Can I Do My Own Business Tax Return? The Pros and Cons
Filing taxes for a small business is one of the essential processes in maintaining a business’s financial health.
However, small business owners wishing to reduce overhead and expenses may wonder – Can I do my own business tax return? Yes, a small business owner can do their own tax return but should do so with a full understanding of the possible consequences of doing taxes without an accountant. Those choosing to file a small business’s return independently should consider the consequences/penalties of making a mistake (innocent or otherwise) when working with the Canada Revenue Agency (CRA).
If you’re considering doing your own business tax return, you should give yourself lots of time so that you are not under the pressure of a fast-approaching CRA deadline, and keep in mind the many potential issues that may arise from doing taxes without an accountant. We’ll discuss some of the bigger ones here.
Not Filing/Paying Taxes on Time
Most small businesses are calendar-year filers, which means the tax year ends 12/31. April 30th is tax day, as noted by the Canadian Revenue Agency, with June 15th available for self-employed individuals filing taxes.
The CRA assesses a late penalty and/or interest on the amount of taxes due until the balance is paid. As of the 2020 tax year, the late filing payment was 5% of the amount owed, plus 1% for each month – with a max of 12 months of fees for unpaid balances. Note, additional fines are set for late installment fees. The late fees are even higher for returns from 2017, 2018, 2019. These steep fees and penalties are the fundamental reason NOT to miss a tax deadline. CRA extensions are available for specific instances but filing an extension does not delay the required payment of those taxes due by the original deadline.
Failing To Pay Estimated Taxes As Required During the Year
Most self-employed individuals – filing as a sole proprietor, a shareholder in a Corporation, a Partner, or simply self-employee – are required to make payments towards their estimated taxes if they anticipate their payable taxes will exceed the maximum allowed. Note, minimum amounts will depend on the location of the business, the type of business formation, and the work being done. The CRA offers a calculation chart to help.
An accounting professional or bookkeeper can offer guidance on the appropriate amount that needs to be sent.
Mis-Categorizing Employees As Contractors
The employee vs. contractor issue tends to generate many CRA audits – which is significant because the determined status influences how an employer must manage employment insurance and other entitlement benefit deductions. The CRA’s rules regarding the taxation of contractors can be complex. Even if the contractor works from home and uses their own equipment during the hours they set themselves, they may still be re-characterized as employees under CRA guidelines.
Mis-classifying contractors can be quite costly to a business owner who may miss CPP (Canada Pension Plan) and other required deductions. The bottom line is that independent contractors are defined by their contribution to the business, not where or when they work.
In addition to the above-noted problems created by doing your taxes incorrectly, the following issues may also cause potential problems:
- Late/Inaccurate Wage Taxes
- Mis-reported Home Office Deductions
- Under-Reporting Income
- Travel Mileage Deducted Without Documentation
- Inaccurate Inventory Counts
- Unreasonable Corporation Owner’s Wages Compared to Shareholder Income
Not Choosing to Use a Professional Accountant
Although it can be quite tempting to follow “the road less expensive,” the amount of work required (as an accounting novice) and the potential consequences for making a business tax filing mistake are quite substantial. This makes it worthwhile to avoid making these costly mistakes when possible.
Even if you file your taxes on time without an accountant and remit the required amount, a small business owner may miss deductions for which they qualify simply because they lack the knowledge, experience, and skill to know they exist.
Accountants may seem like an expense you can forego until you realize that tax preparation and filing are complicated and, if done incorrectly, expensive. And while filing a business tax return only needs to be done once per year, the implications for mistakes are far-reaching.
If you’d like to discuss your tax filing needs, just schedule a free consultation and we’d be happy to answer any questions you may have, including, can I do my own business tax return?
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Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
