Everything’s going along well in your small business. You set up a HST/GST account, the cheques are rolling in, you’re attracting more clients and then DUN DUN DUN tax season comes along.
You take your shoebox of receipts to your accountant, or spend a few nights crying over a bottle of wine while entering in numbers to your tax software and then you realize … you OWE taxes. A LOT of taxes.
Or let’s say you’re on mat leave, focused soothing your crying baby, completely unaware that the government may not be withholding enough tax from your EI benefits, leaving you on the hook at tax-time.
Or you’re working two jobs, and the amount of tax deducted on each paycheque is less than you owe based on your total income.
Surprise! You owe money. A LOT of money.
If you’re working one salaried job paying taxes is easy. The government automatically deducts taxes on each paycheque, and sometimes takes too much of it, to the point that it has to refund you back money, you lucky duck.
But if you’re an entrepreneur, freelancer, working multiple jobs, on parental leave or in any other sort of non-typical work situation, you’re not only responsible for figuring out owe much tax you owe but also for collecting it.
If you aren’t organized, and disciplined, you’re in for a nasty surprise come tax time.
Here’s some tips to prevent that:
1. Estimate your annual income
Your annual income will determine how much tax you owe. Check out your marginal tax rate to see which bracket your income falls in and then save around that percentage of each paycheque. If your income is variable, or it’s too hard to estimate, play it safe. Saving 20-30% of each cheque is a good place to start.
2.Create a separate tax account
Consider nicknaming it “TAXES” so you don’t get confused and drain it to pay for a vacation, or beer. Don’t think of it like a savings account. Rather, think of it like a fund to help pay for your doctor visits, the road you bike to work on or your nephew’s public school.
3. Ask your employer to withhold more taxes on each paycheque
If you have multiple jobs it may be easier for you to just ask one of your employers to withhold more taxes each paycheque. You’re basically lending the government money interest-free, but many people psychologically (but perhaps irrational) prefer lump-sums refunds, as opposed to lump-sum payments.
To help prevent any other tax surprises, check out our FREE Tax Prep Party course.
Our free tax prep party is a guide to help you get organized for tax season and ensure that you don’t miss credits and deductions. It doesn’t matter if you’re an employee or sole-proprietor, this course will help make tax time super fun.