Self-Employed Taxes … Now What? (Calculator)

Self-Employed Taxes … Now What? (Calculator)

We’ve all heard the phrase. There are two things certain in life, death and taxes

 

Death we can do nothing about. Eventually, it will come for us all, and we just have to accept that. Taxes, however, we can minimize. As people, especially people within the FI community we often pride ourselves on our ability to minimize our expenses and increase our savings rate.

 

For this, we often make budgets. We take into account all of our income and compare it to our expenses. We then try to eliminate or minimize our biggest expenses, which is where many of our flaws begin.

 

For most people, they would list their three biggest expenses as shelter, transportation, and food. Even StatsCan posts these as Canadians top three spending categories. However, in many of our cases, particularly Canadians, our largest expense is actually one thing: Taxes.

 

Only interested in the Excel? That fine! Click here to go straight to it!

 

It Gets Complicated

 

As an employee of a corporation your taxes, as strange as it may seem, are actually quite simple. You tell the government how much you paid in taxes, how much you made, a handful of tax credits later they decide if you paid enough or too much.

 

Easy Peasy.

 

For many of us, however, we are more than just employees. We run a business(es), have a side hustle, or many other things that complicate taxes quite significantly.

 

It was this complexity that led me to question my own tax situation.

 

Was I using the most optimized way? Should I be incorporated?

 

All of these questions and more left me wondering. So I dove deep into the subject, spoke with multiple accountants, and eventually decided I would create an Excel. So that as my income grew, and my business developed I would be able to adjust my path to minimize the amount of taxes I had to pay.

 

I have included this excel at the bottom of this post, as well as on my “Tools” page so that you too can decide which way is best for you.

Note: There are a couple of limitations to the excel. They are also listed at the bottom of this page, click here to see them

 

Options

 

For this excel I considered 4 options, each of which has their own advantages and disadvantages.

Note: All of these options assume you pay yourself out 100% of the business’ profit. If you intend to leave some money with your business the numbers will vary slightly.

 

Employee

 

The first option I considered was simply being an employee. We’ve all been at this stage of our lives. You show up, punch in, do your job, go home. It is the simplest way to deal with your taxes and forms a great baseline for analyzing our other methods.

 

Advantages

There are a couple of non-monetary advantages to being an employee.

 

Your taxes are extremely simple to file. Most programs will walk you through the process and offer you step-by-step guides with very few questions.

 

You will likely get a refund.

 

Much, much less paperwork to keep. As someone is self-employed you have keep receipts, track mileage, keep invoices, etc. None of those problems as a simple employee.

 

Only pay employee half of taxes. In Canada for CPP and EI both the employer and the employee pay matching contributions to them. As a simple employee, you are only responsible for half of these paid taxes.

 

Disadvantages

 

There is one glaring disadvantage being an employee.

 

You pay the most tax of any situation, BY FAR.

 

Sole Proprietorship

 

The second option is a sole proprietorship. This is the category that most side hustles or beginning businesses will fit under. All of the income for the business flows through your personal accounts.

 

For this post, I will keep the advantages and disadvantages to a tax perspective. but keep an eye on the blog for an upcoming post to know which is the better option in general for you.

 

Advantages

There are a couple of advantages for sole proprietorships over being simply employees.

 

Write-offs. Easily the largest advantage is that you now have access to business write-offs. Write-offs are when you take an expense and deduct it from your income before calculating taxes on it. This means that if you need to drive for work, you can write off your gas. If you need to print flyers, that ink and paper is a write-off.

 

A complete list of business write-offs can be found on the Canada.ca website, here.

 

Optional EI taxes. As a sole proprietorship, you have the option of contributing EI premiums or not after your first year in business. This gives you the flexibility to decide whether the additional cost is worth it for you.

 

Disadvantages

The first disadvantage is that too take advantage of all of your new-found write-offs you have to keep a substantial amount of records. this includes receipts, tracking mileage, etc.

 

Although this may not seem like a big deal at first, when you’re just starting out, it grows quickly.

 

No refund even possible. While this may not seem like a big deal, if you aren’t good at budgeting, or if you rely on your tax refund to pay off some things this can cripple you. You have to keep money aside, unspent, purely to pay the tax bill at the end of the year.

 

Taxes are complicated. Not as complicated as a corporation, but going from being an employee to being a sole proprietorship can be a lot to adjust to, especially if you’re a person who files their own taxes.

 

There is software out there that can help you, but even then, there will be dozens of more forms and hundreds of more lines to complete on even a basic tax filing.

 

GST. This may not seem tax related, but in the province of Alberta if your gross business income exceeds $30,000 you are required to collect GST, and, if your province has it, PST, on all of your sales, complicating your paperwork, even more, come tax time.

 

Minimum Wage Incorporation

 

The first of the incorporation options; this variant entails paying yourself a minimum wage and receiving the rest of the profit as a dividend.

 

Even though, as you will see on the Excel, it is usually more expensive when speaking in terms of corporation it is my preferred option. Especially when your business income is far higher than the expense of a minimum wage employee, as you’ll only be paying dividend tax on everything above that salary, while still receiving the benefits of being simply an employee.

 

Advantages

 

Keep EI and CPP eligibility. Unlike when you’re a sole proprietorship there isn’t a one year delay between when you begin paying yourself and when you are able to qualify to pay EI.

 

This means that transferring from being an employee to this form of corporation you won’t see a gap in insurable hours for your EI coverage, leaving you eligible.

 

Ability to adjust your personal wage as needed. Unlike when you’re an employee or sole proprietorship you’re able to adjust how much you pay yourself based on your needs.

 

This means that if you’re trying to receive the benefits of being an employee while still minimizing your tax burden you can pay yourself minimum wage.

 

Meanwhile, if you need to get approved for a loan or other similar situation you can inflate your wage to it’s full earning potential. This also eliminates the need to show your tax returns when applying for most loans, instead, showing a certain amount of paycheques, the wage of which, is decided by you.

 

Some of your taxes are already paid for you.

 

This means that you will have a smaller tax burden to pay as a lump sum at the end of the year, and even give yourself the possibility of having a refund.

 

More tax advantages.

 

One of the most notable tax advantages this gives you is that as a corporation you are allowed to “gift” each employee up to $500 tax-free!

 

Also notably, your CPP and EI contributions will be split between both your corporation and yourself.

 

Disadvantages

 

Paperwork. Of all of these options, this one is probably the most paperwork heavy.

 

Not only do you have to maintain all of the paperwork for business including receipts, etc. you have to maintain all of the appropriate paperwork for having employees; including pay stubs, T4’s, ROE’s, etc. Which can be quite a burden sometimes.

 

Double tax. This kind of goes along with the larger amount of paperwork as, at the end of the year, you will have to file both personal and corporate taxes.

 

You’re binding yourself to be an employee.

 

This means that, while your company will be able to take advantage of many write-offs, your personal expenses will be bound to the same write-offs as any other employee.

 

Dividend Corporation

 

Being the lowest tax option in most cases this is a route that many people have chosen to take.

 

Advantages

 

Lowest tax burden.

 

Dividends, for the most part, are taxed lower than regular income. This means you’ll owe less at the end of the year.

 

Unique tax benefits

 

There are several unique tax benefits eligible to those that receive large amounts of dividends in a given year that you would find yourself able to take advantage of.

 

Can be declared anytime.

 

This means that you can optimize your tax situation by deciding when exactly you want to pay out your dividends.

 

Disadvantages

 

The largest disadvantage BAR NONE is that in the eyes of the government, you don’t have an income.

 

This means that you are unable to take advantage of any personal tax benefits, such as RRSP contributions and tuition credits, as these are only applied to earned income.

 

Dividends are sometimes quite hard to calculate.

 

There are tax programs that make it easy, but when trying to anticipate taxes it complicates it quite a bit.

 

Not covered by employee programs.

 

This includes both EI and CPP. For some, this is not a big deal, but it is worth noting that, while you have significantly lower taxes, much of this is because you don’t have to pay into these programs.

Excel Calculator

 

Finally, we get to the meat and potatoes.

 

Now that all of the different situations visible on the excel are explained we can use the calculator to calculate what the best choice for your situation is.

Note: This excel shows purely from a tax minimizing perspective. For other advantages and disadvantages see above.

 

How it works

 

On the calculator, at the bottom, you will see 3 tabs: Info, Calculations, and Tax Brackets.

 

taxes excel three tabs

 

Beginning at the “Info” sheet, fill out everything highlighted in yellow.

 

This will cover any expenses you may have, tax breaks, etc.

 

Then move over to calculations and look at your results! It’s that easy!

 

Some questions have been put in to account for future development of this spreadsheet as well. So you can look forward to that!

 

Limitations

 

There are some key limitations to this excel.

 

  1. This excel assumes that qualify for the small business corporate tax rate. Meaning that in order for it to work, you must make less than $500,000 a year after expenses.
  2. This excel is set up as if you rent, not own. If you own your home, make sure to include the interest you pay on your mortgage under “Other Expenses”
  3. All expenses are calculated monthly. This means that even though you pay some expenses yearly (registration, insurance, etc.) you will need to enter it as a monthly amount for it to work.
  4. There are many different ways to calculate each of these write-offs, especially in regards to motor vehicles. For this reason, I have taken it down to its base level and assumed that all car expenses are being written off. There are plans to update this in the future, but it is not yet functional.
  5. Due to the sheer amount of possible write-offs I have not taken into account every possible situation. If you qualify for a tax write off that I have not included in the excel please let me know in the comments below and I will do my best to include it in the next update, as well as send you an updated version.
  6. I am not an accountant. This spreadsheet was designed to give you an idea of the savings capable by choosing each option, not to guarantee your tax bill at the end of the year.

 

And now … without further ado … the calculator!

 

 

Side note: I don’t really like how this works and have been trying to do it as a web app, or form. However all of the solutions I have found have either been extremely expensive ($40+ for 3 months), or ridiculously time consuming (re-creating the Excel as a calculated fields form). If anyone knows of another alternative, or has a contact, please let me know!

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