I had a brief meeting with an accountant a few months ago. I had questions about how to go about legitimizing my business. Since, it became legal to sell my services I wanted to move away from operating a solely cash business. Paying taxes and making it a legitimate business would help me build my credit. It has worked so far. I am taking in e-transfers and I am an independent contractor as a part time cam performer.
My question is, how much should I be putting away to pay the taxes on these items? It wasn't really an issue before, but I am getting more and more e transfers and I have a client that pays strictly with e transfers. This month alone I have $700 in e transfers from him. How much of that $700 should I put away to pay taxes on lat the end of the year?
When I "write something off" how much of the value of what I purchase is put towards taxes that I owe?
Any help or advice would be appreciated. Pretty well all my working life I've worked for or operated cash businesses and I'm not sure how it all works and it been the biggest barrier to becoming a legitimate business.
You are allowed to deduct expenses so it's not the$700 you pay tax on, but how much you keep after your costs.
Keep receipts for rent, advertising, phone bill, supplies, transportation, whatever you spend.
If you have a capital expense, something that you invested in that you paid for once but keep using, you depreciate that instead of deducting it. Things like a computer or a car that you buy, use for a few years, then possibly sell for some residual value. Things like that have special treatment. You deduct a percentage each year rather than the whole price. You can look up the rate based on the category of item--computers have one rate, furniture another. You can find this online by searching.
For example if you spent$10,000 on computer equipment you would deduct 30% each year, since that's the rate for computer equipment. So $3000 in the first year, and consider it to have a remaining value of $7000 in the second year.
But regular expenses like a phone bill or rent or advertising, meals, hotel bill, utility bill, or taxi fare you deduct 100% since it's a straight up operating cost. It doesn't have a residual value, is not something you can keep using or resell. So it's used up when you buy it and you deduct 100% of these things in this year.
Using space in your home for business has special rules as well. Basically try and estimate what area of your home is exclusively used for you business, eg, your webcam studio. Then find out what percent of your square feet it is and deduct that percent of your rent. Say it's a 20x10 room out of a 1200sqft home, so it would be 1/6th your rent.
Finally if you own and drive a car for both work and personal use you need to log you business trips. Each time you drive for work, how many km. Keep it logged so you can see what percent of your driving is work and deduct the right percent of car expenses including depreciation.
You will then pay tax on the difference between your total revenue collected and you total deductions for the year. You should estimate what you expect that profit to be. Figure it out per week or per month if that's easier and then estimate what it will be for a whole year.
Plug that annual profit number into one of those online income tax estimating websites and it'll spit out how much total taxes you need to have saved by the time taxes come due. From that you can figure out how much to put aside each week. It won't be exactly right but hopefully close enough that you see aside enough so you aren't struggling to pay your tax bill.
