Dominik Loncar, CYBF Entrepreneur-in-Residence, firstname.lastname@example.org
Here’s a scenario that I’ve seen happen with first time entrepreneurs:
An entrepreneur pools all the money s/he received from sales into one account and just takes what they need. By tax time they realize they don’t have much in their bank account and are shocked to see what they owe.
The reality is that when you collect money for services rendered, depending how you structure your business, you will pay roughly 20-25 percent of your gross profit in taxes. If you also charge H.S.T., you will owe 13 percent (in Ontario) of your sales – some of which can be claimed back. You can quickly see from this example however, that the total amount of money you have in your bank account that is not yours can add up to 38 percent (25 +13)!
The following example* can help put this into perspective. Imagine you have a marketing company and last year your income statement showed:
Gross profit $60,000
You can see what dilemma you’ll be in if you don’t have $19,800 on hand ($12,000 in taxes plus $10,400 in H.S.T. minus $2,600 that you can claim). *This is a simplified version.
The solution is to create a separate bank account where your H.S.T. and estimated taxes (i.e. 20–25 percent of sales) go into or, you can create a spreadsheet and keep track of your sales showing how much you owe in H.S.T. and estimated taxes (i.e. 20-25 percent). You must make sure you have that amount in your business bank account (or elsewhere).
The result is that you won’t be surprised at tax time.
There may be other things you can claim, thereby reducing your taxable income. Just remember that the money you collect from sales is not all yours (unless of course you’re operating at a loss). Keep track of the tax portion up front.
Start implementing this today and you’ll sleep better when you go to do your taxes.