If you are a small IT consultant business in Canada, there are a number of ways you can reduce the expenditure of your corporate tax or business tax lawfully. This article provides information in relation to the strategies that can be used to decrease your business taxes and allow you to keep more money in your business.
In order to enjoy these corporate tax exclusions, your company must be a sole trader IIT consultant or partnership; you can also consult accountants for small businesses in order to help you file your business tax.
How to save taxes as an IT consultant?
1. You must always collect receipts
Running a business, whether big or small, requires a lot of time, and sometimes it can be difficult for business owners to keep up with the accounts of the business; this is one of the biggest mistakes business owners make when running an organization. Keeping records for expenses as small as gas expenditure is highly important, especially if you want a return on corporate tax; this is why it is important to let accountants for small businesses do the job for you.
Over the course of the year, all these little expenses can all add up and make it difficult for you to maximize your business tax reduction; however, if you collect all your receipts which will probably be many in an IT consulting firm as you have costs such as software, repairs, maintenance, etc.
2. Forming a holding company
Another way of saving taxes as an IT consulting firm is to reconstruct your company by creating family trusts holding companies; this can help you save thousands of dollars in taxes that you can use as saving in order to execute this, you may need the help of an accountant for small businesses. If you reconstruct your company, you can keep excess cash within your corporate structure, and your income tax may be exempted; extra cash is money that is kept in your business after you have paid your corporate tax; this is the amount above what you require in order to pay your expenses.
3. Subtract the cost of the motor vehicle/ commute
A great tip for tax savings for IT consultants is deducting motor vehicle costs related to business use. Deductible expenses include insurance, fuel costs, interest, maintenance and repairs, leasing costs, and license and registration fees. If the car is used for both personal and business purposes, records must be kept to track expenses separately for each use.
4. Hire family members
Another great tax savings tip for independent contractors is hiring family members, as wages and salaries paid to employees can be deducted from business income. By employing family members, you can not only reduce taxes by claiming the amount of compensation, but you can also save on taxes by sharing income (i.e., by transferring income from a higher category person (you) to a person with a lower tax band, such as your child). To learn more about sharing income with children, visit the Income Sharing section.
5. Deduct premiums for the Private Health Services Plan (PHSP)
You can reduce your taxes by deducting the premiums paid under the Private Health Services Plan (PHSP). PHSP is an insurance contract relating to medical expenses or hospital treatment. Some names of PHSP providers are Olympia Benefits Inc. The best Canadian provider of phsp, Customer Support, and Smartin Benefits. In order for your premiums to be deductible, 1) your net income from self-employment in this or the previous year must be your main source of income (i.e., more than 50% of your total income) OR 2) the income you have earned from other resources is $ 10,000 or less. In addition, you must be actively involved in the business on a regular basis, and the premiums you have paid are insured for yourself, your spouse or roommate, or other people in your family.
Frequently Asked Questions
Can I use my bank statement as proof of expenses rendered for my IT firm?
The Canada Revenue Agency (CRA) does not consider credit card statements as a form of receipts or proof as an expense; this is why keeping original receipts for the purpose of corporate tax returns is essential.
Why should I set up a holding company and not pay myself the excess amount of cash available?
So if you have extra money or assets kept in the company, they are unlikely to qualify as a capital gains exemption. The extra cash/ asset can flow into an investment holding company, and this will be sufficient to defer your personal income tax. This investment holding company can also be used to make the purchases of property such as real estate; as there is so much tax saving, there is more chance of availability of funds to ensure that a down payment is made on these properties.
How much tax money do self-employed consultants pay?
During the first year, no business tax of self-employed are deducted, so this is a great way of making a saving; you are able to save at least 20% of your earnings.
Can I attribute my home office expense as a business expense?
Yes, any use of the home office that may be done to facilitate your work as an IT consultant can be tax-deductible and should become a part of your profit and loss expense as a rental expense.
Can incorporating my business save me more?
The tax advantage is that corporations are taxed separately from their shareholders and have a lower tax rate than individuals. As a result, starting a business reduces the amount of taxes that the owner must pay.
Bottom Line
The above tax-saving methods for IT consultants are great for reducing taxes owed and consequently for improving profits. The most important technique to make sure you have the best tax savings is to find an excellent tax accountant who is familiar with the pros and cons of self-employment taxes!