Small business owners, especially new business owners, usually have quite a bit on their shoulders to maintain. From management of staff, payroll, bookkeeping, marketing, and business operations it can be a task doing it on your own. However, one of the major things business owners need to consider is that their taxes must be up to date and in order. In this guide, we navigate sole trader taxes, deadlines, income tax returns, business profits, and all filing requirements to prepare small business owners, independent contractors, and self-employed individuals for the next tax year.
When setting up a new business, it’s important to learn how to choose a business structure that’s right for you and determine how it will affect the specifics of your business’s taxes. Many small businesses usually levitate to starting off as a sole trader.
So, what is a sole trader? It is someone who owns an unincorporated business by themselves. It’s the easiest and most straightforward business structure to form.
If you’ve already decided to become a sole trader, your next question is probably, “How are sole traders taxed?” Fortunately, since this is one of the least complicated business structures, the taxes are similarly straightforward.
How Is Sole Traders Taxed?
Sole traders are taxed at the individual income tax rate, like how they were taxed before as when they were an employee. This involves the owner reporting and paying their sole trader taxes as part of their personal tax return.
In Trinidad & Tobago, a sole trader needs to ensure they’re registered with the BIR (Board of Inland Revenue) where they pay quarterly taxes at a rate of 25% of what is earned, better known as an income tax.
How to determine A Sole Trader Income Tax
Sole traders do not pay income tax based on the revenue or total sales made by the business. However, they do pay on the profits earned after all expenses have been minused.
This means they’ll get taxed on all profits (total income minus expenses) regardless of how much money they withdraw from the business. Therefore, the sole trader’s taxable income will be close to the “net income” or “net profit” number at the bottom of the profit and loss statement, but with a few adjustments.
Like any business, sole traders can deduct business expenses on their return; however, they’ll want to ensure that they’re managing their small business bookkeeping correctly to report taxable income and any applicable deductions accurately.
A common mistake that sole traders make, for example, is recording cash activity, such as owner’s withdrawals, cash deposits from loans or investments, and debt payments—as expenses or income on their profit and loss statement when these activities do not impact taxable income. These incorrectly recorded transactions will mess with the total profit calculation and can result in either paying too much or too little on taxes.
Paying too much is obviously a disadvantage because that’s money that a new business owner could be using to grow their operations. Paying too little could result in fines or penalties from the Board of Inland Revenue (BIR), definitely not what a small business owner wants.
Tax Deductions for Sole Traders
One of the best parts of taxes for small businesses is the ability to itemize deductions and decrease the overall tax bill.
Some Tax deductions that a sole trader should know about are:
ü Personal Maintenance
ü Tertiary Education Expenses
ü First Time Homeowner Allowance
ü Covenanted Donations
ü Alimony and Maintenance Payments
ü Contributions to Approved Deferred Annuity/Pension Plans
A sole trader who wants to make the most of their deductions would be wise to consult a professional accountant such as Robley Baynes Tax and Accounting Services who can ensure they’re maximizing their deductions and taking advantage of everything they’re eligible for. When business owners fail to take advantage of qualified deductions, they leave money on the table for the BIR!
What Taxes does a Sole Trader Pay?
The following are taxes sole traders are responsible for paying:
ü Income Tax (25% up to 1 million dollars or 30% if the profits is over one million dollars)
ü Business Levy (0.6% of your Revenue)
ü Health Surcharge
ü VAT (once above the threshold of $500,000)
How Can Robley Baynes Assist Your Small Business?
Robley Baynes Tax and Accounting Services has trained and certified taxation experts that are willing to break down the step by step process to you. Our dedicated team will ensure that all your books are in order and your taxes paid on time, exempting your business from being faced with heavy fines and interest rates by the BIR. Contact us today to get started and take your business to the next level, call 1 868 293-1508 or email service@robleybaynes.com.