Basics, Business Income, Expenses, Forms & Schedules, Getting Organized, Self-Employed, Tips & Advice

Filing Taxes as a Self-Employed Small Business Owner

Along with the responsibility and rewards of being your own boss, being self-employed means that the way you file your income tax return also changes.

Don’t worry.  Filing taxes as a self-employed small business owner is easier than you think once you know the basics!

Am I Really a Small Business Owner?

When you think of the term “small business” what comes to mind?

  • A small mom & pop store?
  • Or, the little deli on the corner that sells those amazing wraps?

Being a small business owner does not require a store-front, nor does it require employees.

You are a small business owner if you own a small business.  You are self-employed if you operate a business where you are the business, such as:

  • Freelancers
  • Consultants
  • Ride-share drivers
  • Contract writers

Whether you do dog walking as a side gig or sell your veggies at the local farmer’s market, congratulations, you are self-employed, and you likely have a small business.

Your Business Structure Makes a Difference

Most small businesses begin as sole proprietorship’s which means you run your business by yourself and your business is unincorporated.  As a sole proprietor (or sole prop), the details about your business are included on your own personal tax return. Any profit you made is added to your income, and any losses are deducted from your income. If your business made $35,000 this year, you made $35,000 this year.

Filing Using TurboTax Self-Employed:

  • When you prepare your tax return, you will just enter all of your business’s details (income and expenses) into the self-employed section of TurboTax Self-Employed.
  • All the business-related information is entered into the T2125, Statement of Business Activities, which informs the CRA of your self-employment income and deductions as well as deductions.
  • The T2125 is sent to the CRA along with your other tax forms which make up your T1 General return.
  • If you own your unincorporated business with a partner (or partners), the same T2125 is filled out, however, there is some additional information relating to the partners which is required, and TurboTax Self-Employed takes care of that too.

If, on the other hand, you have chosen to incorporate your business, then you are required to file a separate return, a Corporation Tax Return, or T2, for the business itself.  All of your personal income and credits stay on your return and the business’s income and credits stay on its own return.

Choosing your business’s structure is an important decision. Incorporating has its advantages and disadvantages. To learn more about choosing a business structure, check out our tax tip Taking the Leap from Employee to Owner.

Keep Consistent Records

Whether your small business venture is just a few hours a month or your full-time gig, good record-keeping is essential.

  1. Set aside time regularly to organize your receipts and track your income.
  2. Label expense receipts as you file them away.
  3. Sign up for e-billing for utilities if you’re claiming home office expenses.
  4. Keep a log book for business mileage.
  5. To make record-keeping even simpler, consider using business software or apps, such as QuickBooks Self-Employed.

Preparing Your Tax Return: Self-Employed

The self-employment section of your tax return is made up of three parts:

1. Identification

All the general details about your business including the;

  • Business name and address. If your business doesn’t have an “official” name, you use your own name. Same goes if your business is home-based, use your home address.
  • Industry code for your business. The industry code for your business is used by Stats Canada to keep track of how many business are in a particular field. Finding your industry code is quite easy. Use the code provided by TurboTax and not the one on the Industry Canada website.
  • Information on partners or co-owners, if applicable.
  • Fiscal period for your business. Most small business owners use the calendar year as their fiscal year – that makes calculation much easier.

2. Business Income

Your business’s income is exactly what it seems. It’s the income you’ve earned by selling products, performing a service, etc.

Depending on the type of business you own, other information (like subcontractor’s payments, GST/HST amounts, or discounts) may be included in this section. Keep in mind that this section is for gross income (before expenses). You’ll factor in all of your costs in the next section.

3. Business Expenses

It takes money to make money right? You’ve likely shelled out a bit of cash to run your business.

Common Business Expenses include:

  • Supplies
  • Advertising
  • Meals (50%)
  • Office supplies
  • Vehicle expenses, if you use your vehicle for business

There may even be costs you hadn’t thought of as business expenses. Did you operate your business from home? You might qualify to claim home office expenses. Use your car for deliveries? You may be able to claim a portion of your fuel, repairs, insurance, etc.

Claiming all of your business-related expenses is especially important for two reasons:

  1. You are subtracting your costs from your income (which means less tax due).
  2. Recording all of your expenses allows you to see the most accurate picture of your business’s health.

Once you’ve taken all of the costs of running your business into account, you’ll be able to determine if you’re making as much money as you think you are.

Small Business Tax Myths

Q1: My business didn’t make any money so I don’t have to report anything right?

A1: False. Many businesses don’t see a profit in the first year (or more). You are still required to include details of your business on your tax return and if your business actually lost money, you can apply the loss to your other income.

Q2: I made less than $5000 so I don’t have to file.

A2: False. Although you may not owe any taxes on your business income, you may be responsible for Canada Pension Plan contributions. As a small business owner, you pay both your share of CPP and the employer’s share. The amount due is calculated by TurboTax Self-Employed on your tax return.

Q3: I am a student so the money I make is tax-free.

A3: False. The CRA doesn’t have special rules for small business owners who are still in school. The details of your self-employment must be included when you file your return.

More Information

TurboTax FAQ: What is a business?