Tax Tips for the Work at Home Mom
A popular trend for mom's in past decade has been home-based businesses. These businesses include daycare operations, Avon, Pampered Chef, Passion Parties, Blogging Businesses, Spa Services, Etsy and Ebay sales, Consulting businesses, and so on. What links all these businesses, aside from that they are home-based, is that they are operating as self-employed. Taxes are treated differently for self-employed compared to the traditional employment and subsequently the "T4" distribution.
1. Keep organized. Setting up a system in advance (January) is easier to keep up through-out the year and helps at tax time. I suggest accordion folders to my clients
2. Keep everything. Every slip of paper. Make notes on the backs of your receipts to remind you how it relates to your business. DO NO HIGHLIGHT! It eats the ink on the receipt and makes me sad. I suggest circling the totals or amounts if necesssary.
3. Work Space at Home tax deduction - this can be tricky. Keep all your receipts you incur from running your home. Determine by square foot how much of your home is used for business and how much is used for home.
In order for any expenses to be deductible, the work space must be either:a. the place where the individual mainly does their work, or
b. used exclusively for earning employment income, and used on a regular and continuous basis for meeting customers or other persons in the course of performing the job.
I do not suggest claiming capital cost allowance. When the business is sold or the home is sold, this will come back to bite you.
Here are some home-related you can potentially deduct that you should keep in mind:
- Mortgage Interest
- Homeowners’ Insurance
- Security Systems
4. Be Prepared to pay taxes in April. When we are employed, our employer deducts income taxes and CPP based on our tax bracket. This doesn't happen when you are self-employed but you still have to pay it. I suggest putting aside a portion of your income on a monthly basis. It all depends on the amount of expenses you have, but if you can guess what your income is after expenses - save about 30% of that for tax time. Having more in your savings then you owe in April will certainly make spring happier.
5. Count kilometres. If you use your personal vehicle for business use, count kilometres you drive for business. Write down your beginning odometre reading in January and your ending on December 31st.
Here are some other expenses you can deduct:
- Cell phone bill or a second business (just calculate the percentage of these bills that are business use, and deduct that)
- Business-related tools like a laptop, computer repair expenses, special software or a camera.
- Anything that you pay for that you need for work.
- Continuing education courses, memberships or fees
- Entertaining clients for business is deductible at 50%
- Business travel and lodging are deductible at 100%
- Business-related miles driven are tax deductible.
Final Tip - I advise my clients not to incur a business loss more than three years in a row. This sends off flags that your operation is a hoax and only used to lower your taxes. The CRA wants to see an attempt to make an income.