Sole Proprietors: Set Yourself up for Success

There is much to consider when running a business as a sole proprietor, but taxes don’t have to be overwhelming. We can try to set you up for success and maximize your expenses, tax write-offs, etc.

The first thing to recognize with a sole proprietor business is that any income earned from it (net of any related expenses) is considered to be your personal income and is reported on your personal tax return. Tax return filing deadline is June 15 of each year, although taxes need to be paid April 30.

This income will be taxed in the same way as if you were earning T4 income from an employment job. The difference is that taxes were withheld off of your T4. There are no taxes withheld from your self-employment income. So, if you’re profitable, expect to pay taxes come April 30.  If you owe $3,000 or more in tax, expect to pay quarterly instalment payments to CRA.

You need to calculate this income using the accrual method…not the cash method. What this means is that you report your income when you earn it, regardless of when you receive payment, and you report expenses when you incur them, regardless of when you paid for them.

For example, on December 20, 2016 I earned $2,000. I received a deposit of $500 when I performed the service/made the sale. I received the $1,500 remaining on Jan 10, 2017.  In what year do I report the income? (Answer: 2016).

Don’t worry about the accrual method when you’re dealing between months, only when you’re spanning the end of the year.

There are some exceptions, farms are a big one. The other is commissioned sales agents. Both these can choose whether to use the cash or accrual method.