Owning a small business is stressful at the best of times. You work hard, putting in precious time and energy to keep it running successfully. You’re then faced with the tough decision on how best to pay yourself. There are two main options available: salary or dividends. To help you decide, we’ve compared the advantages and disadvantages of both.
Salary Payment Advantages
A big advantage with paying yourself a salary is that you have a personal income. This means that:
- You are able to contribute to the Registered Retirement Savings Plan (RRSP)
- You will be paying into the Canada Pension Plan (CPP), which both set you up for retirement.
- Your salary will be tax deductible for the corporation
- Splitting income with a related family member becomes easier
Salary Payment Disadvantages
There are some disadvantages as well when it comes to salary payments. For one, having a personal income is a con as well as a pro. It means that:
- Your salary is 100% taxable
- You will have to pay CPP as both an employer and an employee
- You will have to set up a payroll with the CRA
- All related paperwork will have to be completed for the CRA
Dividend Payment Advantages
If you’re not sure paying yourself through a salary is for you there is also dividends. Dividend payments have the following advantages:
- They are taxed at a lower rate
- Not paying into CPP means saving more money
- It is a simpler paying process
Dividend Payment Disadvantages
There are also some disadvantages to receiving dividends. Such as:
- Not allowed to contribute to the RRSP
- Not paying into the CPP directly effects how much you receive when you retire. Both of these things put your retirement in jeopardy.
- Tax deductions such as childcare might not be available to you
- Wage replacement for injuries and disabilities is harder to calculate
Which Payment Method?
There are advantages and disadvantages to both payment methods. The answer to which method you should pay yourself with is that it depends entirely on your personal financial circumstances. Talk to you accountant to discuss which option is better for you.
Whether it’s personal or business taxes, an audit is everyone’s worse nightmare. Sometimes there is nothing you can do to avoid one- the CRA (Canada Revenue Agency) does audit at random. However, there are 8 huge red flags that people often commit that draw unwanted attention and can result in an complete financial audit.
- Revenue Discrepancies: Make sure the revenue you declare on your income taxes matches all forms including your employer’s, your GST and your spouse’s.
- Being an Outlier: If your business profits are higher or lower than the normal industry amount the CRA pays special attention to you. Sometimes you can’t avoid this so if you’re in this situation talk to your accountant to make sure all your financial information is set incase an audit comes your way.
- Deducting Large Business Expenses: Make sure you’re deducting the right amount for the large items you purchased for your business. Your accountant can best advice you on how much to claim for advertising, entertainment and other business expenses.
- Claiming Home Office Deductions: If you work out of a home office you can make some tax deductions but the CRA keeps a close eye on these so be sure you qualify and that you only claim the correct amounts.
- Claiming 100% Business Use of a Vehicle: This is a huge red flag the CRA notices. Very few people use a vehicle exclusively for business. Keep detailed records of mileage and consult your accountant before making these claims.
- Running a Cash-Intensive Business: Businesses that work with high levels of cash (restaurants, bars, hair salons etc.) are big targets for the CRA. There’s a big temptation to underreport and the CRA knows this. Make sure you report everything to avoid an audit, back payments and fines.
- Math Errors: Basic math mistakes are red flags committed by both individuals and businesses. We’re only human but the CRA audits most people because of these simple errors. Have your accountant double check all your work to avoid unwanted attention.
- Income Threshold: If you earn more than $100,000 in income a year the CRA automatically pays more attention to you unfortunately. If you fall into this category make sure you and your accountant have all your financial data ready for an audit because your chances of getting hit with one significantly increase.
Honesty is the best policy when it comes to filing both business and personal taxes. Avoiding these red flags significantly decreases your risk of an audit by the CRA. Sometimes it can’t be avoided though so make sure you keep your financial information up to date and organized.
There are a ton of benefits to incorporate as a business profession but unfortunately only a few professions qualify for it. Typically only professions that are governed by a professional governing association can be lawfully incorporated.
There are some limitations and restrictions when it comes to professional corporations and your accountant can help guide you through them. The benefits greatly outweigh the limits though. A primary reason to incorporate has to do with taxes. Professional corporations receive lower tax rates and income tax deferrals. Personal taxes are also positively impacted when you incorporate.
Unfortunately only a few professions are eligible to incorporate under Canadian law. The following professions are allowed to:
- Dental hygienists
- Dental surgeons
- Dental technologists
- Massage therapists
- Medical laboratory technologists
- Medical radiation technologists
- Occupation therapists
- Physicians and surgeons
- Respiratory therapists
- Social workers and social service workers
- Speech language pathologists
If you’re a licensed profession in any of the eligible fields talk to your accountant about incorporating today. The tax benefits of incorporating your profession are bountiful and it won’t be a decision you’d regret.
Everyone that has ever owned a small business knows that there are costs every step of the way. The good news is that the CRA makes most of these expenses tax deductible. A good rule to remember is that if it is necessary to running your business then chances are you can claim it. Go over these expenses with your accountant to make sure you are claiming the right items for the right amount.
Advertising and marketing is vital to the success of a business. Not every media is equal in the eyes of the CRA though. Canadian newspaper, television and radio advertising is all 100% deductible but most magazine ads are only 50% deductible. There are also certain rules when it comes to claiming advertising in international publications or towards international markets so talk to your accountant about how much you can claim for these.
Business Operating Expenses
Expenses such as fuel, repairs, and building maintenance all fall under this category. These expenses are typically 50% deductible. Service fees for lawyers or accountants are also allowed to be claimed so as you meet with your accountant and go over all these items know that you can write it off on your taxes!
Businesses run from a home office are deductible as well. The CRA keeps a close eye on these though so make sure you qualify. You must use the space only to meet with patients, customers or clients for your business. When expenses overlap with personal ones (such as mortgage, insurance and bills) you can only claim the percentage related to the business.
Meals and Entertainment
For some businesses certain entertainment items like lunches or tickets are necessary to wooing clients and keeping them happy. The CRA allows you to claim 50% of the value of these items. Staff parties, fundraising events and client billings are also fully deductible on your taxes.
Purchases such as vehicles, furniture, equipment and building space are not only vital to the success of your small business but are also tax deductible. For these items the full amount can’t be claimed in one year, but the cost can be claimed in small percentages over the lifetime of the item.
When it comes to deducting items for your business, it is always a good practice to talk things over with your accountant. Deducting errors can lead to a CRA audit, which no one wants to always double check.
If you use a vehicle for work, or are considering purchasing a vehicle for work, a number of great tax deductions are available to you. The CRA keeps a close eye on individuals that claim these deductions to make sure you qualify for them and only deduct approved expenses. Contact your accountant if you have any questions so that you can avoid over claiming and an audit.
The Canadian Government has four required conditions that you must meet in order to be authorized for automobile deductions. If you’re not sure you qualify check out their website or talk to your accountant.
- You must normally work away from your place of business or employment
- You must pay your own vehicle expenses and not receive any allowances or reimbursement for them
- You must not receive a non-taxable allowance for automobile expenses
- You must keep a cope of Form T2200 along with all other records
If you meet all of these conditions the next step is determining which expenses can be deducted. A big thing to keep in mind is that only the percentage of expenses related to earning business income can be deducted. So the drive to and from your place of work is considered personal use and therefore not deductible. Below are all of the costs the CRA and Canadian Government allows you to deduce as vehicle expenses:
- Maintenance and repairs
- Licensing and registration fees
- Capital cost allowance
- Eligible interest
- Eligible leasing costs
Always talk to your accountant when you start claiming these tax deductions to make sure you’re doing so accurately. The CRA watches these claims closely so your accountant is vital in keeping an audit away from you.
Managing a small business is hard work, especially when it comes to money. Thankfully, we live in a time where there are countless tools to help us out. Here are the top apps to help you financially manage every aspect of your business.
- Float: Keeps track of cash flow for your business with a real time financial dashboard. Also allows your to set up and manage a budget for your business.
- Gusto: This app is great for figuring out payrolls and tax filings. From benefit deductions to employee digital pay stubs, Gusto does it all.
- Hubdoc: If keeping track of receipts will just be the death of you consider Hubdoc. It lets you take pictures of receipts and immediately upload and store them for easy record keeping.
- inDinero: This app is great for synching the multiple bank accounts a business can have. It links all of your cards, accounts and data to give you a comprehensive look at your business.
- Level Money: Level Money also synchs all your business accounts but its budget planner is really the key feature of this app. It calculates ideal daily, weekly and monthly budgets based on your income and bills.
- Square: This app is ideal for businesses that are on the go a lot. You can accept credit card and debit payments right from your phone no matter where you are.
- TSheets: If keeping track of employee time sheets is a headache for you consider this app. It allows employees to accurately clock in and out no matter where they are.
- QuickBooks: QuickBooks is really an app that does it all. It’s a cloud accounting software that lets you do pretty much anything from budgets, invoices, digital receipts and real time record keeping.
- You Need A Budget: This app is essential for giving your business strict rules and advice on budgeting and smart financial decisions. You can check business outflow and set up strategic management to get out of debt or pay off loans.
Life is stressful enough, especially with a small business on top of everything else. Check out a few of these apps, and others, to help you with it all. Most are worth the small amounts of money they cost as they save your time and money in the long run.
Whether you’re just opening your small business, or you’ve been around for a while everyone makes mistakes, especially when it comes to money. These mistakes can be detrimental though. Below are the worst, and most common, accountings mistakes small businesses do and can make.
Using your business account for personal purchases (for vice versa)
First things first- always have separate accounts for your personal and business finances, even if you’re a company of one. It’s incredibly hard to sort out which payment was for what purposes later on and your accountant won’t thank you if this happens often. It also looks fishy to the CRA and it’s a potential audit red flag.
Not keeping receipts
Even keeping your receipts in a shoebox is better than not keeping them at all. There are plenty of safe apps out there for you to use to keep track of your receipts electronically. Accurate accounting is extremely difficult without a full record of receipts.
Not watching the cash flow
Cash can be hard to keep track of but even the smallest receiving and spending needs to be kept track of. Those small payments can add up when they’re not kept track of and going back later trying to remember them all is nearly impossible.
Doing it all yourself
Just because you own a small business doesn’t mean you have to wear all the hats. Focus on what you’re training and skilled in and hire professionals to help you with the rest. Not asking for help can lead to costly mistakes.
Doing accounting in-house
It’s tempting to cut costs by doing all the bookkeeping yourself. And while small amounts of money might seem manageable doing the accounting in house is a mistake if you’re not trained. An accountant keeps your financial data organized and can end up saving you tons of money through hidden tax deducts and catching math errors.
Not having backups
Not having backups is one of the easiest mistakes to do. Just having the information saved on one computer isn’t enough. What if it gets stolen or there’s a fire? Consider adopting cloud accounting software for you small business so that you can have remote backups of all your data.
Avoid making these critical small business accounting errors and you’ll see a flourishing business. An accountant is always your best bet to gain valuable advice and insight on how best to accomplish avoiding these mistakes. Contact one today.
I know what you’re thinking- taxes are horrible, why would I want to start them early? Well, they’re unfortunately an unavoidable evil. So instead of putting them off and being stressed about them at the last minute start early and give yourself more time to breath. Below are the reasons why you should consider filing your taxes early.
- More time to pay– The earlier you file, especially if you owe money, the more time you have to arrange a payment schedule or get together the money.
- Faster tax refunds– Refunds are handed out first to those that submitted them the earliest. Wouldn’t it be great to have that refund money sooner?
- Avoid a tax extension– the earlier you sit down and start to do your taxes the longer you’ll have to gather and sort your financial data. Doing this earlier helps you avoid having to ask for an extension and paying fines.
- Updated financial information– Updated financial data is vital, especially if you have an expensive life moment coming up like student loans. The sooner and more updated your information is the more your accountant can help you.
- Extra time to ask for help– Maybe you sit down and two hours in you realize you’re in over your head. Well, if you start early you have time to seek out an accountant to help you
- Accountants are less busy– Tax season is the busiest time for accountants, if you wait to do yours when everyone else is your accountant’s time is going to be more divided and you might not even get an appointment.
Filing early, or at least getting started on your taxes early, is always a good idea. Talk to your accountant about how best to get started and submission dates.
Despite the widespread use of cloud technology in everyday life, there is still some resistance when it comes to adopting cloud technology for accounting purposes. Below are the top six fears that are stopping people from using cloud accounting software.
Potential security risks are the top concern as to why people are hesitant to switching to cloud accounting. There’s no need to worry though. Cloud accounting is actually safer than traditional software due to its remote storage, encrypted channels and password protections, making it a lot harder for the data to get stolen, lost or damaged.
Cloud technology is here to stay. Don’t worry about wasted time spent adopting and learning a new technology only for it to be obsolete the moment you get it. That won’t happen with cloud accounting software, at least not for a few years.
Compared to traditional software, cloud accounting is actually cheaper. There’s no costly updates, no expensive equipment and businesses can even cut costs on IT personnel and traveling expenses to and from your accountant.
While some time is necessary in order to learn how cloud accounting works, in the long run businesses will be saving time. Updating data happens instantaneously so there’s no lost time spent trying to input months of receipts and checking for bookkeeping errors.
With cloud accounting businesses have more control over their financial data. They can now access it anytime and anywhere, from any device. Sharing is also made easier and businesses even have control over what information gets made available to whom.
The generational gap is most apparent when it comes to technology. Those that had to adopt technologies are much more reluctant to accepting cloud software versus those that were born amongst it. It’s understandable, but the cloud is the way of the future so by resisting it businesses are ignoring prime demographics and cementing themselves in the past.
Talk to your accountant about adopting cloud accounting for your business today.