Freelancing can be a rewarding way to earn a living, but it also comes with some challenges regarding taxes. Unlike employees, freelancers are responsible for reporting their income and expenses, paying taxes and contributing to social security programs. If you’re a freelancer or self-employed worker in Canada, here are 10 tax tips to help you save money and avoid trouble with the Canada Revenue Agency (CRA).
How to report your freelancing income and expenses on Form T2125
Any income you generate from freelancing must be declared on your income tax return. As a freelancer in Canada, you declare your freelancing payments as business income on Form T2125. Form T2125 is part of your T1 tax return and allows you to report your gross income, business expenses and net income or loss.
To fill out Form T2125, you must keep track of all your invoices and receipts throughout the year. You must also choose a business name and number (if applicable) and select a fiscal period for your business. You can use the calendar year or any 12-month period that ends in the tax year.
How to budget for taxes and pay quarterly instalments if required.
One of the biggest challenges for freelancers is budgeting for taxes. Unlike employees, freelancers don’t have taxes withheld from their paychecks by their employers. Instead, they must set aside money for income and self-employment taxes (Canada Pension Plan and Employment Insurance) throughout the year.
A good rule of thumb is to save at least 25% of your net income for taxes. You can use a tax calculator or an online tool like TurboTax to estimate your tax liability based on income and deductions.
If you owe more than $3,000 in taxes in the current year and any previous two years, you may have to pay your taxes in quarterly instalments. It means that instead of paying your taxes by April 30, you have to pay them four times a year: March 15, June 15, September 15 and December 15. The CRA will send you instalment reminders with the amounts you must pay based on your previous year’s tax return.
How to claim business deductions for your home office, vehicle, supplies and more
Being self-employed allows you to claim business deductions for expenses related to your work. It can help you lower your taxable income and save money on taxes. However, you must ensure that the costs are reasonable, necessary and supported by receipts or invoices.
Some of the standard business deductions for freelancers include:
- Home office expenses: If you use a part of your home exclusively and regularly for your work, you can deduct a portion of your household expenses such as rent, mortgage interest, property taxes, utilities, insurance and maintenance. You can use a simple or detailed method to calculate your home office deduction based on the size and use of your workspace.
- Vehicle expenses: If you use your vehicle for business, you can deduct a percentage of your vehicle expenses, such as gas, oil, maintenance, insurance, license fees and depreciation. You must keep a logbook of your business trips and record the date, destination, purpose, and distance travelled.
- Supplies and equipment: If you buy supplies or equipment for your work, such as stationery, software, computer or phone, you can deduct the cost or a portion of it depending on whether it’s a current or capital expense. A current expense provides a short-term benefit (such as paper or ink), while a capital expense provides a long-term benefit (such as a laptop or printer). You must use the capital cost allowance (CCA) method to deduct depreciation over time for capital expenses.
- Professional fees: If you pay for professional services that help you run your business, such as accounting, legal or consulting fees, you can deduct them as business expenses. However, you cannot deduct fees for personal services such as tax preparation or financial planning.
- Advertising and promotion: If you spend money on advertising or promoting your business, such as online ads, flyers or business cards, you can deduct them as business expenses. However, you cannot deduct expenses for entertainment or gifts unless they are directly related to earning income.
How to contribute to your RRSP and save for retirement
Freelancers don’t have access to employer-sponsored pension plans or group RRSPs. It means they must save for retirement and take advantage of the tax benefits of registered retirement savings plans (RRSPs).
RRSPs are personal savings accounts that allow you to defer taxes on your contributions and investment earnings until you withdraw them in retirement. You can also use your RRSP to invest in various assets, such as stocks, bonds, mutual funds and ETFs.
The main benefit of contributing to your RRSP is that you can claim a tax deduction for the amount you put up to your RRSP contribution limit. It can reduce your taxable income and lower your tax bill for the year. Your RRSP contribution limit is based on 18% of your earned income from the previous year, up to a maximum amount. For 2022, the total amount is $29,2101.
Another benefit of contributing to your RRSP is using it for other purposes, such as buying your first home or paying for education. The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP to buy or build a qualifying home without paying tax on the withdrawal. You have to repay the amount within 15 years. The Lifelong Learning Plan (LLP) allows you to withdraw up to $20,000 from your RRSP to pay for full-time education or training for yourself or your spouse or common-law partner without paying tax on the withdrawal. You have to repay the amount within ten years.
How to register for GST/HST and charge sales tax to your clients
If you provide taxable goods or services in Canada as a freelancer, you may have to register for a GST/HST account and charge sales tax to your clients. GST stands for goods and services tax, and HST for harmonized sales tax. GST/HST is a value-added tax that applies to most goods and services sold or provided in Canada.
You have to register for a GST/HST account if:
- Your total worldwide revenues from your taxable goods and services (including those from other businesses) are more than $30,000 in one calendar quarter or four consecutive calendar quarters.
- You provide taxi or limousine services.
- You sell goods or services outside Canada but use Canadian services or property in making those sales.
You can also register voluntarily if you meet certain conditions.
Once you register for a GST/HST account, you must charge GST/HST on your taxable goods and services at the applicable rate, depending on where you make the sale or provide the service. You must also file GST/HST returns and remit any net tax owing to the CRA by the due date.
You can claim input tax credits (ITCs) for the GST/HST you paid or owe on purchases and expenses related to your business activities. It can reduce the amount of GST/HST you have to remit.
How to avoid common tax mistakes and penalties as a freelancer
As a freelancer, you must manage your taxes and avoid common pitfalls that could cost you money or get you in trouble with the CRA. Here are some tips to help you avoid common tax mistakes and penalties as a freelancer:
- Keep accurate and organized records of your income and expenses throughout the year. Use accounting software or apps to track your transactions and receipts. Store your documents in a safe place for at least six years in case of an audit.
- File your income tax return and pay any balance owing by the deadline. The deadline for self-employed individuals is June 15, but any balance owing is due by April 30. You may face late-filing penalties and interest charges if you miss the deadline.
- Report all your income from all sources, including cash payments, tips, bartering transactions and foreign income. You may face gross negligence penalties or prosecution if you fail to report income or underreport income.
- Claim only eligible business expenses that are reasonable and necessary for earning income. If you claim personal expenses as business expenses or overstate your expenses, you may face reassessment or penalties.
- Report any personal or business information changes to the CRA as soon as possible. It includes changes in your name, address, marital status, banking information or business number. It will help you get all important notices and payments from the CRA.
Conclusion
Freelancing can be a great way to earn income and enjoy flexibility, but it also comes with some tax responsibilities and challenges. As a freelancer or self-employed worker in Canada, you must report your income and expenses, pay taxes and contribute to social security programs. You also have to budget for taxes and pay quarterly instalments if required. However, you can also take advantage of tax deductions for your business expenses, RRSP contributions and GST/HST credits.
To help you manage your taxes as a freelancer, here are some resources you can use:
- The CRA website has a section dedicated to self-employed individuals, where you can find information on registering your business, filing your tax return, claiming deductions and credits, paying your taxes, and more.
- TurboTax has a blog that provides tax tips and advice for freelancers and self-employed workers in Canada. With guidance and support, you can also use TurboTax software to prepare and file your tax return online.
- MoneyGenius is a website that offers financial education and tools for Canadians. You can find articles on RRSPs, TFSAs, budgeting, investing, etc.
- Freelance Canada is a community of freelancers who share their experiences and insights on various aspects of freelancing, including taxes, contracts, clients and more.
We hope this article has given you some helpful tax tips for freelancers and self-employed workers in Canada. If you have any questions or comments, feel free to leave them below. And if you found this article helpful, please share it with your fellow freelancers. Thank you for reading!
If you have any questions regarding freelancer taxes in Canada, feel free to contact finnection via email at info@finnection.ca or call us at (647) 795-5462
Disclaimer: Above information is subject to change and represent the views of the author. It is shared for educational purposes only. Readers are advised to use their own judgement and seek specific professional advice before making any decision. Finnection Inc. is not liable for any actions taken by reader based on the information shared in this article. You may consult with us before using this information for any purpose.