Being self-employed is about being independent. Most people enjoy the feeling until it comes to tax season. Obligations to the Canada Revenue Agency (CRA) can feel like you’re twisted in red tape and paperwork. But it doesn’t have to be so.
In this podcast, Licensed Insolvency Trustee, Derek Chase talks about taxes and self-employment. How can you avoid the stress of the annual tax season? What systems can you put in place that will keep you on track through the year.
Derek also discusses:
- Why self-employed people run into tax problems
- Why the CRAs penalties and interest charges make tax debt the hardest to catch up with
- What a good bookkeeper can do for you
- The advantage of setting up monthly or quarterly tax installment payments
- What options are available when you aren’t able to pay your taxes
If you are struggling with any kind of debt, Licensed Insolvency trustees can help you regain control of your finances. They are considered some of the best financial advisors in the country and are licensed by the federal government of Canada.
Read the Transcript
Wayne Kay 0:04
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay.
Today we’re going to talk about taxes and self employment and how it all works. Because oftentimes self-employed people do have tax problems. We’re going to discuss that – that’s not something new. How do self-employed people actually go about paying their taxes? And what can they do to stay out of tax trouble. And finally, when should self-employed people deal with their taxes, and who can help?
My guest today, Derek L. Chase from Derek Chase & Associates, Licensed Insolvency Trustee serving Vancouver Island, Sunshine Coast and BC North Coast. Derek, it’s always a pleasure.
Derek Chase 0:48
It’s a pleasure to be here, Wayne really looking forward to this.
Wayne Kay 0:51
I think this is a great discussion, taxes and self employment. It happens a lot of times where people start thinking, You know what, I’m going to branch out on my own. And in the past, typically, when you work for somebody, they take care of taxes and all of the different fees that are associated with being self employed. Do you find that a lot of people don’t really know what it is they’re getting into when they get into this self employed, paperwork?
Derek Chase 1:20
For sure, we see a lot of situations where self-employed people who are very good at whatever it is they’re doing, and very talented people. We’re just not all cut out to be accountants, and it can be very difficult to keep on top of the paperwork, and the tax filings that are required when you’re self-employed. So it does lead to a lot of difficult situations and problems that can trip you up personally and with your business.
Wayne Kay 1:54
I guess in your business, you would see this quite regularly. But why do self-employed people have tax problems? What are some of the things that they go through that cause this issue?
Derek Chase 2:06
Well, I think there’s several factors that cause tax problems for self-employed people. I mentioned that we’re not all wired to be bookkeepers or accountants. So right off the bat, you might be just uncomfortable dealing with the numbers and the paperwork required to actually make the remittance.
I think probably a bigger aspect of that is income tax for the self-employed is it’s really invisible in a way. Your weeks and your months go by and you’re dealing with different issues. And there’s not an invoice always right in your face, saying this month tax is x. As a result, it can easily skip by for a month or two or three, and you haven’t dealt with your taxes. And once you start getting on the wrong side of that momentum, it’s probably the hardest type of debt to catch up with because there’s so much penalty and interest added on to late filings.
But there’s also another aspect of the problem, which is that a lot of self-employed people don’t have enough working capital to make their business function. And I think that phrase working capital deserves a bit of explanation because essentially, a lot of businesses operate without enough cash in reserve or ability to, to deal with things that are unexpected. And as a result, when something does happen, that’s unexpected, like a period of stretch of time where there’s no work, or maybe one of their customers has a problem and doesn’t pay on time. Without that cash flow. Where do they go?
Well, they might have already gotten a loan from the bank, so they can’t get any more access to cash that way. So a common way to get cash to pay the bills is to tap into money that would otherwise go to your taxes. And ideally, you either want to be saving for your taxes or actually paying it in installments. And if that’s not happening, because you need that money to pay your ongoing expenses, it’s going to be a problem come April 30, or June 15 when your taxes become due.
Wayne Kay 4:33
That’s a great point. Also, there’s the other point that they’re so busy working, they just don’t have the time to be, as you said, remembering that they have to make the payments at all – they’ve got so many balls in the air.
I’ve dealt with some small businesses where I have to go after them to say, I never did get an invoice, and it’s three four months later. That would make it a very different situation as well, when you’re talking about that cash flow,
Derek Chase 5:03
Absolutely, there’s a certain rhythm to the business cycle. And if it gets interrupted somehow, then the cash flow is going to falter. And you’re absolutely right. You think of some self employed people, again, who would be extremely talented in what they’re doing. They’re up early, they’re going full blast all day, and they’re pretty much spent by the end of the day. Then they think, Oh, I have to do some bookkeeping to get my taxes ready, or get my GST remittance ready, or my payroll source deductions ready, or my WorkSafeBC. It just goes on and on and on.
Wayne Kay 5:42
That’s exactly it, though. All those things that you were just mentioning are all the things that a lot of people don’t realize they have to do when they get into working for themselves.
Derek Chase 5:50
You know, it’s quite interesting for a person that’s never been involved in a self employed situation, you just don’t realize how much of a burden the self employed person has for administrative reporting and paperwork and red tape. And it’s just darn hard to keep up with. And then if you don’t have a tendency to like that kind of stuff, well, you better find a good bookkeeper quickly, or someone that you trust that can help because you won’t last for more than a couple of years without some tax problems.
Wayne Kay 6:28
So how do self-employed people pay their taxes?
Derek Chase 6:33
If you’re an employee, it’s withheld from your paycheque every two weeks or every month, and your employer will remit it to the government. When you’re self-employed, there’s a couple of different ways that taxes could be paid.
If your taxes are modest, you would likely just wait until you file your tax return and pay it at that point. But if your taxes grow to a little bit larger requirement, the government doesn’t want to wait – just getting it once a year. So you may have to pay them every three months. But you don’t have to pay them every three months. That’s called making an installment payment.
You could pay them every month, if you chose to. And personally, I think that’s a good rhythm to get into. Because once you establish that pattern, habit or discipline, and you’re paying it every month, even if you overpay, you’re only going to get a tax refund at the end of the year. So it’s probably the safest way to do it. Otherwise, you’ve got these competing factors trying to take that tax money away and use it for some other purpose. And it’s, it’s just so darn tempting that I think a lot of people can’t resist.
Wayne Kay 7:50
That’s a great point. So recommend monthly or at least three months, because after one year, if all of a sudden you get a $50,000 tax bill or more – that’s a big hit in the pocketbook.
Derek Chase 8:05
It sure is. And I think most people wouldn’t realize that when you start getting into tax problems, it doesn’t just grow like an unpaid loan might grow on a somewhat shallow slope. If you start missing the tax requirements – filing or paying, you might recall seeing a jet fighter come along the runway, and then all of a sudden goes straight up into the air. It goes vertical, all the penalties and interest just escalate. That amount owing gets so high, it’s very difficult to catch. So it’s something that’s well worth the energy or the time or the expense to keep in good order.
Wayne Kay 8:51
So I guess that would be exactly what you’d want to do to stay out of tax trouble. Are there some other tips you can share with us that can help us with that?
Derek Chase 8:58
Well, staying out of tax trouble as a self-employed person, and just becoming familiar with what an installment payment is. Even if it takes 10 minutes to have a read at how that’s actually calculated.
I mentioned earlier that having a good bookkeeper is just gold. You want someone that you can trust that is not going to charge you an arm and a leg to help you. Most good bookkeepers will tell you how to do it if you want to do it. They actually teach you a little bit because they want their life to be easy as well.They don’t really want to see a mess coming at them. They’ll give you some instructions as to what to provide to stay out of tax trouble. If you’re not feeling confident in doing those remittances and filings then talk to your accountant or bookkeeper.
I think it has got to be number one on the list. Also along with that, staying out of tax trouble means having a bit of some capital building up, some savings so your eyes are not drawn towards, wow, I can take this money that I’ve set aside for taxes.
So if you’re not going to do installments, then you definitely need to save for the year and tax bill. But my advice would be not to go that way. Because there’s too many reasons to use that money during the course of the year,
Wayne Kay 10:28
I actually have a family member who is a contractor who does his own contracts out. He has to do his own taxes and pay the bills, just like what you’re mentioning. And every year, there’s this big panic that happens with him. And I always say to him, I don’t understand why you don’t just take 40% of it and put it into a separate account every single time you get paid. Just put it into a separate account. And would that be the easiest thing to do is have a separate account where your tax money goes into.
Derek Chase 11:00
It’s certainly a strategy that some people use. Again, I think it circles back to having the discipline to do that. And to do it on a regular basis and to also have the discipline not to take that money to bridge a period that has a tight cash flow or for some other purpose. But having a separate bank account where you put your taxes is fine. If that’s something that you’re comfortable with, then that’s great. And then there’s no problem at the end of the year, when the return is filed, and you get the news as to how much is owed, you’re ready.
Wayne Kay 11:34
Now, when you’re filing your taxes for your business, is it the same as just a regular person who’s working for a living – where we all have to file our taxes by April 30? How does it work for the self -employed? Can they have a different schedule for like June to June? Or how does that work?
Derek Chase 11:55
Well, that question gets into what type of structure you’re operating as, as a self-employed person. If you have an incorporated or limited business or corporation, then you can choose your year end. And it could be that June to June rhythm, which has its own subsequent set of deadlines following the year end to file your taxes.
When you do not have a company, you’re usually operating what’s called a sole proprietorship. And that sole proprietorship information will go on to your personal tax return. The personal tax return for a sole proprietorship does not have to be filed until June 15. of the calendar year, but the taxes must be paid by April 30. If you’ve been adhering to your installment schedule, that shouldn’t be a problem. But if you’re not, then there’s a lot of shaking and trembling that goes on.
Wayne Kay 13:01
You’ve dealt with this before. You’ve had people come in that have missed those tax payments, because I think when you gave the visual of a fighter jet going along the runway, and then straight up. That’s scary. That’s what happens with all the fines and fees and all these things that happen when you don’t pay your taxes on time. When somebody is in that situation, what do they do?
Derek Chase 13:27
Well, you’re probably going to start getting calls from the Income Tax department. Coming through the pandemic, the Income Tax department was one of the places that basically stopped collecting. But now they are and so you’ll likely start getting some correspondence and some phone calls from the Income Tax department.
I would talk to them and just be honest. Talk to them, like you’re talking to any person. If you start to get abrupt and angry or kind of snarky, that’s not going to go over very well. They’re a person on the other end of that call, and they’ve got their own buttons that they can push.
So I would just talk to them politely. And if the amount is reasonable, you could usually get into a payment plan directly with Canada Revenue Agency, and hopefully that would be enough to get you back on track.
The problem that we often see is that once a person misses filing for say, one calendar year, it often doesn’t get filed for a couple years. And then it’s just too high to catch and the momentum is rolling along too fast. And at that point, you need to take some more steps. Certainly reaching out and talking with your accountant is a good start. But at that point you may need to turn to a Licensed Insolvency Trustee to really stop the collection that might be coming at you.
Wayne Kay 14:59
Great advice. So if someone is in that situation, it’s often a free consultation for first contact. So you can often tell them what you can do to help out.
Derek Chase 15:11
It’s more than often a free consultation, it’s always a free consultation with our office. We’re happy to meet with people and give them some ideas and some thoughts about how they might change their situation to get back on track.
Maybe it’s just as a third party, telling them what they might already need to know. They might need to refinance something or sell a redundant piece of equipment or, there’s things that can happen.
But if you really need protection, and you need to stop the Income Tax department from garnishing your cash flow or freezing up your bank account, then we are authorized. We have tools that we can use to stop that process and allow a self employed person to continue to earn a living.
So it’s important for people to know that and it’s important for accountants to know that there are ways to talk to the Income Tax department that allow the Income Tax department to actually take less than what’s owed. And that might sound too good to be true. But I can tell you it’s true. It happens through us. And that’s the only way that it can be done in Canada.
Wayne Kay 16:29
I love that you shared this information. And I think this will give people hope. Any final words of wisdom you need to share with us regarding taxes, self-employment, and who can help.
Derek Chase 16:41
File your remittances on time, and you won’t have any problem but if you do, certainly reach out sooner rather than later. So you don’t have to deal with that frozen bank account.
Wayne Kay 16:52
Terrific. Derek, thank you very much for the information today.
Derek Chase 16:54
My pleasure Wayne.
Wayne Kay 16:56
To schedule that free consultation with Derek L. Chase and Associates Limited Licensed Insolvency Trustees, you can go over to their website, bankruptcytrusteebc.ca.
And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And if you’re listening to the show, and you know somebody who’s in this situation, please feel free to pass the show along to them as well. If you want more information, you can always check out our website at debtmatters.ca Thanks very much for listening.
About Derek Chase
Derek Chase is a Licensed Insolvency Trustee in British Columbia. He has been helping individuals and corporations restructure their debt since 1997. His areas of practice include personal and corporate insolvency including Consumer Proposals and Bankruptcy. The best part of his work is to be able to witness lives change for the better when the heavy burden of unmanageable debt is lifted.