Expenses, Self-Employed

Who Can Claim Expenses as a Self-Employed Individual?

It was Sol Luckman who once said, “it takes money to make money.”

If you’ve recently picked up a side gig or are considering making the leap from employee to business owner, you may be wondering which, if any of your costs might be eligible to be tax deductions, or if you just have to spend the money to be able to make the money.

Let’s review who can claim expenses as a self-employed individual.

Are You Self-Employed?

Although this question seems like a simple one, it can be more complex than you think. In some situations, there’s a fine line between employee and self-employed. For example, a contact writer may be a casual employee at one company and a freelancer for another – even if the work is identical.

The simplest way to determine your employment status is to examine how you are paid. If deductions like Canada Pension Plan premiums and income tax are being deducted from your pay, that’s a good indication that you’re an employee, not self-employed. If you incur expenses as part of your employment, check out our tax tips page What Expenses Can You Deduct as an Employee?

Do you set your own hours? Do you use your own tools or equipment? Can you sub-contract the work out to another party? If you answered yes to any of these questions, you’re likely self-employed.

Still not sure if you’re self-employed? Check out our tax tips page 6 Surprising Ways to be Self-employed for more information.

Are You Self-Employed or a Small Business Owner?

Short answer – both!

When it comes to taxes, the Canada Revenue Agency considers self-employed individuals to be small business owners. In other words, the self-employed dog walker files their taxes the same way as the person who runs a small bakery from their home. At tax-time, both will declare business income and business expenses.

Are Your Expenses Tax-Deductible?

The general rule for claiming business expenses is quite simple – you can claim reasonable expenses related to earning business income. For example, if your business is selling items on eBay, the cost you incur to ship the goods to your customers is a business-related expense. However, the cost of shipping a gift to your Nana for her birthday is not an allowable business expense. Other common business expenses include

  • Vehicle expenses
  • Advertising
  • Inventory
  • Office supplies
  • Insurance
  • Business-use-of-home expenses (home office)

Depending on your business type, expenses you’ve incurred may not fit into any of the common categories. No need to worry. Use the “Other Expenses” category to list your business’s unique expenses.

The Importance of Claiming Business Expenses

Claiming all of your business’s expenses is crucial for two reasons:

  1. Unlike employees, self-employed individuals have no payroll deductions. Any tax owed is collected via your annual tax return. Additionally, Canada Pension Plan premiums due are also included on your tax return. By claiming all of your business’s expenses, you’re lowering your business’s net income. This also lowers your tax owing and CPP premiums due.
  2. Once you’ve listed all of your expenses, you’ll have a clear view of your business’s finances – perhaps for the first time. Many expenses aren’t closely examined until tax-time. That $10/week expense could go unnoticed in the day-to-day hustle of running your business. By claiming all of the costs associated with running your business, you’ll be able to see an accurate picture of your business’s overall health and perhaps find ways to improve it.

References & Resources

Canada Revenue Agency: Employee or Self-employed?