Three Key Tax Accounts Every Business Owner Should Monitor
We're providing you with essential tips, tricks, and strategies to grow your margins, maintain control of your business, and ultimately increase profitability. Today, we're focusing on a crucial aspect of financial management: monitoring tax accounts. Understanding and keeping an eye on these accounts can help you anticipate tax bills, plan effectively, and potentially save on taxes.
The first account to watch is the GST/HST payable, which appears on your balance sheet under current liabilities. This account represents the amount of Goods and Services Tax (GST) or Harmonized Sales Tax (HST) you've collected from your sales but haven't yet remitted to the government. For instance, if you're in Ontario and your business has made $1 million in sales, you've collected $130,000 in HST. This amount will be due to the government, typically within the year.
Keeping track of your GST/HST payable helps you avoid unpleasant surprises. For example, if your balance sheet shows $10,000 in this account, and you have $20,000 in your bank account, you know that half of your available cash is earmarked for tax payments. This awareness allows you to manage your cash flow more effectively.
Next, consider your corporate tax balance. While this doesn't appear directly on your financial statements until you've calculated your taxes, you can estimate it based on your net profit. In Canada, if your business earns under $500,000 in profit, you're generally subject to an 11% corporate tax rate.
To estimate your corporate tax liability, simply take your year-to-date net profit and multiply it by 11%. For example, with a net profit of $100,000, you can expect to owe around $11,000 in corporate taxes. This estimate helps you plan for tax payments and manage your business's financial health.
The third key account is the shareholder's loan balance. This account tracks any money you take out of or put into the business. It's listed under the liabilities section on your balance sheet. If you've withdrawn funds from the business, this balance may show a negative amount, indicating that you owe money back to the company.
A negative shareholder's loan balance can trigger tax implications, as the amount may be treated as dividends, subject to personal income tax. Conversely, if the business owes you money, this represents funds you can withdraw tax-free. Regularly monitoring this account allows you to optimize your tax strategy by balancing payroll and dividends.
By consistently monitoring these three accounts—GST/HST payable, corporate tax balance, and shareholder's loan balance—you can cover around 80% of your tax planning needs. Staying on top of these figures helps you avoid surprises, plan for upcoming tax liabilities, and potentially reduce your tax burden.
Need Assistance?
If you need personalized guidance in understanding these numbers and how they impact your tax position, our team is here to help. We can walk you through your financial statements, explain the significance of each account, and assist with your tax planning strategy.
Many businesses struggle with payroll management, often relying on manual processes or using tools like the CRA payroll calculator. In our next session, we'll introduce you to a simple, automated payroll system that can streamline your processes and help you avoid penalties. Stay tuned for an easy solution to take the hassle out of payroll management!
