Working for yourself comes with real freedom, but it also means the tax side of your life gets a little more involved. Nobody deducts income tax from your invoices, so it is up to you to track, report and pay what you owe. The good news is that with a few simple habits, freelance taxes are very manageable.
Your income goes on Form T2125
As a self-employed person in Canada, you report your business income and expenses on Form T2125, Statement of Business or Professional Activities, which is filed with your personal T1 return. You list what you earned, subtract your eligible expenses, and the net amount is added to your personal income. Keep every invoice and receipt, because the CRA can ask to see them for six years after you file.
Set money aside as you earn
The most common freelance mistake is spending everything that comes in and facing a painful bill in April. A simple fix is to move a percentage of every payment into a separate savings account the day it arrives. For many Ontario freelancers, setting aside 25 to 30 percent of each invoice covers income tax and Canada Pension Plan contributions comfortably. Remember, self-employed people pay both the employee and employer portions of CPP.
Watch the HST registration threshold
Once your worldwide taxable sales pass $30,000 over four consecutive calendar quarters, you must register for a GST/HST number and start charging HST on your invoices. In Ontario, that is 13 percent. Many freelancers choose to register early, because registration lets you claim back the HST you pay on business purchases through input tax credits. If you are close to the threshold, do not wait until the CRA notices; register and stay onside.
Common deductions worth tracking
You can deduct reasonable expenses you incur to earn business income, including:
- Home office costs, based on the portion of your home used for work
- Vehicle expenses for business driving, supported by a logbook
- Supplies, software subscriptions and professional fees
- Advertising, website hosting and business insurance
- A portion of your phone and internet bills
- Meals with clients, generally deductible at 50 percent
The key word is reasonable. Personal costs dressed up as business expenses are the fastest route to a review, so keep your claims honest and your paperwork tidy.
Quarterly installments may be required
If your net tax owing is more than $3,000 in the current year and either of the two previous years, the CRA will expect you to pay tax by installments, due in March, June, September and December. The CRA mails installment reminders with suggested amounts. Paying them on time helps you avoid installment interest and keeps your cash flow predictable, because you are paying tax in four smaller pieces instead of one large one.
Give yourself a filing cushion
Self-employed Canadians have until June 15 to file, but any balance owing is still due April 30. Interest starts building on unpaid amounts after that date, so it usually makes sense to file early, know your number and pay by the end of April.
This article is general information, not professional advice. For guidance on your specific situation, contact CAL Accounting at 705-728-6469.
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