Congrats, you’re a dedicated employee by day and a self employed ninja by night. Kudos to you for being able to do all of that extra work because, let’s face it, there’s no way it is possible to easily balance both. Whatever your reason for earning extra cash, don’t forget to dot your i’s and cross your t’s come income tax time.
When you hold a full-time job, your employer automatically deducts income tax, CPP and EI from your earnings. At the beginning of every year, you receive a T4 slip in the mail, which lets you know how much money you earned during the year and how much CPP, EI and tax you paid. When you receive that slip, tax preparation is so easy since everything you need to know is on that slip of paper.
But when you’re self-employed, or earn self-employment income, tax filing is a whole different ballgame. You’re the only one who knows how much money you made that year and it’s your responsibility to report the accurate amount to the government.
Since the government hasn’t charged you income tax on your extra earnings, they’ll do so when you file your income taxes.
Whether you’re considered self-employed or as another employee of the business makes a difference to the CRA. If you’re considered another employee, you’ll have less deduction options. The contract you’ve signed with the company can help determine what sort of business arrangement you’re in. There’s also certain criteria the CRA users to determine your status: how much control the worker has, who provides the tools used in the job, how much financial risk the worker takes on, what is the worker’s opportunity for profit and can the worker subcontract work or hire additional help.
If you’re raking in some extra dough, good for you, but how much you earn makes a difference in your income tax.
- If you earn less than $30,000 as an independent contractor, you don’t have to register for the GST/HST, although you might want to if it turns out that you might have a tax refund earn on in your businesses life due to input Tax credits.
- If you earn more than $30,000, then you have no choice and at that moment have to.
If you’re fretting about the extra income tax you may need to pay during tax time, the government offers what could be a saving grace. No matter how much extra income you’re earning, you can now deduct some business expenses. Whether you have a home office space where the extra work magic happens or you drive your car to meet your clients (during off hours, of course), you’ll be able to claim a portion of those necessary expenses that helped you earn income.
Most importantly, keep your deductions and figures as accurate as you can. If you’re claiming that your vehicle was used 100% of the time for the purpose of earning income, the CRA might investigate that.
Hold onto all your receipts as proof.
Earning extra money is great, but chances are that you’re more likely to either receive a lower income tax return or be required to pay some extra income tax. Hang on to more of your hard earned cash by taking advantage of RRSP contributions, business expenses, tax breaks or selling a losing stock for a capital loss. Find ways to cut your tax bill year round.
But in the unfortunate scenario that none of these can lower your tax bill, you better make sure you have some extra money on hand to pay up during tax season.