As a freelancer, your friends and family often believe you spend your days writing e-books or designing graphics at the beach. But people never see the mundane tasks of generating leads, invoicing, or doing taxes.
When tax season arrives, reporting self-employment income is substantially more complex than employment income. In addition to claiming tax credits, you also need to determine your business revenues and expenses and figure out HST/GST and PST obligations.
Tax season for freelancers can be a stressful time. That’s why this article highlights nine tax items you should know as a freelancer in Canada.
- Income you earn as a freelancer is taxable, and it’s vital to track this income as well as expenses
- Being self-employed allows you to claim business deductions for things like your home office, business travel, meals, and office supplies and equipment
- You need to register for a GST/HST number if you earn over $30,000 per year from self-employed business activities
1. How to know if you’re self-employed?
Self-employed income must be reported at tax time, under the “self-employed” category. Which is different from your traditional T-4 income process if you were an employee of a company.
Here’s a quick checklist you can use:
- Are you selling products and being paid for your products or services?
- Are you driving for a rideshare company?
- Are you working as a part time freelancer?
- Do you walk dogs on the weekend as a side hustle?
If you said yes to any one of these, you’re considered self-employed!
TIP: Another word for “Self-Employed Income” is “Business Income”. This is what the CRA uses to define self-employed individuals who earn money from any activity they carry out with an expectation to earn a profit.
How is being a freelancer different from being an employee for tax purposes?
Being an employee and being self-employed are different in a few keys ways:
|When you’re an employee||When you’re self-employed|
• You get a T4 slip.
• Taxes are withheld from your paycheck each payday.
• There’s no employer to withhold taxes from your pay. Instead, you may make your own quarterly estimated tax payments.
• You can deduct expenses related to your work such as vehicle expenses, home office costs, supplies, etc.
What if you’re employed AND an independent contractor?
Being an employee and an independent contractor reveals two very different worlds. If you freelance evenings and weekends while working a nine-to-five, you can easily earn some extra money. This also increases your taxable income for the year and can put you into a higher tax bracket.
Once you hit a particular tax bracket, each additional dollar you earn gets taxed at the new rate — not your overall income.
For example: Suppose the tax rate for incomes below $75,000 was 25% and the tax rate for $75,001 – $100,000 was 30%.
If you earn $60,000 from your full-time job and $20,000 from your freelance role in a tax year, only the dollars you earn above $75,001 are taxed at 30%. Your first $75,000 is taxed at 25%. We call this the marginal tax rate.
Make sure to take advantage of your RRSP account and business expenses to reduce your tax bill.
2. Is freelance income taxable?
As long as you’re providing a service or selling a product with an expectation of profit, you’re considered self-employed. This means on top of completing your standard personal tax forms, you’re legally required to report your self-employment income and expenses to the Canada Revenue Agency (CRA).
How to avoid paying tax as a freelancer?
There’s no way to avoid paying taxes as a self-employed individual. The good news is that you have a wide range of possible expenses you can claim to lower your tax owing by maximizing your tax deductions which will ultimately save you money. So be sure to claim all of your eligible costs.
TIP: To claim your business expenses, you have to keep proof of the expenses. The CRA may ask you to provide that proof in the future.
Do freelancers need to charge GST/HST and PST?
Freelancers that earn over $30,000 of revenue are obliged to collect and remit sales tax on their invoices. You charge sales tax based on the location of your client and remit these amounts to CRA monthly, quarterly, or annually.
Ideally, you should keep any collected GST/HST/PST in a separate account. Remember that this money isn’t yours — you’re just collecting it on behalf of the CRA.
The great news about charging sales tax is that you can also claim input tax credits (ITCs). ITCs essentially let you reclaim the sales tax you’ve previously paid on business expenses.
Do freelancers have to pay for Canada Pension Plan (CPP) Contribution?
CPP contributions are mandatory for everyone between the ages of 18 and 70 with an income over $3,500. As a self-employed individual, you’re on the hook for both the employee and employer portion of CPP.
In contrast, EI contributions are optional for freelancers. Options may be useful if you want to receive benefits for situations such as parental or maternity leave or sick leave.
TurboTax will automatically calculate and claim these contributions in the appropriate areas of your return.
3. When is the tax filing deadline for freelancers?
April 30th is generally the income tax filing deadline for individual tax returns.
Self-employed individuals have until June 15th to file. However, the CRA begins to assess interest on unpaid amounts starting May 1st.
For incorporated businesses, T2 corporate tax returns are due six months after your business’s fiscal year.
Penalties for filing late or not at all
The CRA charges interest on those that fail to pay their taxes by April 30th each year. Interest rates compound daily and are based on the prescribed interest rates, which may change every three months.
If you file your tax return after June 15th, as a self-employed freelancer, the CRA charges a late-filing penalty. This penalty is 5% of your tax balance plus an additional 1% for each month you file after the due date, capped at a maximum of 12 months.
Those that don’t file at all may be liable to criminal charges. These charges could land you with substantial fines or even jail time.
4. What information will you need to complete your income tax return?
It’s always best to prepare and have as much information in front of you when you start your process. Download our self-employed tax prep checklist to make filing your income taxes smooth & easy.
How to know your industry code
For those filing self-employment income on their tax return for the first time, you need to provide CRA with an industry code. You report this code on your T2125, and it corresponds with your main self-employed business activity.
5. What tax forms do freelancers need to complete?
Personal Tax Forms:
Business Income Tax Form:
Personal Tax Form:
Business Income Tax Form:
If you have more than one small business or multiple sources of self-employment income, your tax return will require a completed T2125 form for each source of income.
Whether you’re a sole proprietorship or corporation
Freelancers often start as sole proprietorships. You don’t need to register a sole proprietorship unless you operate under a name other than your own. Corporations require registering with the government and have numerous other obligations, such as annual filings and minute book maintenance.
Sole proprietorships and corporations also face different tax obligations, with the latter being much more complicated. As an unincorporated business, you file your self-employment income through a T2125 form. If you’re incorporated, you file personal taxes with a T1 form and your corporation’s taxes through a T2 form.
6. How to calculate your freelance income
Business income is income from any activity you carry out for profit or with a reasonable expectation to profit. So, any income received from clients for your work is clearly taxable business income.
See our guidelines for reporting self-employed income to learn more.
7. Can freelancers claim tax deductible expenses?
Absolutely. Claiming your business expenses is the best way to save money by maximizing your deductions.
Free Self-Employed Expenses Calculator
Enter your expenses and we’ll crunch the numbers to show you approximate tax savings!
What to claim as business expenses
- Marketing costs like your website, print and digital ads, or SEO maintenance
- Equipment like a laptop, camera, or microphone
- Software subscriptions
- Your cellphone, mobile plan, and internet bill
- Travel, meals, and entertainment costs related to your business, such as taking a client out for dinner
- Training and professional development
- Business insurance, legal fees, and accounting costs.
More considerable expenses, like equipment, are classified under capital cost allowances (CCA). Depending on its category, these items have their costs expensed over several years.
For example: If you buy a $1,000 camera, you can’t deduct that whole amount in your year of purchase. Cameras are usually a Class 8 CCA deduction, so 20% or $200 becomes deductible every year over the next five years. For some Class of assets, due to the half year rule, only fifty percent of the maximum allowed CCA can be claimed in the first year.
Lastly, you should maintain proper records of your expenses. Whether you’re purchasing a new computer or paying for a quick client lunch, you must keep the appropriate receipts to claim it as a tax deduction when you file.
8. How to claim expenses for a home office
You can claim business expenses related to a home office if you entirely or par tially run your business from home. The claimable amount depends on your office’s space in comparison to the rest of your unit or building.
For example: Suppose your home office is 140 square feet, and your apartment is 700 square feet. In this case, your office is 20% of your apartment. You can then claim 20% of your apartment’s bills as a deductible expense.
Deductible amounts under this include water and heating bills, home insurance, mortgage or rent, phone and internet bills, condo fees, and property taxes.
9. How to track your self-employed income and expenses?
You should understand what comes in and out of your business as a freelancer. It’s not only an important business planning step, but your net income is the amount you report to CRA.
There are many ways to track incomes and expenses. You can choose from business apps like QuickBooks or stick with a spreadsheet. You also need to report these incomes and expenses on your T2125 form.
What if you have clients outside of Canada?
You’re liable to income tax on any money you earn from client’s outside of Canada. As a Canadian freelancer, you’re taxed based on where you reside — not where the client resides.
If your services are rendered to a non-resident, it’s also generally zero-rated, meaning you don’t need to collect GST/HST even if you’re a GST/HST registrant.
However, there are some exceptions to this, such as services related to real estate located in Canada. So if you sell a home located in Canada to a non-resident, GST/HST is usually still required.
Should you use a business credit card as a freelancer?
A business credit card has many benefits. You can use it to build points for travel or cash back. But for tax purposes, it helps you organize your business expenses from your personal expenses. You know that anything charged on your business credit card should be added as a business deduction on your tax return.
Your self-employed tax situation, covered
Whether you’re a freelancer, side-gigger, independent contractor, or have multiple sources of income, TurboTax can handle your return.