Setting your own hours and pricing makes work as an independent contractor and ownership of a small business attractive. But independent contractors and small business owners don’t have any taxes withheld on the payments you receive, which can prove challenging if you wait until year’s end to address withholding. Just like salaried and hourly employees, you must pay contributions to various government programs alongside your taxes, and in some cases, you must make tax instalment payments throughout the year. Tax planning ensures you know when to make these payments and how much you need to pay so you don’t deplete your small business’ cash reserves.
What Are Tax Instalment Payments?
Income tax instalment payments comprise periodic payments you must submit throughout the year. These payments come due quarterly as you earn taxable income. Insalment payments to the Canada Revenue Agency (CRA) keeps your business in good standing, prevents you from having to come up with a lump sum during lean periods, and reduces risks of interests and penalties. If you have to pay the CRA tax instalment payments, it typically sends you an instalment reminder so you don’t forget.
Who Must Make Tax Instalment Payments?
Under the Income Tax Act, those who have no tax or not enough tax withheld for more than a year have an obligation to make income tax instalment payments. Some examples of those who much make instalment payments include independent contractors, small business owners, and workers that receive income from more than one job. Additionally, those with rental, investment, or pension plan income may also need to make instalment payments. It’s wise to assume you need to make instalment payments if you owed a certain amount of net tax when you filed your previous year’s return and expect to earn enough current year income to owe net taxes. Essentially, the CRA assumes if you had taxes to pay last year, you need to pay some again this year, and it requires you to pay some of it in quarterly instalments.
For 2018, you have to make income tax instalment payments if you expect to owe net taxes above $3,000 and your owed net taxes above the threshold for either 2016 or 2017. Residents of Quebec reach that threshold at $1,800 as they work within a comparable provincial system, so it splits its instalments between the two regimes. If you think you have lower current year revenue and might not meet the threshold, you don’t have to make the payments. Keep in mind that if you don’t make payments, the CRA charges interest and sometime penalties on the amounts you should’ve paid if you made incorrect calculations or owe net taxes above the threshold.
Voluntary Tax Instalment Payments
If you start a new business or experience strong growth in your existing business, you may choose to make income tax instalment payments even if you don’t technically have an obligation. This can help out with cash flow management when you expect you may owe taxes when you file your tax return. Even though the government pay interest on them, advance payments can help you avoid surprise tax bills.
How to Make Tax Instalment Payments
The CRA accepts instalment payments four times a year on the 15th of March, June, September, and December. If you need to make mandatory payments based on your previous years, you receive instalment reminders by mail or through the CRA’s My Account portal. The CRA lets you make payments online, by mail, or at most financial institutions. Though it isn’t mandatory, you can request Form INNS3 to receive a remittance voucher from the CRA. But in most cases, you can just send the CRA your payment with a simple note that includes your Social Insurance Number (SIN) and a request to pay a tax instalment.
Save Year-Round to Meet Your Tax Obligation
Saving a certain percentages of your business’s revenue year-round can help ensure you have plenty of funding to meet your income tax obligations. For instance, if you put 10 to 15% of your earnings in a separate savings account each month and don’t touch it for any payment but taxes, you can make a big dent in your tax bills. If you suspect you might sit in a higher tax bracket, it makes sense to boost the percentage you save to ensure you have enough to cover your bill. If you overshoot your goal, you might want to keep the extra funds in the account so you have a head start on next year’s taxes.
Keeping your business’ tax instalment payments up to date gives you peace of mind and helps you avoid interest and penalties. You can do this easily by saving consistently throughout the year and paying all your tax instalments in full and on time. And while it’s essential to pay your fair share of taxes, it’s even more vital not to pay too much. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.