As a freelancer, self-employed individual or small-business owner, we understand how difficult it can be to balance your work and family and all other obligations. Adding the tax requirements on top of all of that is asking a lot, which is why we try to make the tax reporting process so much easier for you and why we provide tips, suggestions and recommendations.
As a self-employed worker, we have found that it is crucial to the success of your business and tax filing if you are aware of your taxes all year and if you ensure that you maximize your deductions and credits, and reduce your taxes owed during the year and not just at year end.
Here are 5 Common Mistakes self-employed Canadians make when filing their your annual return(s):
1. Failing to Write-Off Business Expenses
If you are self-employed, the CRA will allow you to deduct reasonable expenses incurred to earn business income. Qualifying expenses can include start-up costs such as interest paid on business loans; business fees, memberships or subscriptions; salaries, wages and benefits of employees; fees for accounting, legal or other professional services; and telephone lines and utilities – just to provide an overview.
Additionally, if you use your vehicle or your home for your business, you may be able to deduct expenses related to these costs, as well.
It goes without saying that failure to identify qualifying expenses and claim them as deductions can result in a larger taxable income and more taxes paid.
2. Claiming Expenses That Are Not Deductible
Another common mistake is claiming expenses that are not deductible. Claiming extra expenses is considered a failure to report income by the CRA. If the CRA were to reassess your tax return, you may be charged interest and penalties on the unreported income from the date your tax return was filed until the extra tax is paid.
For example, not every home office is eligible for a home office deduction. In order to qualify, the space must your principal place of work, or it must be used exclusively for business and host regular meetings with your clients or customers. If you have a home office where you do only 25% of your work, you fail to meet this first requirement. If you meet clients regularly at your home office, but you also use the space for personal use, you may not meet the second requirement.
3. Forgetting to Track Expenses
Regardless of how well you understand self-employment deductions, they can quickly become difficult to account for if you forget to track them throughout the year.
Instead of storing your receipts in a drawer or attempting to remember your expenses, ensure you keep accurate records by tracking all of your business expenses immediately. QuickBooks Self-Employed is the perfect solution to ensure that mileage is captured, as are business expenses.
4. Failing to Report Cash or Trade Payments
If you accept cash or trade (barter) in exchange for work, you are still required to report it. In fact, the CRA has severe penalties in place for contractors or freelancers who fail to report cash payments. If you are caught not reporting cash payments, you may be assessed taxes, interest and penalties.
Similarly, if you accept payment in trade, you must report the equivalent cash value of the item given to you as income on your tax return. For example, if you own a catering company and you accept payment from your client in the form of free dog training lessons for your dog, you must claim the retail value of the dog lessons as income on your tax return.
5. Insufficient Proof Related to Meal and Entertainment Costs
Self-employed individuals and freelancers can claim a partial deduction for meals and entertainment on line 8523 of their tax returns. You may deduct 50% of meal and entertainment expenses incurred in order to expand your business or for travelling for work.
In certain cases, such as holding a holiday party for your employees or buying food for a charity dinner, you may be able to deduct all of your expenses. Additionally, if you are a long-haul truck driver, you can claim 80% of your meal expenses. Similarly, if you are a self-employed courier or rickshaw driver, you may claim a flat rate of $17.50 per day.
However, you need to save more than just receipts for these expenses. You also need to be able to prove to the CRA that these expenses were necessary for your business.
If you are writing off business meal or entertainment expenses, take a few moments after each event and record who came, what was discussed and how it relates to your business. Ensure to save these notes and your receipts either physically or electronically. In the case of truck drivers, couriers and rickshaw drivers, keep a log showing when you worked and where you traveled.