Owning a small business means collecting, managing and paying taxes even if you are a self-employed “solo entrepreneur”. Determining what to save for your taxes varies depending on your unique business needs.
A surprise at the end of the year is never nice. One of the wisest financial decisions you can make for your small business is to set up a tax-saving system.
Taxes to consider
In order to know how much to save for taxes, first determine what your tax obligations are. What payroll, sales or corporate tax do you need to pay? Depending on where your business calls home, you may have several government agencies expecting a report and payment of taxes. How much you need to save for taxes as a self-employed person depends on the unique needs and location of your business.
For example, a self-employed person in British Columbia, Canada would have to determine their Provincial Sales Tax, Goods and Services Tax, Income Tax, Payroll Tax, and Canadian Pension Plan, among others!
Here’s a quick breakdown. A “solo entrepreneur” that owns a sole proprietorship in British Columbia, Canada and makes $90,000 a year would have to pay 24% in federal and provincial income tax and 11.4% (up to $6,999) in CPP*. So it would be wise to take off 35.4% of every dollar earned and put it in a tax savings account.
*Based on information from the Government of Canada website in June 2022. These numbers may not be accurate as tax amounts can change. It’s a good idea to keep up with the current tax deductions in your area every year.
Track your expenses
As a self-employed individual track your expenses DILIGENTLY. For every $1 of expenses that you miss, it could cost you up to 30 cents at tax time. Record every single expense that you have.
Where to save your taxes
When business and personal expenses get mixed in together it can cause confusion at tax time.
Open a separate business bank account, and in that account have a savings account only for taxes. Every month transfer your tax money into this account. When tax time rolls around and you have a BIG bill to pay, you’ll be very thankful for the pot of money you’ve set aside. You’ll be able to pay that bill stress-free!
What if you didn’t save?
Was there ever a time when you didn’t have the cash for your taxes? If that’s the case, is it better not to report it?
Actually, it’s not! The fines for not reporting are high. Instead, report and pay what you can. That way you will only get interest on the amount you can’t pay, instead of the full amount PLUS the penalty for not filing. For example, let’s say you owe $5000, and can only pay $4000. Report that and pay the $4000. Then you will only be charged on the remaining $1000 instead of on a full $5000 plus the high penalties.
How much should you save for taxes as a self-employed entrepreneur?
There are a lot of nuances for each individual and business depending on what you do and where you are located. In Canada, your taxes can be between 26%-35% of your revenue depending on where you live, what type of business you have and how much money you make. It’s not a one-size-fits-all answer.
It’s best to talk to your accountant. They are an amazing resource and can make all the difference at tax time. As the leader of your company, it’s your responsibility to be compliant. You got this!
Until next time, enjoy your entrepreneurial journey!