It’s January and the blogosphere is buzzing these days with posts of taxes owed, forms to be filled out and lots and lots of moaning and groaning about piles of receipts to be entered. It appears that very few people keep up to date with their bookkeeping, I admit, I too was behind by about 4 months. (as of today I’m caught up, wooohoooo!) Around September things in my wee business just got really busy and entering those little pieces of paper into a spreadsheet became very low on my priority list. When faced with the choice of making beads or jewelry, updating my facebook site or dealing with bookkeeping guess which choice wins?
Keeping track of all your receipts is one of those icky little chores that is critical to your financial well being.
If you sell $1,000 of jewelry Revenue Canada (or the IRS) sees $1,000 of income and will tax you on that full amount. You however did not make $1,000. You bought the materials to make that jewelry. You paid online shop fees or craft show booth fees. You bought packaging to put the jewelry in and envelopes to mail it out. Of that $1,000 you probably made $700. You need to make sure you do not pay income tax on that $300.
In the 27% income tax bracket, tax on $1000 is $270. Tax on $700 is $199. You save $71. If you sell $10,000 in a year, the tax saved is $710 in our example.
This is where the all-important receipt comes in. EVERY single business expenses must be backed up with a receipt. No receipt, no deduction. While you do not submit your receipts with your tax return you are legally obligated to keep your receipts for 7 years. If you are audited you must produce receipts backing up every expense claimed.
A lot of people misplace receipts for small amounts and then think, well, it was only $5, no big deal. You’d be surprised how those small amounts add up. If you don’t keep that $5 receipt 4 times a month, that’s $20 a month of expenses you are missing. That’s $240 in a year, at the 27% tax rate that’s $65 extra income tax you will pay. No matter how small the amount, keep that receipt.
For those who are collecting HST/GST/PST (depending on the province) your receipts have another purpose. Every cent you spend in HST/GST/PST is refundable. Again, no receipt, no refund. You’ll be amazed how fast the amount of tax you pay adds up. If I spend $5,000 in expenses in a year then in Ontario my HST paid is $650. I want that back.
Keeping the receipt is the first step. Entering the amounts into a system is the second step. In a small or part-time business it is not cost effective to pay someone to do your bookkeeping. A simple spreadsheet is all you need to track your own expenses. Break your receipts into meaningful categories and simply enter the receipt amounts. When it comes to filing your tax returns it is definitely better to have a professional accountant complete yours. Personally I would rather focus on making jewelry than on learning the ins and outs of tax laws. An accountant will charge less if you have already input all your receipts and can just hand them the numbers.
I recommend tracking your expenses monthly. It’s much easier to remember what you spent 2 weeks ago rather than 10 months ago. And if you have misplaced any receipts you won’t find them in a years time. My process is simple. I have a manila envelope on my desk and I put all my receipts in there. Weekly I dig through my wallet and purse looking for stray receipts. Once a month I sit down and print out any electronic receipts (such as phone bills). Then I break my receipts down into categories and enter them on an Excel spreadsheet. Once a receipt is entered I put a checkmark on it and stick it in another envelope. That envelope goes into a box for storage. Voila!
OK, so this weeks topic isn’t the most fascinating and there’s no pretty pictures of eye candy. However it’s super important and a hot topic amongst crafters. How hot? Well someone even made a video about tracking receipts: