Self-employment earnings may be one of the more common reasons tax preparation gets complex, since there is only the self-employed taxpayer’s receipts, and annual information may be built from scratch at tax time.

However, because self-employment income is so common, it is covered in a T1 federal tax return, which Canada Revenue Agency-approved software covers, so it may be possible to declare self-employment income with some free packages including TurboTax Free.

Reporting Self-Employed Income

“Form T2125, the Statement of Business or Professional Activities, reports an individual’s income and expenses from self-employment,” says Terry Baker, fellow chartered insurance professional with Investors Group in London, Ontario. The data and calculations made on the form cover information typically covered by a business income statement, including revenue, cost of goods sold and fixed expenses.

Tax preparation software usually echoes the layout of form T2125, but some products may use a question-and-answer format to collect information. As more companies enter the tax preparation software field, some boast user interface as a drawing feature, so this may impact how self-employment data is collected by various products.

Free Software Support

The CRA approves tax preparation software for use with its Netfile electronic filing program.

The certification process has three stages and runs proposed software through a wide variety of tax scenarios. The CRA does, however, allow some omission of features or aspects of tax preparation that are not central to a wide range of taxpayers’ needs. Some features for farmers, for example, may not be supported by all software.

When considering free software and free offerings from sellers of retail software, you may encounter features that are not supported or blocked as part of the product’s marketing. Self-employment income is omitted from some simple-tax-form free offers. Companies that waive fees when returns are below a certain income level are more likely to support self-employment earnings.

Using Form T2125

  • If your free software supports form T2125, it will guide you through the declaration of self-employment income from business, professional and commission sources, or provide you with a form for entry of this data.
  • If you have both business and professional activity, or two or more of either activity, a separate T2125 form is required for each.

You will report all revenues from self-employment, reported on:

  • line 162 of your federal return for business activity
  • line 164 for professional income
  • line 166 for commission income

If you make products for resale, costs of goods sold are reported, followed by any other reasonable business expenses. Costs subtracted from gross income create net income. Your share of net income is then transferred to line 135 for business income, line 137 for professional activity or line 139 for commission earnings.

Keeping Records to Support Your Claim

Claiming self-employment income requires documents to support that income, such as sales receipts or reports of income, as well as support for deductible business expenses, in the form of receipts, canceled cheques or other written documentation. This is in addition to any applicable records supporting employment income, such as T4 slips from employment and T5 slips covering investment income.

Documents may be in paper or electronic form, including digital images of paper documents.

  • When documents originate in digital form, the CRA requires that they are retained in digital format, even if printed or converted to another storage format.
  • When using free tax software, retain a PDF copy of your complete return.
    • Storing data in a proprietary format may not meet CRA standards if old files can’t be opened in later tax years.

References & Resources