As tax season approaches, I bet your list of questions has been growing. How much am I going to owe the government? What deductions can I take advantage of? WHY IS THERE SO MUCH TO DO?
I hear you. But let’s take it back a few steps because there are some things to know when it comes to taxes.
First, there are two major kinds to know about: sales and income. What are the differences between them, and why do you have to know them?
Before I jump into the nitty-gritty of what they are, knowing the difference between these two can help you make much better decisions for your business. That way, you charge enough for your products and services and you’re not surprised when tax time rolls around, forcing you to charge your credit cards to cover what you haven’t saved.
For the most part, this advice applies to Canada, but there are some resources for the United States. Okay, enough chatter. Let’s talk taxes.
What to Know About Sales Tax
Sales tax is the tax associated with goods and services.
For example, tax added to groceries, all of your candles and jewelry from online shops like Etsy and Ebay, or services like getting the plumbing fixed. We pay extra for almost every purchase we make every day.
For most people, that’s where it ends.
However, once you begin a business, you’re also responsible for charging Sales tax and giving it back to the government. That’s why I mentioned in the post about how much to pay yourself that not all the money you receive in business is your money.
If you make over $30,000/year in Canada, then you must charge %5 GST (goods & services tax).
Depending on your province, either PST (provincial sales tax) or HST (harmonized sales tax). I know, lots of acronyms. Stick with me here.
I live in Quebec, so I charge %5 GST and %9.975 PST.
You can check if your province has harmonized sales rates by clicking here.
If you live in the United States, check out this resource from the Tax Foundation.
What about digital products?
Because the number of people doing business online is expanding so quickly, many countries around the world are still catching up and haven’t created tax laws for digital goods yet.
If you sell digital products in Canada, then digital products are subject to tax and follow the same rules as if you were selling a tangible product. You can learn more about that here.
In the US, it depends on your state. For example, a state like Nevada considers digital goods tax-exempt while a state like Colorado considers the products taxable. Take a look at this list to check your state.
What to Know About Income Tax
Income tax is based on your total gross sales for the year, which are the sales before your expenses.
We pay those at the end of the year, and they’re determined by percentages set out by the government. Find your tax rate by clicking here.
In an employee situation, those income taxes are deducted right off your paycheck. You don’t really have to worry about it.
In your business, though, you are once again responsible for paying those taxes. (II know, it’s the price we pay for being able to work in pajamas and eat out of the Nutella jar whenever we feel like it.)
If you don’t pay it, the government will start charging you interest the day after taxes are due (April 30). That’s not a situation you want to find yourself in, so plan ahead.
If you operate a business in Canada, you can estimate how much taxes you will be owed here: Simple Tax Calculator
If you operate a business in the US, you can use this calculator: Self-Employment Tax Calculator
Now, here’s the most important piece of advice I can give you in this article.
Once you have an estimate, start saving portions of your income every month. That way you’ll be prepared at tax time. I recommend opening a separate bank account just for taxes. You can read more about that here: 3 Must-Have Financial Pieces to Run Your Online Business
If you want ideas on how to reduce your tax owing, check out the tax guide by signing up for the free bookkeeping resources library.