It’s September. Summer is gone, you’ve spent the last few weeks organising schoolbooks and getting the kids settled back in school. Now it’s your turn. Five weeks to go to have your own books organised and filed with the Revenue. Is it enough time? Well, a lot depends whether you can easily lay your hands on the information required.
Here’s a few tips on sorting through the mess, and what to do in future to take the stress out of tax time.
Let’s start with the purpose of the deadline. What’s it for? It is for you as a sole trader to pay the income tax you owe for your latest accounting period. For example, if your tax year is January to December, then on October 31st, 2009, you need to pay tax on the income you earned between January 2008 and December 2008.
What exactly is considered my income?
This is actually a very simple formula. You need to know what you sold during that period, and what your business costs were during that period. Sales minus business costs equals income. This income is what gets taxed at the 20% or 41% rates. We’ll discuss the calculation later. Let’s deal with how to gather the sales and costs information first. This is where you can make things as easy or as difficult as you like, depending on what you did with your paper during the year.
How do I figure out my sales?
It’s important to note that right now we are talking exclusively about sales. What did you charge your customers? “I charged €2,000 plus VAT to wire a house.” Well, €2000 is your sales (drop the VAT, you don’t get to keep it). “But I had to buy cabling to do that, and I needed to repair my drill.” Exactly, there are costs involved in sales. But that is handled in the next section. Right now, just figure out the total of what you charged to people in 2009. You might have a set of docket books that you used, or just a notebook, an excel spreadsheet, a printout from a software package, something that somehow recorded your sales. Now get a total for the year, without the VAT. Remember, if you have a revenue inspection, you will have to be able to explain that figure and back it up with paperwork.
How do I figure out my business costs?
Your business costs are simply goods or services you bought for the expressed purpose of doing business. For example, paper and ink cartridges for your office printer are considered business costs and can be subtracted from your sales to determine your income. Same with accounting software and accountant’s fees. As with the sales, you don’t include the VAT amount.
Wages paid to employees, and PRSI paid to the Revenue on their behalf are also deductible.
I am hoping you have a box or a lever arch file with all your purchases together. Better still if you have them typed up in a spreadsheet or in an accounts package. Or even written up in one of the famous red ledgers accountants are so fond of handing out (but why I ask). Ultimately you want a total for the year, that you can explain and tie back to the paperwork if you have a Revenue inspection. For the few things that you won’t have receipts for, like wages paid out, you will have to find these amounts in your checkbook or on your credit card or bank statement.
What is not a business cost?
Anything you didn’t spend to do business. School clothes for the kids. Food and other personal living expenses. Holidays, unless it’s a business trip. And before you ask, not business suits either. Yes I know you wouldn’t wear them expect for business. I didn’t say it was fair. The mortgage on your private home. Entertaining or even feeding business guests doesn’t count either, as unfair as it seems. Neither do wages paid to yourself count. Ignore them for the purposes of this calculation.
“Aileen, I bought a van for the business. Sure there won’t be any profit to tax after that?”
This is where it gets a bit tricky. If you bought any assets for your business, such as a Van or a special equipment, you need to spread out the cost over a few years. So instead of calling the whole price of the van a business cost in the first year you bought it, instead you will calculate what is called a Capital Allowance each year for as long as what the Revenue considers to be the life of the van. Confusing? Call the Revenue or your accountant for a longer explanation. But don’t get bogged down and give up. These kinds of items are about 5% of your job. The other 95% are very straightforward.
“Aileen, what if I didn’t keep any records?” Oh boy. Had you read the Revenue Guide IT48 you would have noticed that it says, “Q. What happens if I fail to keep proper records? A. Failure to keep proper records or failure to keep them for the necessary six years, where you are chargeable to tax, is a Revenue offence. If you are convicted of a Revenue offence you face a heavy fine and/or imprisonment.” For this year, your best bet is to try and find a good bookkeeper or accountant who will help you figure out what you owe up to now. Skip ahead to the part that says “How do I make this easier for next year?”
For those still here read on… Ok, now I know my income now, what is my tax going to be? Say you have figured your sales minus your costs to be 45,000 (we are making it even for simplicity’s sake.) “Good God, I haven’t that much in the bank” Yes, that’s the difference between paying tax as you earn it (PAYE) and paying later. It can kind of build up on you. So what’s the tax on €45,000? Well let’s say you are single, or you are married but your spouse also works. We need to use the 2008 rates, cause that’s when the income we are talking about was earned. Well, up to €35,400 will be taxed at 20%. So that’s €7,080 right there. That leaves 9,600 at 41%. That’s another €3,936. We are up to €11,066 now. But hey you get a discount, in the form of tax credits! As a self-employed person you get to take all of €1,830 off the €11,016 leaving you with a tax bill of €9,186 “What? Nearly Ten grand??” I’m sorry, I am not finished. I am afraid you will also have to hand over 5% of your gross income to the Department of Social Welfare for PRSI and Health Levy. That’s an additional €2,250 giving you a grand total of €11,436 that you owe to the taxman. Hopefully you paid enough preliminary tax last October to cover most of it.
Check it out yourself here: SortMyBooks Quick Self Employed Tax Calculator
“What’s Preliminary Tax?” It’s kind of like a deposit that you make this October on the tax that you will you owe next October. “A deposit? Like 5%? or 20%?” Sorry, I am afraid it is actually 90%. “And what if my deposit wasn’t enough?” Well chances are you will have to pay interest on the balance, unless it’s your first year of business. You don’t have to pay preliminary tax in your first year of business, but it only means you will have to pay double tax in your second year. For a longer explanation, see the IT48 section on Preliminary tax.
“Aaargh, you’re killing me – is there anything I can do to reduce my tax?” Well the first thing people usually to is scrabble around to make sure they didn’t forget about some really big business thing they bought and forgot to include in their accounts (I was that soldier). But failing that, the best way I know of to reduce your tax bill is to go get a good pension. If you have hit the high tax bracket, then for every hundred euros you put into your pension, that’s 41 euros off your tax bill, and another 5 off your PRSI. Which means your 100 euros of pension only cost you 54 euros. Wouldn’t you rather put it towards 65 year old you’s pina coladas on the beach than give it to the Revenue? Check out the Pensions Board website to learn more about this. It has a handy calculator.
“Aileen, I don’t want to go through this again. How do I make this easier for next year?”
Separate, separate, separate. As you may have noticed, you had to find out what money came in from your business, and what money went out for the purpose of your business, as opposed to personal expense. Wouldn’t this be a whole lot easier if you had a separate bank account just for your business transactions? Another good idea is a credit card that you keep just for business purchases. At least if you lose a receipt, there is a record of the expense. If you lose a receipt that you used cash to pay for, chances are it never gets included as a business expense, and you’ve just paid another 46% more for that item that you didn’t have to. Also, set up a preliminary tax direct debit with the Revenue. This will help with the end of year shock.
Learn - Knowledge is key. Get the Revenue Guide IT48 www.revenue.ie/leaflets/it48.pdf, from the Revenue On-Line website, it is fairly easy to understand.
Take a business class to help you set up an easy to use (preferably computerised) bookkeeping system to avoid the Halloween nightmare. I say computerised because it’s a way of killing several birds with one stone. Use it to keep track of who owes you money, how much VAT you owe and what your profits are. You will have those figures anytime you need them rather than just at the end of the year. Ask your Enterprise board or local VEC about classes. Know your own business. Learn to set up an organised system and spend just one hour a week on it, and you will never have a Halloween nightmare again.
I ought to know, I am a reformed sloppy record keeper, and I have the sherrif’s letters to prove it.
SortMyBooks one day workshops are being run in Kerry, Cork and Dublin to help business owners stay out of trouble with the Revenue and keep track of their VAT, Profit, Customers and Suppliers on an ongoing basis. Click here for course details.
