An excellent tax saving strategy for independent contractors is to learn of and apply all tax deductions that are available for reducing taxable income. This article indicates numerous deductible expenses that can result in substantial tax savings for self-employed individuals.
1: Deduct Private Health Services Plan (PHSP) Premiums
You can reduce your taxes by deducting premiums that are paid under a Private Health Services Plan (PHSP). A PHSP is an insurance contract relating to medical expenses or hospital care. A few names of PHSP providers are Olympia Benefits Inc. Canadas Best phsp Provider, Customer Care, and Smartin Benefits . In order for the premiums to be eligible for deduction, 1) your net self-employment income from this year or prior year must be your primary source of income (i.e. greater than 50% of your total income) OR 2) the income you earned from other sources is $10,000 or less. As well, you have to be actively involved in the business on a regular basis and the premiums paid are for insuring yourself, your spouse or common-law partner or other individuals at your household.
2: Deduct Motor Vehicle Expenses
A great tax saving tip for an IT consultant is to deduct motor vehicle expenses relating to business use. Expenses eligible for deduction include insurance, fuel costs, interest, maintenance and repairs, leasing costs and license and registration fees. If the automobile is used for both personal and business purposes, a logbook must be kept in order to track the expenses separately for each use.
3: Incorporate Your Business
Deciding to incorporate can result in many tax advantages while also credit proofing your personal finances. One tax benefit is that corporations are taxed separately from their shareholders and have a lower tax rate than individuals. As a result, incorporating a business decreases the amount of tax the owner has to pay.
You can read more about the other excellent benefits of incorporation at Benefits of Incorporating in Canada .
4: Hire family members
Another excellent tax saving advice for independent contractors is to hire members of their household since salaries and wages paid to employees can be deducted from business income. By employing family members, not only can you reduce your taxes by claiming the compensation amount as a deduction but you can also save taxes via income splitting (i.e. transfer income from a higher tax bracket individual (you) to a person in a lower tax bracket such as your child). To learn more about income splitting with children, please visit Income Splitting.
5: Utilize Extra Space at Home as Office Space
Using a part of your home as office space will save you both rent and taxes. If your office at home is your primary place of business or you utilize the area to only earn business income and meet clients on a regular basis, then home expenses related to the office space can be claimed on your tax return in order to reduce your business income that will be taxed. Business expenses that can be claimed are indicated on the CRA website. To determine the percentage of home expenses that is deductible, divide the area of the office by the area of your house.
The Very Last and Best Advice!
The above tax saving methods for IT consultants are great for reducing your tax payable and in turn, improving your bottom line. However, the most important technique of ensuring that you have the best tax savings is to find an excellent Tax Accountant who is familiar with the ins and outs of self-employment taxes!
To learn about more tax saving tips, please visit 20 Tax Saving Tips.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.