What I wish I knew before starting my business for the first time

I’ve interviewed a few of my clients and asked them what they wish they’d known before they started their business for the first time. These spanned from side hustlers to full time entrepreneurs because the challenges from a business perspective are the same. Here were the most common answers. 

1. What’s the difference between Income tax and HST/GST?

Income taxes are the taxes you pay on your bottom line (see point 2 below). When you are an employee, your employer takes your income taxes out of your paycheque before you receive it and sends it to the government on your behalf. But when you work for yourself, you don’t have an employer to take care of that, so it become your responsibility. There is tax on basically every penny of income (again, see point 2), so make sure to save a part of every payment your receive to be able to pay that either at year.

HST/GST is a sales tax. You’re likely very familiar with sales taxes on the normal things you buy, in Ontario for example, you’ll pay 13% on almost all purchases. So if you are required to collect sales tax, discussed further in point 3 below, you will also need to set that amount aside and pay it to the government at the end of the year. 

2. What’s the difference between Revenue and Income?

Revenue is the total amount of money you bring in. If you sell candles, for example, and you sell 100 candles for $20 a piece. Your revenue for those candles is $2,000. 

Income, also called the “bottom line”, is the difference between revenue and the expenses that are required to generate that revenue. So you made 100 candles and the wax, wicks, jars and scent costs $8 per candle, plus you have to pay someone help with your manufacturing. You paid them $100. Then your total expense is $8x100 or $800 for materials, plus the $100 for labour for a total of $900 of expenses. Therefore, your income in this case is $2,000 less $900, $1,100.

3. What is the 30,000 HST Rule?

You may have heard of the 30,000 HST rule when looking into starting your own business and been confused. Most of the data on this rule is written in a super complicated way. I’ll try to simplify it. 

Essentially, if you make 30,000 from your business (this does NOT include money you make at your 9-to-5 job if you have one), in any consecutive 12 month period, you are required to register for an HST number and charge HST to all your customers. Here are a few examples to help you out. 

4. You can register for HST anyway because then you can book the HST you pay against what you charge. 

If you are worried about the complex problem above, I have an easy solution for you, you can register for HST early if you want. You are not required to wait until you’ve made 30,000, you can register whenever you want before that as well. This serves two purposes. 

1. You don’t have to worry about calculating how much you’ve made in the 12 consecutive months beforehand and risk missing when it’s required. 

2. You potentially get some of your money back. You are likely paying HST on supplies, subcontractors, or services (like zoom or website hosting). If you charge HST, when you file, you get to remove the amount paid from the amount collected, so the supplies/services you purchased become cheaper. 

5. Simple tools are very helpful. 

People are often disparaging of simple, free tools like excel and WAVE. But free tools like this are great options. In fact, I would HIGHLY recommend at least using excel from the moment you start your business. This will help you track how your business is doing and growing and help you be prepared for tax time. Having a shoe box of receipts is a lot less stressful when you also have a spreadsheet that shows exactly what those receipts are for. There are many free or inexpensive premade spreadsheet options available online that will help you track all your expenses and help you to feel more organized. 

6. What are installment payments and do I need to make them?

Installment payments are quarterly tax payments made for both HST and Income tax for business owners. If you pay more than $3,000 in tax during the year outside of what your employer collects (if you are still side hustling), then you need to pay quarterly installment payments. There are multiple ways to calculate each of these different types of tax. Let’s start with HST:

1. You can take the total amount of HST you paid in the previous year and divide that by 4, resulting in a quarterly amount to pay. This is usually the amount the CRA recommends. 

2. You can calculate the actual amount of HST collected less HST paid and pay that amount. This is nice because you’ll definitely have that amount set aside and don’t have to worry about paying too much or too little and helps you be sure that you don’t have an accidentally huge HST bill at the end of the year.  

3. Estimate how much you’ll make in the year and calculate HST based on this number, then divide by 4 as with point a above. This is helpful if you this you will make a drastically different amount from the year before, but it can be complicated. 

Income tax is calculated and remitted in very much the same way. 

1. Base the amount you pay on how much you paid in income tax the previous year, divide by 4 and pay this amount. As mentioned above, this will be the amount the CRA is expecting. 

2. Estimate how much you think you will make in the year and , use a tax calculator to determine your marginal tax rate (I recommend this calculator from Wealthsimple), then pay either a quarter of the total OR the marginal tax on the amount you’ve already earned. 

7. The first year is about learning - particularly the tax bit, but it does get better. Growing pains. 

Growing pains are real. Understanding all these things in a short period of time is basically impossible. That first year will be tough, you’ll likely be stressed about taxes and deadlines and so many other things. This is normal, almost everyone feels this way, you are not alone. It does get better and you will feel more in control as time goes on.

8. You can always reach out to an accountant or bookkeeping for a conversation. 

You may not need an accountant or bookkeeping to prepare your books for you, or you may not be able to pay for that service yet, but that doesn’t mean you can’t reach out to one to have a quick conversation about these things. Many local accountants will have an option for a one-on-one call where you can ask all your questions and they’ll make recommendations to you based on their knowledge. While they usually charge a small fee for these conversations, they can be very valuable and help you to prevent expensive mistakes.