Recently, Intuit Canada released a study on “The Rise of the Self-Employed Economy.” The study found that half of Canada’s workforce will be freelance by 2020. At first, this number seems high, but when I thought about it, it made a lot of sense.
I started freelancing two years ago, and a lot of my peers also now freelance. The thing is, we don’t do it full-time. It’s not a stretch to expect half of Canada’s workforce to be doing some freelance work by the time the next decade rolls around.
The extra cash that you generate is great, but what you want to make sure avoid the following tax mistakes as a freelancer.
Not reporting all your income
You may be tempted not to report your additional income, but that’s fraud – don’t do it. Some people may wonder, how the CRA will know? Well, there will always be some record, you know, like from the company that paid you. It doesn’t matter if you made $50 or $5,000, you need to report all your income streams when filing your taxes.
Forgetting about your deductions
As soon as you start freelancing, you can deduct any reasonable expense that helps you earn business income. The most common things would be meals and entertainment, advertising, office expenses, and mileage. However, you can also deduct some lesser known things such as rent, property taxes, mortgage interest, and travel. Remember, these expenses must be related to your business; you can’t claim personal expenses.
Not logging all your information
Okay so you know you need to report your income, and you can make deductions, now don’t forget to actually log everything! I personally prefer to use a spreadsheet, but I recently tested out the Quickbooks Self-Employed app which made tracking my expenses a bit easier. It doesn’t matter how you track your income and expenses, just make sure you do it.
Not working with an accountant
When I first started freelancing, I didn’t bother using an accountant since my taxes were pretty simple, but I quickly realized it made sense to have professional help. I asked around for a referral and found an accountant that was familiar with freelancers in similar situations as me. He was able to advise me on tax deductions and give me tips on how to manage all my expenses. The money he saved me easily made up for the fee I had to pay for him to file my taxes. One thing to note, look for a professional accountant if you’re a freelancer, the ones that show up at the malls during tax season probably aren’t a good fit.
Understandably, not everyone may be able to afford the services of an accountant, but that doesn’t mean you can’t get expert help. TurboTax Self-Employed is a great alternative as it allows you to ask a tax expert questions when you’re doing your taxes. The cost of the service is reasonable and there are often promo codes online.
Not making a profit
This may sound odd, why wouldn’t you want to make a profit? Well, some people do run into hardships while others may run their business strictly out of passion e.g. running a website about something they love. Regardless of the reason, the CRA does expect you to turn a profit at least once every seven years. If you’re worried about an audit, simply stop reporting your losses (as in, stop making business expense claims). If you’re in this position for a reason, talk to your accountant about what to do.
Not registering for an HST number
Once you’ve made a freelance / self-employed / business income of $30,000, you must register for an HST/GST number. The CRA doesn’t track these things, so it’s totally on you to keep track of when you pass the $30K mark. Some people stress out about HST registration, but it’s pretty straight forward. Also note that getting an HST/GST number doesn’t mean you pay more tax. It just means you need to collect HST, and in turn, you can claim the HST you’ve paid. It’s sort of a wash, but it does require more bookkeeping.
Not paying your taxes on time
First off, make sure you always file your taxes on time, even if you don’t have the cash to pay any taxes owed. Assuming you owe money, you must pay it by April 30th. If you don’t pay by then, you’ll have to start paying interest as of May 1st. Also, refusing to pay your taxes can result in the CRA garnishing your income or potentially seizing your assets to settle your tax bill. Keep in mind that the CRA understands that sometimes you won’t have the money available. If you speak with them, they may allow a payment plan or even relief depending on the circumstances.