All income you earn is taxable
As a freelancer, taxes aren’t withheld from your pay. That means you need to set aside some money every time you get paid, in order to help pay your eventual tax bill. You’ll want to set aside 25% of your income for tax purposes as a general rule.
Regardless of whether you’re completely self-employed, or still have a regular job and have a side gig, all your income is taxable. This includes any income from selling services or products online to people in other countries.
Since you’re no longer getting the T4 statements that employees get, you’ll need to keep detailed income records. The easiest way to do this is to create a spreadsheet with all the work performed. Log how much you’ve earned and the taxes you’ve collected.
When filing your taxes, you would file everything under the “self-employed” category. The process of filing your taxes is simple, as it can be done with any free tax software program. Alternatively, you could use specific software such as TurboTax Self-Employed or hire an accountant.
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More income, more taxes
Canada has a marginal tax system. That means as you earn more income, your tax burden will increase. In other words, as you make more, you need to set aside more funds for your tax bill.
There’s a misconception that the tax system means you’ll earn less money if you work more. The additional taxes you pay only apply to the dollars earned in your new tax bracket.
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For example, the federal tax rate for 2022 is 15% on the first $50,197 of taxable income. You’d then be taxed 20.5% on the portion of taxable income over $50,197, up to $100,392. Note that provincial income taxes differ, and you will have to account for those as well.
Simply put, you’ll always make more by working more.
You may need to pay GST/HST
Freelancers who earn over $30,000 in revenue in a calendar year must register for a GST/HST number within 30 days of crossing that threshold. Since the government doesn’t track your income, it’s up to you to register on time. Once registered for GST/HST, you need to start charging taxes on your invoices.
In most cases, you would only charge tax for clients that are based in, or have a major presence in Canada. Clients outside of Canada are considered zero-rated, so taxes don’t apply.
As of July 1, 2021, digital economy businesses have a tax obligation to charge and collect GST/HST. So if you use freelance sites — such as Upwork — to secure jobs, you’d have to input your GST/HST number and start charging taxes.
Although collecting and paying sales taxes may sound like a pain, it does have one benefit. Any GST/HST you collect can offset the taxes you’ve paid on your business expenses.
It’s a good idea to open a separate bank account for any income and sales taxes collected. This way, you won’t be tempted to spend it.
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You can claim your expenses
Freelancers are no different from self-employed individuals, so you can claim many expenses related to your business. The most common expenses include:
- Meals and entertainment related to the business e.g. a work meeting over lunch
- Marketing costs
- Office expenses, including pens, stationery, stamps
- Equipment such as your computer, camera, microphone, and software subscriptions
- The portion of your cellphone and internet bill that’s related to your business
- Utilities and office space related to your business
- Professional insurance and legal fees
- Travel expenses, including public transportation and hotels
To be clear, you can only claim the portion of your expenses that are related to your business. For example, say you’re paying $150 a month for your cellphone and internet plans. However, you use both services 50% of the time for your business. That means you can only claim $75 a month as a business expense.
With some business expenses, there is a limit that applies. For example, you can only claim 50% of the cost of your meals related to your business. It pays to research what you can deduct as it could reduce the amount of taxes you owe.
If you’re going to claim your expenses, you need to ensure you have receipts in case you get audited. Generally, try to track your expenses in a spreadsheet or with software, such as QuickBooks Self Employed. Alternatively, you could get a business credit card to separate your business expenses from anything personal.
It is much easier to file your taxes with all your documents organized.
Your tax deadline is different from individuals
Self-employed individuals don’t have to file their taxes until June 15, 2022. That’s significantly later than the deadline of May 2, 2022 for individual tax returns. That said, if you owe any taxes, you need to pay by May 2, 2022, or you’ll incur interest charges.
For those that have incorporated their businesses, your T2 corporate tax return isn’t due until six months after your business’s fiscal year. For example, if your tax year ends on March 31, 2022, your tax filing wouldn’t be due until Sept. 30, 2022.
Even if you can’t afford to pay any outstanding taxes, you want to make sure you file by the deadlines. Doing this will avoid any late-filing penalties, which is 5% of your 2021 tax balance, plus an extra 1% for each month after the due date until you file. The penalty caps at 12 months, but that’s hardly a consolation prize.
If you owe taxes and can’t pay, the Canada Revenue Agency (CRA) is quite understanding. They’ll work with you to develop a payment plan that works within your budget.
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