Both self-employed individuals and employees with additional business income should be aware of common pitfalls when filing personal tax returns that include business income. Here are safeguards to avoid these issues:
Common Pitfalls When Filing Personal Tax Returns
1. Misreporting Business Expenses:
- Pitfall: Overstating business expenses or failing to differentiate between personal and business expenses can lead to disallowed deductions and potential penalties.
- Safeguard: Maintain clear and accurate records. Regularly update expense categories to reflect CRA requirements, and if unsure, consult with an accountant to ensure compliance.
2. Incorrect GST/HST Remittance:
- Pitfall: Self-employed individuals earning over $30,000 in revenue within a calendar year must register for GST/HST. Failing to do so results in compliance issues and potential penalties.
- Safeguard: Monitor revenue regularly, and if the $30,000 threshold is crossed, register for a GST/HST account. Remit collected tax based on the required schedule.
3. Underestimating Tax Liabilities on Self-Employment Income:
- Pitfall: Receiving business income without source deductions can lead to a large tax bill at year-end if sufficient funds aren’t set aside.
- Safeguard: Estimate the effective tax rate for business income, setting aside a portion monthly for tax payments. Consider consulting a tax professional to create an accurate estimate.
4. Failing to Claim All Eligible Deductions:
- Pitfall: Self-employed individuals and side-business owners may miss claiming all deductions, such as depreciation, home office expenses, and vehicle costs.
- Safeguard: Familiarize yourself with all eligible deductions. Consulting with a tax advisor can help ensure that deductions are accurately calculated, potentially lowering your tax liability.
Key Takeaways for Timely Filing and Compliance
1. Know Your Deadlines:
Self-employed individuals should be aware of the June 15 filing deadline, while employees with side businesses should file by April 30. Taxes owed for both groups are due by April 30 to avoid interest.
2. Make Instalments if Required:
To prevent large year-end tax bills, self-employed individuals and those with significant side income should consider making quarterly instalments if they meet CRA criteria.
3. Seek Professional Guidance:
Filing returns that include business income can be complex, especially when handling deductions and meeting CRA requirements. Working with a tax professional can ensure compliance, optimize deductions, and help avoid common mistakes.
By following these safeguards and maintaining organized records, both self-employed individuals and employees with business income can meet their tax obligations, minimize their tax liability, and avoid unnecessary penalties and interest.