Working with the Government
The easiest way to stay out of tax trouble is to follow the rules and guidelines set down by the IRS or the CRA. Both government departments offer a range of resources to help you do just that.
Two IRS publications provide an excellent place to start. Publication 583, Starting a Business and Keeping Records, and Publication 334, Tax Guide for Small Business (for sole proprietors who file Schedule C or Schedule C-EZ with their Form 1040) summarize all of the essential concepts with plenty of examples to help explain them.
The IRS also partners with federal tax specialists to offer a series of Small Business Tax Workshops throughout the United States; and most of these are free. Self-study versions of the workshops are online, the same as small business products such as tax calendars and resource guides, which can also be ordered on CD/DVD.
In addition, Publication 1066, the Small Business Tax Workshop Workbook, which is used in the workshops, takes you through various helpful examples and case studies, and it is available online and in hard copy.
The best place to look for federal tax information for the CRA is online. Toll-free phone assistance is available for the IRS at 1-800-829-1040 (individuals) and 1-800 829-4933 (businesses). For CRA assistance in Canada, call 1-800-959-8281 (individuals), 1-800-959-5525 (businesses), and 1-800-959-2221 (to order publications).
In Canada, start with the CRA's Guide for Canadian Small Businesses (RC4070) and Business and Professional Income (T4002). The CRA also provides small business information seminars free of charge and will even offer a staff person visit to your location if you're too busy to attend a seminar. Contact your local tax services office to register (local offices are listed on the website).
Because you're self-employed, there's no employer withholding money from your paycheck in anticipation of income taxes that will become due and payable each April. Consequently, you may have to make estimated tax payments on your own, which are usually due quarterly. This can be challenging to calculate, especially in the first few years, when you're not sure what your profits will be.
However, it's important to do this as accurately as possible, not only because the government may impose penalties and interest on you if you don't — but because facing the bill for an entire year's income tax can be a nasty shock in April if you haven't been paying quarterly.
In the United States, you need to make quarterly estimated tax payments (April 15, June 15, September 15 and January 15) if you expect to owe at least $1,000 in federal taxes (including income tax and self-employment tax). See Publication 505, Estimated Tax Payments, for specifics.
In Canada, you may be paying by installments if you expect to owe more than $2,000 in federal taxes. Payments are due March 15, June 15, September 15, and December 15, and need to include Canada Pension Plan contributions, if they'll be payable, as well. For details, check the CRA's Paying Your Income Tax by Installments (P110).
Preparing Your Tax Returns
If you're comfortable completing your individual tax returns and your business structure is a straightforward sole proprietorship or partnership, you likely won't have any trouble completing the tax forms for your business/self-employment.
However, if you run into challenges, don't hesitate to hire a tax preparer or accountant. They know the rules and may even find deductions you weren't aware of (including their own fees).
If you're preparing your own tax returns, invest in a tax software program annually. It can't replace expert advice, but this specialized software does make the process much easier — all the forms are included, along with plenty of tips. If you know the tax forms, you can complete them as needed; if you don't, the software walks you through the process systematically.