Freelancers can often enjoy more freedoms than salaried employees, but that freedom could come at a cost—especially if you’re not familiar with the self-employed tax-filing rules or taking full advantage of credits and deductions.

Here’s how filing works: If you’re a freelancer or a self-employed individual, you file your taxes as if you are a small business owner. This process entails additional steps and more careful bookkeeping than a salaried employee. For instance, you report the income portion of what you made being self-employed. But then you need to subtract your business expenses related to earning that income. The remainder of what’s reported is your earned income for the year.

In addition to including this information on your general income tax return, you must complete and submit Form T2125, Statement of Business or Professional Activities. This form helps you calculate your income and deductions related to business use of home and vehicle expenses.

Here’s a clear breakdown of what’s needed to file your self-employed taxes.

Key Takeaways
  1. In order to file your taxes correctly as a self-employed individual, it’s important to keep meticulous records that document your invoices and receipts.
  2. Contribute to your Registered Retirement Savings Plan (RRSP) to save toward your retirement and lessen your tax bill.
  3. Budget for taxes, otherwise you could end up with large tax payments at the end of the year.

Save your receipts and invoices throughout the year

Whether you buy something for your business in store or online, make sure you keep your receipt and file it. When it comes time to file your tax return, it is a lot easier to claim your expenses when you have an organized receipt repository. (Reminder: June 15 is the self-employed tax filing deadline. If that date falls on a weekend, your taxes are due the following Monday.)

Here are a few important points to keep in mind considering your expenses:

  • The Canada Revenue Agency (CRA) requires you to provide receipts and invoices for the expenses you claim.
  • If you are audited, you need to provide supporting documentation to back up your claims.
  • Without documentation, your claims are disallowed and you face penalties and interest.

How freelancers should budget for taxes

Unlike salaried employees, income tax and payroll deductions, such as the Canada Pension Plan (CCP) and Employment Insurance (EI), are not withheld at the source. You need to contribute the employee portion and the employer portion of both CPP and EI—which can be costly.

A good year for business could mean a hefty tax bill. So make sure you budget for income taxes throughout the year. For example:

  • If your marginal tax rate is 30%, consider setting aside 30% of your earnings so you are not left scrambling on April 30 (while you have until June 15 to file as a self-employed individual, you need to pay any taxes owing by April 30).
  • If you owe $3,000 or more to the CRA in the current tax year and any of the last 2 tax years, you must pay your taxes in quarterly instalments going forward. In other words, instead of paying your taxes all at once before April 30, you have to pay them quarterly throughout the year.

Why contributing to an RRSP matters

Since freelancers cannot benefit from the perks of a company pension plan, more weight is on you to cover yourself as a business owner—keeping in mind that CPP and Old Age Security (OAS) are only supposed to provide a portion of your retirement income. To help supplement your lifestyle in retirement—whether self-employed or salaried—consider contributing to a Registered Retirement Savings Plan (RRSP). Here’s why:

  • RRSP contributions lower your tax bill in the current tax year, and your money grows tax-free.
  • You defer paying income tax until you withdraw the money, at which time you are likely to be at a lower marginal tax rate.

Claim every home office deduction you can

It’s import to know your credits and deductions as a self-employed person. Do your homework and make sure your deductions are reasonable and comply with the CRA small business deduction rules. To start, if you work from home you should be able to claim a percentage of your household expenses based on the size of your home office. For example, you could claim 20% of your household expenses if your home office takes up 20% of the square footage of your home.

Here are some examples of home office deductions you can claim on your income tax return:

  • Heat
  • Hydro
  • Water
  • Telephone
  • Home insurance
  • Mortgage interest
  • Property taxes

See “The Big List of Small Business Tax Deductions” for a full rundown.

But what if I have employees?

If you have employees or need to submit goods and services tax/harmonized sales tax (GST/HST) payments, you must apply for a business number (BN) and open up a payroll number (RP) or a GST/HST number (RT). You can do this online with the CRA. But make sure once you register that all your information is up-to-date.

When you file your taxes, keep records of all your income and expenses. In the event you might need to destroy records, don’t forget to submit Form T137 so the CRA has documentation.

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