You decide to set out on your own and establish a small, owner operated business. But after years of automatic payroll tax deductions from your employer, you may not think to set aside funds for income taxes. Then, when tax season rolls around the next year, you find yourself facing an extra-large tax bill.
The bottom line is you have double the taxes to pay back, and often in a short time period. Otherwise, CRA will begin to charge interest, and likely not at a credit union rate.
If you’re a small business owner, a good way to prepare for tax season is by setting up a savings account for your taxes. Each month, we’ll transfer a preset amount into this account, with the total accumulating over the year until tax season. For example, if your business’ monthly income tax deduction equals $1,500, this account will have $18,000 by year-end, with those funds then available for taxes.
The best way to set that monthly contribution level is to consult with your accountant and develop realistic sales targets. The total transfer should account for both federal and provincial income taxes, required CPP contributions, and other fees. But the actual tax owing will depend on your contributions to RSPs and TFSAs, and may turn out to be less than what’s accumulated in your tax deduction account.
Oftentimes, those who experience the fewest cash flow problems during tax season have adopted a strict policy of only withdrawing from their CRA account to pay taxes. This approach gives you more confidence in your revenue and cash flow projections, and allows you to avoid unexpected bills that may hinder your business’ growth. Plus, you’re earning interest in your savings account.
By removing the temptation to use funds reserved for taxes, you are better able to plan and expand. With enough planning, you don’t need to fear your annual tax bill.
Open a tax savings account
Interested in opening an account, or have more questions? A great first step is to talk to an account manager about your individual situation. Call us at 1.800.728.6440 or fill out a contact form to book an appointment today.
