TAXES 101
Disclaimer: The information contained here is provided for informational purposes only,
and should not be construed as legal advice on any subject matter.
Let’s talk about tax
So, let’s face it. Tax is not the sexiest of subjects to talk about, but it’s a
hugely important part of running your business.
We’re going to go through some of the most common questions people have
about tax, like when you should pay it, how it’s calculated and how you can
contact your local tax office.
If in doubt....
Please speak with a local accountant or tax office to confirm which
regulations and rates apply to you, as this will vary in different countries and
states.
How are my taxes calculated?
Taxes are usually calculated based on your income during the financial year.
There are different tax brackets and rates based on how much you earn and
what type of business you have (sole trader or limited liability company).
Usually, the higher earners will have to pay a higher tax rate than lower
earners.
Here’s an example from the UK for a sole trader (2021;
www.getcoconut.com):
>>>> So, if your yearly income was £40,000, you would be taxed at 20%.
However…
There are some other things to keep in mind. Your local tax office may grant
business owners a personal tax-free allowance. This means that this
tax-free allowance is deducted from your overall income, before your tax
rate is calculated.
Again, please check with your local tax office whether this applies in
your country.
In the UK, the personal tax-free allowance is (2021; www.getcoconut.com):
So, going back to the previous example, if your yearly income was £40,000,
your personal tax-free allowance would be £12,500. That means the tax office
would only calculate your tax based on a taxable income of £27,500
(£40,000 - £12,500)
Now if we go back to the tax brackets on the previous page, we can see that if
your taxable income is £27,500, you’d still be taxed at a rate of 20%.
And then there’s expenses
As well as your personal tax-free allowance, some business expenses can
also be deducted from your taxable income.
This will usually be things like:
● Office equipment & stationery
● Home office utilities (heating, lighting etc.)
● Insurance
● Professional training courses (including The 9 To Thrive Vault!)
● Bank fees (for business transactions)
● Marketing & advertising costs
● Business travel costs
● Staffing costs (subcontractors, employees)
>>>> This is why it’s really important to keep copies of all of your business
expense receipts and invoices, so that you can claim these back at the end of
the financial year.
What can I do to prepare?
Step 1: Open a new bank account
I recommend having a separate bank account for your business transactions,
so that it’s easier to do your tax return at the end of the year.
If you’re a sole proprietor, it doesn’t need to be a ‘business’ account; it could
just be a separate personal account.
If you have a limited liability company, you’ll need to open an actual business
account.
Step 2: Find an accountant (and bookkeeper if you wish!)
Personally, I would recommend hiring an accountant to do your end of year
tax return, unless you’ve done one before or have professional training in it.
It will save you a lot of stress and potential costly errors! Remember, if your
tax return is wrong or submitted late, you will likely have to pay a fine.
Some Virtual Assistants also hire a Bookkeeper to organize all of their
financial records during the year, so that it’s ready to be passed on to your
accountant. Or if you prefer, you can do this yourself.
Step 3: Keep records of EVERYTHING during the year
The last thing you want is a mad scramble at the end of the year to organize
all your receipts and financial records.
Block out time in your calendar for the end of each month to get your records
organized.
You’ll need to keep a record of:
● Invoices sent to clients
● Payments received (bank statements)
● Expenses ( receipts, bank & credit card statements)
All of the transactions in your bank statements and business credit card
statements will need to be matched to invoices or receipts as evidence, so
spend some time doing this at the end of each month.
If you use an invoicing app, you should be able to do this in the app itself by
connecting it to your bank account and scanning in photos of the receipts with
the CamScanner app.
Or you can organize the documents in a Google Drive folder, with a subfolder
for each month.
You could then give each transaction on your bank statement a number and
save the invoices and receipts with those numbers (e.g. 1. Canva invoice; 2.
Dropbox invoice….).
Your accountant will then ask for access to your invoicing app or
Google Drive folder to do the end of year tax return.
Is there anything else I need to think about?
Depending on your country, there may be other requirements to keep in
mind when preparing your taxes. Your account will be able to advise on this or
you can speak to your local tax office.
How can I contact my local tax office?
Below is a list of a few tax offices in different countries, which you can contact
if you have any questions. If your country isn’t on here, you can search “tax
office [your country]” in Google and their website should appear.
UK
HMRC
https://www.gov.uk/government/organisations/hm-revenue-customs/contact/in
come-tax-enquiries-for-individuals-pensioners-and-employees
Webchat:
https://www.tax.service.gov.uk/ask-hmrc/webchat/income-tax-enquiries-for-ind
ividuals-pensioners-and-employees
Phone: 0300 200 3300 (inside UK) or +44 135 535 9022 (outside UK)
US
IRS
https://www.irs.gov/
Contact your local office: https://www.irs.gov/help/contact-your-local-irs-office
Canada
Canada Revenue Agency
https://www.canada.ca/en/revenue-agency.html
Contact:
https://www.canada.ca/en/revenue-agency/corporate/contact-information.html
Australia
Australian Tax Office
https://www.ato.gov.au/
Contact: https://www.ato.gov.au/About-ATO/Contact-us/
New Zealand
Inland Revenue
https://www.ird.govt.nz/
Contact: https://www.ird.govt.nz/contactus
