Boris Baranov is a CPA in Toronto and the owner of Baranov CPA Professional Corporation, an online accounting firm. His firm is assisting the new generation of tech startups, digital marketers and Ecommerce businesses with expert accounting and tax advice.
Accounting and taxes can be daunting. To make matters a notch easier, we have composed this list of the most effective tax tips that our firm recommends for web designers. By keeping your business financial information organized you will greatly reduce your stress at tax time and make your accountant happy.
In essence, web designers are service providers who can provide their expertise within a specific geographic area (e.g.for a client in Toronto) or export their knowledge by providing services to clients outside of the country (e.g. for a client in New York).
While the business activity is comparable to other service providers, web designers have specific tax deductions and strategies that can be easily overlooked.
In this article, we are going to discuss both general and industry-specific tax tips for the creative industry.
Have Separate Bank and Credit Card Accounts
If you want to avoid a nightmare at tax time, make sure that you have a clear division between personal and business expenses. At the very minimum, it involves opening separate bank and credit card accounts for your business.
It will make your accountant’s life a lot easier when you keep everything properly separated. It will also help you when your business is selected for an audit by the Canada Revenue Agency (CRA).
Some banks like RBC offer free small business and credit card accounts. Feel free to take advantage of those offers.
Open a Small Business Corporation
The Canadian government allows small businesses to incorporate and enjoy a very low tax rate on the first $500,000 of income. The current combined rate in Ontario is 14% (2018). It will be further reduced to the combined rate of 12.2% in 2019.
If you don’t require all your business earnings for personal expenses, you may defer a significant amount of taxes by leaving and re-investing the profits into your business.
A corporation can also protect your personal assets from potential legal liabilities if someone sues you.
On the other hand, if you don’t have a lot of personal assets and use all your business income for personal expenses, you may not benefit from opening a corporation. A corporation is a separate legal entity, and as such, it requires additional compliance and tax work which will result in a bigger accounting bill.
Speak to your accountant to decide if this business structure is right for your web design business in Toronto
Register for a GST/HST Account
Web design companies in Toronto are frequently exporting their services by providing expertise to clients located outside of Canada. If you are registered for a GST/HST account, then, in addition to collecting GST/HST from your Canadian clients, you are eligible to claim Input Tax Credits (ITC) on GST/HST amounts paid on Canadian expenses.
For example, let’s say you did some web development or web design with your New York client and billed him $10,000 for your work. You did not charge any GST/HST on top of the invoice since the client is located outside the country.
At the same time, your expenses were $3,390 out of which you paid $390 in GST/HST. If you would have registered for a GST/HST account and would not have any other clients in that tax year, the government would have sent you a check for $390.
Note that registering for a GST/HST account is mandatory if your annual worldwide sales exceeded $30,000 CAD in the last or the last four consecutive quarters. If your revenues are less than $30,000 CAD, the registration is optional.
If you make less than $30,000 and export majority of your services, consider registering for an GST/HST account to receive a refund from the CRA for your Input Tax Credits.
Elect Quick Method of Accounting
Alternatively, if you are registered for a GST/HST account and are collecting much more sales taxes than you are spending on your expenses, then you might consider electing for a Quick Method of Accounting.
The Quick Method of Accounting eliminates the need to track GST/HST paid on purchases and allows you to remit a specific percentage of your income in a year. In Ontario that rate is 8.8% for service businesses.
For example, Rob is a professional working with a web design company in Toronto and he provides services to Canadian clients. Rob has made $100,000 in revenues and has collected $13,000 in GST/HST from his clients. He is working from home and has minimal expenses. He only paid $600 in GST/HST on top of his expenses.
Under Quick Method of Accounting, Rob would need to send to the CRA:
$113,000 x 8.8% – ($300) = $9,644 instead of
$13,000 – $600 = $12,400
resulting in $2,756 additional income for his web design business.
Use a Cloud Accounting System to Track Your Income and Expenses
There are multiple cloud-based accounting systems available for tracking of your business income and expenses. The advantage of a cloud-based system is that your accounting data is stored securely online. It can be easily connected with other services like time tracking, payments and invoicing.
If you have separate bank and credit card accounts, you can connect them to the cloud accounting system to ensure that no transactions are lost.
Finally, since your data will be in the cloud, your accountant will be very happy to login and view your accounting data remotely.
A good system for web designers and other freelancers is Freshbooks. It costs about $25 USD per month. Another system is Wave Accounting – it is free but lacks certain features like multi-currency billings and time tracking.
TrackHome Office Expenses
If your principal place of business is a space at home, then you can claim a home office deduction on your tax returns. A principal place of business is defined as a place where your work for more than 50% of your time (i.e. you can’t claim it if you have another work space that you are paying for).
You can deduct a portion of expenses that relate to the home office area used exclusively for business. For instance, if you rent a 1,000 sq. ft. apartment and use 200 sq. ft. room for your office, you can deduct 20% of related home office expenses. The expenses that you can claim are:
- Property Taxes
- Maintenance Fees
- Home Insurance
- Phone/Internet Charges (if you used these services for business purposes)
- Repairs and maintenance (related to workspace only)
- Cleaning fees or cleaning materials (a portion that relates to workspace)
Our general guidance is not to exceed 20-25% of your total livable area for your home office claims to avoid being red-flagged by the CRA.
Similarly to home office expenses, if you use your vehicle in your web design business, you can claim the business portion of automobile expenses. For example, if you drove 400 km out of 1,000 total km, then you can claim 40% of your vehicle expenses as a tax deduction.
Note that driving from home to your clients or office space is not considered to be a business mileage (unless your home office is a principal place of business, as discussed earlier).
Another important note that to support your automobile expenses claims, you will need to maintain a physical or electronic log for all business mileage. We recommend using apps like MileIQ to track your business kilometers on your mobile device.
Examples of expenses that you can claim are:
- Repairs and Maintenance
- License and Registration
- Toll road charges
- Depreciation (Wear & Tear)
- Lease payments
- Interest on financing
Be Aware of All Related Business Expenses
In addition to the above deductions, there are a number of other expenses that web designers can claim to minimize the amount of tax payable. In general, any business-related expenses that help you generate income are tax deductible. Some specific tax deductions that are available to creative professionals are:
- Cost of software subscriptions
- Web hosting and domain fees
- Meals and entertainment for your clients (50% deductible)
- Accounting fees
- Advertising expenses (Google, Facebook, etc.)
- Cell phone and internet bills (business portion only)
- Bank and credit card charges
- Education and training (e.g. an online course on web design)
- Subcontractor charges (if you subcontract any work)
- Laptops and computer hardware (deducted from useful life according to CRA schedules)
- Up to 2 business-related conferences per year (including travel expenses)
- Promotional expenses (e.g. referral fees, business cards, influencer marketing fees)
For a more detailed list of expenses you can deduct, visit our ultimate guide of CRA-approved small business tax deductions. The list also discusses tax deductions that are specifically not allowed by the CRA.
Hire Your Family Members
If you have additional work that can be performed by your family members (e.g. social media management, bookkeeping, blog posting etc.), consider delegating it to them in exchange for a reasonable salary.
Since Canada has a progressive tax rate, splitting business income with your family members will result in a lower tax bill for your family.
The payments paid to your relatives are tax deductible as long as:
- You actually paid it
- The work was necessary to earn business income
- The salary is reasonable compared to your relative’s age and experience
You may also put together a one-page job description to substantiate the business nature of the relationship.
If you are paying a salary, you will need to send payroll deductions to the CRA by the 15th of the next month. Speak to your accountant to understand what is required to implement this strategy for your web design business.
We hoped that you enjoyed this article, Feel free to contact us, if you have any further questions.