Freelancers are self-employed people who can choose where, with whom, and how often they want to work. Because you may get paid from a variety of sources, your taxes may be less straightforward than someone who works for just one employer. In this article, we will explain what freelancers are, what they do, and what freelancers need to know to file their taxes.
What is a freelancer?
Freelancers can operate as sole proprietorships, partnerships, or as corporations. The legal structure will depend on the type of small business and how the business is set up. While many choose to be sole proprietors, some opt to incorporate their business.
As self-employed individuals, freelancers who operate as sole proprietors often work from home.
Freelancers in Canada are self-employed business owners. As a freelancer, you complete the T2125 form to file your business tax returns and report your self-employment income. You have to file your business income and make Canadian Pension Plan (CPP) contributions. You may also have to collect Goods and Services Tax and the Harmonized Sales Tax (GST/HST) for the federal as well as provincial governments if you reach the $30,000 yearly threshold.
Freelance income is classified as business income when filing a tax return.
Sources of freelance income include:
- Selling a product or providing a service
- Driving for a rideshare company
- Having a side hustle job working on weekends, such as dog walking
- Being a small supplier
Freelance work can be full-time, part-time, or a side hustle in addition to a regular job. Some people become freelancers to earn income during their retirement years. You may be working as an independent contractor for other organizations. Like other business owners, freelancers are required to pay their income taxes.
The difference between being an employee and a freelancer for tax purposes
The main difference between employees and freelancers is that an employer usually manages employee income taxes. Freelancers are responsible for calculating and paying their own tax requirements.
Here's how that breaks down for employees and freelancers.
Employees have their taxes withheld by the employer from their pay throughout the tax year. They then receive a T4 slip from the employer to file their income tax. They may receive a tax refund if they have overpaid their taxes. If they have underpaid their taxes, they will have to pay more money to the Canada Revenue Agency (CRA).
If you’re a freelancer, you don’t have an employer withholding a portion of your pay for income tax. Instead, you’re required to put that money aside from what your clients pay you. Depending on how much you earn annually, you may have to send quarterly estimated payments to CRA.
In addition to paying your income tax, you need to make contributions to the Canada Pension Plan (CPP). CPP includes employer and employee contributions. Without an employer, you’ll have to cover both parts of the contribution. A good guideline is to set aside around 30% of your income to cover taxes and CPP contributions. If you collect GST/HST, you’ll also have to forward that to the government.
When you file your taxes, you can deduct work-related expenses that might include some of your utility bills and office costs.
Tax forms for freelancers
The forms you’ll fill out during tax season depend on the structure you’ve set up for your freelancing business.
If you’ve set up a sole proprietorship, you’ll fill out the T2125 form to report your taxable income. For personal tax, you’ll fill out a T1 general form and a Form T4A (Statement of Pension, Retirement, Annuity and Other Income). You may receive a T4A slip from clients at the end of February showing the amount earned for a job. If you earn more than $30,000, you will need to register for a GST/HST number and complete Form GST34.
If you’ve set up a partnership, you need to file the T5013 Statement of Partnership Information with your return. For personal tax, you submit a T1 general form. You must also complete the T2125 form.
If you have chosen to incorporate you’ll fill out a T2 form. For personal tax, you submit the T1 general form.
Completing Form T2125 to calculate your gross and net income
People who belong to a regulated industry report professional income rather than business income. Such professionals include doctors and accountants.
Business income is income from a profession (except regulated industries). It includes income from trade, manufacturing, or any activity designed to make a profit.
Details about the most relevant sections are below. For assistance in completing the form, use the guide from the CRA.
If you have multiple freelance businesses, you must complete separate T2125 forms for each business.
Your tax rate as a freelancer will depend on the tax bracket that you fall into and the total net income earned.
After completing all sections of Form T2125, you will have the total amount of tax due to be paid.
This section is where you complete your identification information:
- Your name and business address
- Business name
- Your industry code and main product or service
- Fiscal tax year
This section is for Internet business activities. You need to note the web pages where you earn income and the percentage of income earned from the web pages and websites.
You complete the section relevant to your business:
- 3A: Business income: Gross sales or income, including GST/HST. You will end up with an adjusted gross sales or fees.
- 3B: Professional income: Gross professional fees, including GST/HST. You end up with adjusted professional fees.
- 3C: Gross business or professional income.
- 3D: Cost of goods sold profit: After calculating this, you will have your gross profit or loss.
This section lists all the expenses you can deduct. These include deductions such as advertising, office expenses and bank charges.
Deduct the total expenses from your gross business, professional income or gross profit. This gives you your net income before adjustments.
This section is for calculating business-use-of-home expenses. If you have an office in your home that you work from, you can include the costs of that home office here. This includes:
- Mortgage interest
- Property taxes
You will need to calculate the personal use part, capital cost allowance, and amount carried forward from previous years.
This is where you record car-related business expenses. These vehicle expenses can include:
- Fuel and oil
- Car registration and licence fees
- Maintenance and repairs
- Electricity for zero-emission vehicles
- Business parking fees
You will need to record the total kilometres driven during the fiscal period.
This is where you record capital expenses. This refers to anything that provides “lasting benefit” for your business, such as furniture or computers. As a capital cost allowance, you don’t claim the full amount of the purchase in the year you bought it. Instead, you claim a portion or set amount of the total cost of the purchase over a few years.
The amount you can claim each year will depend on the expense category.
Canadian Pension Plan contributions
Anyone between the ages of 18 and 70 and who earns more than $3500 must contribute to CPP.
The rate that self-employed Canadians must pay varies each tax year. The CRA website has the most up-to-date CPP rates.
As a self-employed worker, you’ll cover both the employer and employee contributions.
You can set up a Registered Retirement Savings Plan (RRSP) as an investment to reduce your tax bill. There is a maximum amount you can contribute annually. Investing in an RRSP will also help you save for your retirement.
Self-employment expense deductions
To reduce the amount of business income you earn, you can deduct business expenses on your T2125 tax form. Common tax deductions you can claim include:
- Advertising, such as business cards, flyers and online marketing.
- Vehicle costs such as leasing, gas, maintenance, insurance and registration fees.
- Bank fees, such as monthly service charges and overdraft fees.
- Office supplies including printer ink, pens, papers and stationery.
Other deductions include:
- Inventory if you purchase products and resell them.
- Cell phone expenses such as calls made for business purposes.
- Business-use-of-home expenses if you run your business from your home.
Filing your income tax return
You can choose to prepare your own taxes and file them yourself, or use a professional tax preparer to file taxes.
If you do them yourself, you can file online using tax software. While it is possible to do paper returns, filing online is usually easier.
A CPA tax professional can file taxes on your behalf. This is especially helpful for freelancers who often have a variety of income sources and deductions. Taxes for freelancers are often complex. A tax professional may also identify additional deductions you may not know about.
GST and HST
You will likely pay the Goods and Services Tax (GST) when purchasing products or services for your business. This is a federal tax.
You will have to pay the Harmonized Sales Tax (HST) in some provinces. This is a sales tax and is combined with GST. It varies in each province. Three provinces have their own separate provincial sales tax (PST) that is not collected by the CRA.
If your gross revenue for the year is more than $30,000, you must collect GST/HST. If you do not earn more than $30,000, you can still register for the GST/HST. Register on the CRA website. You will need to make payments monthly, quarterly or annually. Once you register to collect GST/HST, you must continue collecting it until you close the business.
When you charge sales tax, you can claim Input tax credits (ITCs). These allow you to reclaim the sales tax you pay on your business expenses.
You can file your GST and HST return electronically by TELEFILE or by paper and remit electronically via your bank account.
Tax filing due dates
Tax time in Canada has different deadlines for various income tax filing.
The filing deadline for a personal tax return is April 30. The end of the year for personal income tax is December 31.
The self-employment tax return is due June 15. However, any taxes owed are due April 30. In other words, your payment is due before the tax return is due.
If you have to pay tax in instalments (the CRA will notify you), you will pay them on March 15, June 15, September 15, and December 15.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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