Ever since I started my side hustle, freelance taxes has been a major concern for me. I say major because I absolutely hate taxes. Despite the fact that I have a decent understanding of income taxes, I just seem to have an irrational fear about them when tax season rolls around.
Freelance taxes for Canadians apply to small businesses, freelancers, and self-employed individuals. All of the information you need can be found on the Canadian Revenue Agency website, but this post is meant as a quick overview when it comes to taxes for freelancers.
Should I be filing taxes as a freelancer?
Yes, of course, you should. As soon as you start making any side income, you’re required to report it to the CRA. Even if you’ve only made a few hundred dollars, you should still report it as not doing so would be considered tax evasion. It’s unlikely the CRA will come after you, but that’s not something I would take a chance with.
There’s no legal obligation to register your business as long as you’re invoicing under your own name. If you prefer to invoice under your business name, then you are required to register your business name in your province. But to be realistic, your clients will most likely not care how you invoice them as long as they know who they’re paying.
Keep in mind that you need to keep a record of all of your income and expenses that relate to your business. I use a spreadsheet to track all my income and expenses and keep a small divided folder for paper receipts. There’s also an app available which I’ll detail below. Owing taxes is arguably a goal for freelancers since it means you’re earning income.
Also for quick reference, you should be aware of the following tax deadlines:
- March 1 – RRSP contributions deadline
- May 1 – Tax filing deadline for most individuals
- May 1 – Deadline for any tax balance owing
- June 15 – Tax deadline for self-employed tax returns
Filing taxes as a freelancer
As a general rule, you should always set aside 25% of your income for taxes (set aside more if you’re in a higher tax bracket and/or collect GST). You’re taxed only on your net income which is your total income minus all your expenses. Look for lines 135-143 on your tax return for self-employment income or lines 162-170 for gross self-employment income.
You’ll also need to fill out the T2125 form. This form is a statement of your business activities which covers your income and expenses. A full list of expenses you can claim is listed on the CRA website but generally speaking, you can deduct any reasonable expenses that are related to the cost of your business. For casual freelancers, the following are things you’ll want to claim as expenses.
- Cellphone and Internet bill
- Meals and entertainment
- Office supplies
Note that personal use of any expenses cannot be claimed. So if you use your home internet only 20% of the time for freelance work related assignments, you can only claim 20% of your bills.
If these deductions are making your head spin, don’t worry, there’s a simple solution to make your life easier. TurboTax solutions for Self-Employed walks you through the tax filing process while prompting you with self-employment questions. This ensures you get every business deduction you’re entitled to which in turn means more money in your pocket. Here are some ways you can save money on your taxes.
Freelance taxes remain relatively simple when your income is less than $30,000 since you’re still considered a small supplier. As soon as you pass that threshold, you must register for a GST or HST number. The CRA isn’t keeping tabs on you. It’s totally on you to keep track of your income and to register when you need to – if you don’t, you’ll be penalized later. In other words, you need to stay on top of your tax obligations.
To be clear, the $30,000 threshold only applies to freelance income. It doesn’t matter if you’re making more than that from your regular job, you only need to get an GST/HST number if you make $30,000+ in freelance income.
Once you have your harmonized sales tax number, you’ll need to start charging sales tax. What you charge depends on what province the business you’re charging has its tax base. For example, although I’m based in Toronto and I do work for a company based in Quebec, I charge them GST of 5%. There is no provincial sales tax (PST) in some provinces, which throws a few people off.
Once you’ve registered for your HST number, you can choose the quick method when it comes to reporting the taxes you’ve collected. This method mainly benefits service-based freelancers since it’ll simplify things when you’re doing your taxes. Regular small businesses may want to stick to the traditional methods to maximize their credits.
Also, note that if you owe more than $3,000 in taxes in a year, the CRA will require you to start paying your taxes on a quarterly basis. Here’s a detailed guide I wrote on how to get an HST number in Canada.
Canadians with clients outside of Canada
You don’t need to charge companies based outside of Canada any taxes since they are zero-rated according to the CRA. However, any income you earn from those clients still needs to be reported. GST/HST registration applies to your income. As mentioned, you register once you earn $30,000. Even if all of your clients are outside of Canada, you still need to register for GST/HST once you hit that $30K threshold.
Again, you don’t charge any of your U.S. based clients GST/HST. When filing your taxes, you list how much HST you’ve collected. Add in your input tax credits and you’re done. Nowhere on your tax return do you say where certain revenue came from. That being said, when doing your bookkeeping, you should separate any foreign income so you have a record in case you’re ever audited.
Keeping track of your expenses
As a business owner, self-employed individual, or independent contractor, there are a few tax deductions you can claim. Some of the most common things you can deduct include:
- Meals and entertainment
- Home office expenses such as a portion of your mortgage or rent, and utilities
- Office supplies
- Insurance, such as home insurance and errors and omissions insurance
For the longest time, I tracked everything manually in Excel, but that’s because I happen to like spreadsheets. Admittedly, this takes up a lot of time, so I recently tested out QuickBooks Self-Employed which is a mobile app for Android and iOS.
As the name implies, it’s built for people who are self-employed and comes with features that make tracking your business expenses easier. You can connect the app right to your bank and with a quick swipe, you determine if expenses are personal or for business. What I like is how you can set categories which are based on the T2125 form from the CRA. That’s the form used to claim your self-employed expense so you can see why things instantly become easier to track.
Other features that the app has that will appeal to freelancers include the automatic mileage tracker, the ability to take pictures of your receipts directly within the app, and expected taxes which are based on your business income and expenses.
Note that connecting the app to your bank technically voids your consumer protection, but Intuit (who developed QuickBooks Self-Employed and owns Mint) uses bank-level encryption so your security is their number one priority.
Using a business credit card
A common question freelancers and small business owners ask me is if they should get a business credit card. It’s sort of a personal preference but it also depends on your situation.
If you’re a freelancer and only making limited income and have few expenses, you can use your regular credit card. You’ll just need to manually separate your personal expenses from your business ones when doing your taxes. Hopefully, you have one of the best travel credit cards in Canada or one of the best cash back credit cards so you can rack up those points.
Now, if you need to make regular purchases to run your business, it’s definitely beneficial to have one of the best business credit cards in Canada. Business cards typically give you a higher credit limit and you get a longer time to repay your bills. You also get detailed reports on your spending which will be helpful when you do your taxes.
A business credit card can also be helpful if you know you have major expenses coming up. For example, the American Express Business Platinum Card gives you a welcome bonus of 75,000 points when you charge $7,000 to your card in the first 90 days of opening an account. That may seem like an insane amount, but if you know you have to make a lot of purchases in the near future, signing up and getting those points could be worth it.
Do your taxes at home with the help of professionals
Even after reading this post, many people still have many questions about their personal income taxes. Some have questions about their specific situations, while others wonder if they should work with an accountant. I personally think it’s worth working with an expert, but that doesn’t mean you need to spend a small fortune. You can get pro advice from the comfort of your own home thanks to some services made available from TurboTax.
- TurboTax Assist & Review Self-Employed – $84.99 per return (Regular price is $99.99)
- TurboTax Full Service Self-Employed – $179.99 per return (Regular price is $199.99)
TurboTax is the only Canadian tax preparation software designed specifically for self-employed individuals. With TurboTax Assist & Review Self-Employed, you file your taxes online, but you have access to an expert who knows all about self-employment issues. What I mean is you can ask one of TurboTax’s experts question while you’re filing your taxes. They’ll even review your taxes for you before you hit submit.
If you’re still intimidated by filing your personal tax return, use TurboTax Full Service Self-Employed as you can just have an expert file your taxes for you. This is all done virtually so there’s no need to leave your home.
Alternatively, you could use TurboTax Live Full Service. The service is a bit cheaper at $129.99 per return, but does a similar job to the Self-Employed version. You just need to provide all of your documents. If you haven’t filed your taxes in years, you’ll probably want to hire an accountant.
This post is meant to be a taxes for freelancers quick guide. Handling your freelance taxes can become complicated pretty quickly which is why I recommend hiring a professional to help you with them. A good accountant won’t cost you that much and there’s a pretty good chance that the money they save you on taxes, will cover the fee you’re charged.
Most freelancers don’t get a tax refund, but that’s arguably a good thing since you haven’t loaned the government money for free. It doesn’t matter if you’re a content creator on OnlyFans, or you’re an Uber driver, doing your taxes is a must.