planning Tips for Self-Employed

Tax Planning Tips for Self Employed

Tax Saving Tips for Self Employed Businesses

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Tax Saving Tips for Self Employed in Canada

As a self-employed small business owner, you should be aware of the many tax saving tips that can reduce your tax bill and put more money in your pocket. In this article, we will discuss the various tax savings strategies:

  1. Split Income with Family – You can pay salary to your family members as long as they are reasonable for the kind of job duties performed. If your family members are in a lower tax bracket than you are, then this tax strategy works well to reduce the overall tax bill for the family. By paying them a reasonable salary the business receives a deduction and the income is taxed in the hands of family members at lower marginal tax rate. For 2016, every taxpayer can earn taxable income of $11,474 without paying any federal tax. You can pay your family members up to $11,474 as salary tax free. This will also provide the family member to contribute to their RRSP and CPP. The business owner should prepare employment agreement specifying job duties and wages for each family member employed within the business. The salaries should be reasonable as you should consider what your business would pay to an unrelated party to perform same services. If CRA considers the salary to be unreasonable or not paid, then you could be faced with penalties and denied the deductions ultimately paying more tax in your hands.

Let’s take an example:

John earns $150,000 a year from his business.  Without Income splitting, he would be paying tax at the average tax rate of 34.86 % and marginal tax rate of 46.41%. His tax payable would be $ 52,285, leaving him with an after-tax income of $97,715.

 

John( No Income Splitting)

Business Income

$150,000

Average Tax Rate

34.86%

Tax Payable

$52,285 ( Fed+ Prov+CPP)

After Tax Income

$97,715

Now, let’s take an example where he uses income splitting:

Income Splitting

John(Husband)

Mary(Wife)

Jane(Daughter)

Jack(Son)

Business Income

$80,000

$40,000

$15,000

$15,000

Average Tax Rate

28.14%

14.48%

5.21%

5.21%

Tax Payable

$22,514

$5,793

$781

$781

After-Tax Income

$57,486

$34,207

$14,219

$14,219

John can pay his wife, Mary $40,000 & $15,000 each to both the kids for their services provided.

After tax family income = $57,486 + $34,207 +$14,219 +$14,219 = $120,131.

Savings in Taxes = $120,131 - $97,715 = $22,416 with Income Splitting.

  1. Claim Home Office Expenses – Self-employed individuals can claim expenses associated with having a home office. As a general rule, CRA defines that your home office must be the principal place of your business, or you must use the space exclusively for business purposes on a consistent basis i.e., used for more than 50% of the time. If you qualify to claim home office expenses, you can deduct a portion of the operating costs of your home. For Example, if the total size of your home is 1600 sqft and your home office is 400sqft, then your office is 25% of your home’s total size. Therefore, you can deduct 25% of the eligible home expenses on your tax return. Some of the expenses that you could deduct are Electricity, Heat, Water, Maintenance, Home Insurance and Property Taxes. The home office expenses can only be deducted against the business income and cannot be used to create a business loss. If the eligible expenses cannot be used in the current year, they can be carried forward to subsequent years to be deducted against the business income generated at that time.
  2. Lease Vehicle for Business- Businesses who lease the vehicles used for business purposes can deduct the following vehicle costs for tax purposes:
  • Fuel
  • Insurance
  • Repairs & Maintenance
  • Parking
  • Toll charges
  • License & Registration
  • Lease payments

Along with the above mentioned expenses, the maximum monthly lease payments that can be deducted are up to $800+taxes.

At Bajwa CPA Professional Corporation, we can guide you in making this important decision by offering sound tax planning advice. Contact us today for professional consultation.

 

 

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