In today’s economic reality, young workers often have to settle for short-term contracts while earning less than they desire. Many turn to freelancing – the gig economy – or full-fledged self-employment to pay the bills.
Having business income, or multiple streams of income, can present a challenge come tax-time. Here’s what self-employed Canadians need to know as they prepare to file this year:
When to file
Self-employed individuals must file their taxes by June 15th, however any taxes owing are still due April 30th.
If you owe more than $3,000 in the current year and in either of the two previous years then you’ll have to pay income tax by instalments. These payments are due quarterly on the 15th of March, June, September, and December.
Whether you have income from a salaried job and a side hustle, or income from one or several businesses, you’ll file an individual tax return using a T1 business income tax form to declare all of your income.
What to prepare
You’ll want to make sure you’ve got all of your business records on hand, including copies of all bank and credit card account statements for the month before and after your year-end, along with a copy of last year’s tax return, a copy of all instalments made for income tax, GST, payroll, and a copy of all NETFILE confirmations.
Make things easier on yourself at tax time by registering for Canada Revenue Agency’s My Account, an online service that lets you manage your tax information, view payment history and assessments, as well as receive communication via email.
Familiarize yourself with form T2125 – Statement of Business or Professional Activities – and see if sole proprietors need to be aware of anything new this tax year. For example, if you earn money from online business activities you will need to list all of your websites and the percentage of income generated from each site.
What to write-off
You’ve kept meticulous records throughout the year and made sure to separate your business and personal expenses. Right? Right.
The good news is that you can deduct most reasonable expenses you incur to earn business income. If some expenses have both a business and a personal component then only the business portion is tax deductible.
Home office expenses are one of the most common deductions for freelancers.
You can deduct part of your housing costs such as heat, home insurance, electricity, and maintenance. You can also deduct part of your property taxes and mortgage interest.
Related: Tax deductions vs. tax credits
CRA says to use a reasonable basis to calculate the part you can deduct, such as the area of the workspace divided by the total area of your home. Personally, I use 15 percent of our house as a ‘home office’ and so I deduct 15 percent of the expenses listed above.
Other items that can be written off include capital property such as furniture, computer equipment, or a building that you purchase strictly for business use. These items can be deducted over time as depreciation through what’s called a capital cost allowance.
Meals and entertainment is another common deduction for business owners but it is important to note that you’re only allowed to claim 50% of the amount for food, beverages, and entertainment.
Final thoughts on self-employed taxes
Entrepreneurship of some kind might be a way of life for young workers today. As you branch out into various income streams your tax situation becomes less straightforward than that of a typical salaried employee.
Extra care should be taken by the self-employed to not intermingle business and personal expenses. Keep separate bank accounts and credit cards, and come up with a good filing system to organize your receipts and business transactions so you’re ready to file come tax time.