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Freelance Taxes in Ontario: What You Need to Know Now

Tax season for freelancers can be a stressful time. However, there are ways to make it easier

As a freelancer, your friends and family probably often believe you that your life is much easier than theirs as an employee. No boss breathing down your neck, no long commute and the ability to set your own hours. What could possibly be better?

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.

There’s no doubt that tax season for freelancers can be a stressful time, especially if this will be your first year filing taxes on self employment income. However, there are ways to make it easier while also keeping more of the money you have worked so hard to earn.

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
• You get a T4 slip.

• Taxes are withheld from your paycheck each payday.

When you’re self-employed

• There’s no employer to withhold taxes from your pay. Instead, you are left to make your own quarterly estimated tax payments.

• You can deduct expenses related to your self employed work, such as vehicle expenses, home office costs, supplies, etc.

What If You are Technically Both?

Being an employee and an independent contractor exposes you to two worlds. You can successfully earn extra money if you freelance in the evenings and on weekends while working a 9-to-5 job. This also raises your taxable income for the year, potentially putting you in a higher tax bracket.

When you reach a certain tax bracket, each additional dollar you earn is taxed at the new rate, not your total income.

For example, let’s assume the tax rate for incomes under $75,000 is 25% and the tax rate for incomes between $75,000 and $100,000 is 30%.

In a tax year, if you earn $60,000 from your full-time job and $20,000 from your freelance work, only the dollars above $75,001 are taxed at 30%. Your first $75,000 is taxed at a rate of 25%. This is referred to as the marginal tax rate.

To reduce your tax bill, make use of your RRSP account and remember to deduct business expenses.

How Can I Avoid Paying Taxes as a Freelancer?

As a self-employed individual, there is no legal way to avoid paying taxes. Regardless of how much money you make from self employment, you must declare it to the CRA when tax season arrives. Any act of knowingly failing to submit income is deemed tax evasion, according to the law.

While it is doubtful that the CRA will pursue you for tiny amounts, it is always preferable to be on the safe side and follow all the tax laws. You will hopefully earn more money in the future, so although even if your income is low this year, you might as well learn about how you are taxed today.

Because there is no legal requirement to form a business for freelance work, gig workers can invoice under their own names. If you prefer to invoice under a company name, that company must be registered in the province where you operate. That will also change your tax situation, and at that point you might want to consult with a tax professional to help you get it right.

You Need a Plan. A Tax Plan

It is critical to keep track of all income and costs whether you are self-employed, a freelancer, or a small firm taking on gig work. Expenses incurred in the process of operating your firm can be deducted from gross income, resulting in tax savings. An Uber driver, for example, can deduct car maintenance expenditures from the money they earn while driving for Uber.

It’s critical to be organized because expenses acquired while working on your assignment might easily be overlooked if you assemble everything at the end of the week, month, or even year. There are a plethora of apps and online tools available to assist you keep a digital copy of all your receipts and track your business income and expenses, and you should make good use of them!

It’s also a good idea for gig workers to keep their business and personal finances separate. For starters, it can make your small business appear more real to customers, while also helping you to keep better track of revenue and spending. You may avoid the hassle of having to go through your personal spending to identify business expenses when tax season arrives by separating the two from the start.

Also, expenses are easier to justify to the CRA because there is less misunderstanding about what constitutes a professional or company deduction versus a personal expense. Deducting personal expenses from self-employment revenue is a huge no-no in the tax world.

Claim What You Can

Here are some of the top tax deductions for self-employed individuals in Canada.

Home office expenses

If you work from home, you may be able to deduct a portion of your home expenses, such as rent, mortgage interest, utilities, and property taxes, as a business expense. To qualify, you must have a dedicated workspace that is used exclusively for your business.

Business-use-of-vehicle expenses
If you use a vehicle for business purposes, you can deduct the expenses associated with the business use of the vehicle, such as gas, maintenance, repairs, and insurance. You’ll need to keep detailed records of your mileage and expenses to support your claim.

Office supplies and equipment

Any supplies or equipment that you purchase for your business, such as paper, ink, computers, and software, can be deducted as a business expense.

Professional fees

If you pay for professional services related to your business, such as legal or accounting fees, those fees are deductible.

Travel expenses

If you travel for business purposes, you can deduct the cost of transportation, lodging, and meals. You’ll need to keep detailed records of your travel expenses, including receipts and itineraries.

Advertising and promotion expenses

Any costs associated with advertising and promoting your business, such as website design, business cards, and flyers, can be deducted as a business expense.

Bad debts

If you have uncollectible debts related to your business, you can deduct those debts as a business expense.

Insurance premiums

If you pay for insurance for your business, such as liability insurance, those premiums are deductible.

Training and education expenses

If you take courses or attend seminars to improve your skills and knowledge related to your business, those expenses are deductible.

Self-employment contributions

As a self-employed individual, you’re responsible for paying both the employer and employee portions of the Canada Pension Plan (CPP). You can deduct the employer portion as a business expense.

Making Tax Payments on a Quarterly Basis

Once a freelancer earns more than $30,000, he or she is needed to register for a GST or HST account. To be clear, only freelance income counts toward this criterion; money from conventional employment is not included in the computation.

If you earn more than $30,000 per year as a self employed person, you’ll have to pay your taxes in quarterly installments. You’ll need to start collecting taxes on your freelance employment after you have a GST or HST number. The tax rate that applies is determined by the province where your client’s tax base is located. For example, a Toronto company would charge their Montreal client the Quebec GST rate of 5%.

You must pay the government the GST or HST that you collect. The good news is that you can deduct the amount of GST or HST you paid on business costs from the amount you owe the government. Keeping track of all your invoices and receipts will once again assist you in calculating the GST or HST due.

If it will be your first time filing taxes as a freelancer or gig worker, it’s very tempting to tackle doing your taxes yourself. However, it’s also very easy to make costly mistakes. Any tax software, for example, is only as good as the information you feed into it. So, if you are mislabelling expenses, or forgetting to add paid invoices – or unpaid ones – the software won’t know and can’t help you.

Having a professional file your taxes for you avoids all of this. We ask enough real time questions to ensure you are not forgetting anything and can even help you plan for your future taxes, helping you understand when might be the right time to make the switch from freelancer to small business owner or how to make the most of the increase in income you will hopefully enjoy this year.

As it’s tax season right now, there has never been a better time to get started, so contact us today and let’s do just that!