The freelance life brings freedom and independence, but there are still certain requirements you must fulfill. Since you are your own boss, you need to keep careful track of your income and expenses, and set aside money for taxes throughout the year. Here’s a look at the basics of income tax for Canadian freelancers.
You are considered a sole proprietor.
Just like in the U.S., Canadian freelancers are considered sole proprietors by the federal government. There is no need to file any additional paperwork to register a sole proprietorship. Once you start selling goods or services, you are automatically a sole proprietor. You’ll report all of your freelance income to the Canada Revenue Agency (CRA) on your personal income tax. You’ll only need to file a business tax return if you do decide to take the step of registering your business and forming a new business structure, other than a sole proprietorship.
You have a deadline extension to file your tax return.
The CRA establishes an April 30 deadline for individuals and most businesses to file their income tax returns. You have a little leeway because you’re a freelancer. Your filing deadline is extended to June 15. However, you must still pay your full tax obligation by April 30. Otherwise, you’ll begin accruing interest on the balance. Because of this, it’s in your best interests to simply file by the first deadline or earlier. You can submit a tax return electronically via CRA’s NETFILE service starting in early February. Note that if either deadline falls on a weekend or a holiday, the deadline shifts to the following business day.
You need to budget for your tax obligations.
Employers are responsible for withholding a portion of their employees’ income. As a freelancer, you’ll need to take on this responsibility yourself. You must withhold income tax and payroll deductions, including the Canada Pension Plan and Employment Insurance. Freelancers must contribute both the employee and employer portion of these withholdings. If you aren’t sure of the percentage of income you should set aside for taxes, consider meeting with a qualified accountant. Even if you decide to prepare your tax return by yourself, you can benefit from the guidance of a professional accountant. Set aside the money for your taxes in a separate account so that you won’t accidentally spend it on anything else.
You need to make CPP contributions.
In addition to subtracting income tax from your wages, you need to contribute to the Canada Pension Plan. The CPP contribution rate is 9.9%. If you were an employee, you’d only pay half of that and your employer would pay the other half. But since you’re a freelancer, you’re responsible for paying the full 9.9%. If you earn less than $3,500, you won’t deduct anything for the CPP. If you earn more than $55,300, then anything earned above that number isn’t subjected to CPP withholding. Note that these numbers may be subject to change over time. Always check with the CRA for the current figures.
You may make EI contributions.
Contributions to the Employment Insurance program are optional for self-employed individuals in Canada. If you do opt-in, you’ll pay the same rate as every other Canadian worker. As of 2018, that rate is $1.66 for every $100 of insurable earnings. You might choose to opt out, but consider the benefits of EI before you do. After paying the premiums for a full year, you can access special benefits such as maternity, parental, sickness, and compassionate care. Consider talking to an accountant before deciding whether to opt in or out of the EI program.
You may need to pay in installments.
Freelancers often need to pay their taxes in installments throughout the year, instead of paying one lump sum on April 30. The CRA requires you to make these payments throughout the year if you owe more than $3,000 in the current tax year and either of the last two years. The CRA accepts quarterly payments. Note that if you’re a resident of Quebec, the threshold is even lower. You’ll need to make quarterly payments if you will owe more than $1,800. You can calculate your anticipated quarterly payments based on your freelance income for the previous years. In fact, the CRA will send you a reminder about this twice per year (February and August). Simply pay the given amount on your CRA notice each quarter. If your income for the current tax year is significantly different from the previous years, you can use the CRA’s calculation chart for installment payments. Quarterly payments are due on the following dates:
- March 15
- June 15
- September 15
- December 15
If any of those dates fall on a weekend or a holiday, the due date shifts to the following business day.
You can automate your quarterly payments.
If you feel confident that the amounts for your quarterly payments will remain consistent, you could consider making life a little easier by setting up automated payments. Once it’s set up, your payments will automatically transfer from your bank account to the CRA. Otherwise, you can pay via a third-party payment processor with a debit or credit card. Another option is to bring your CRA remittance slip to your bank to pay there. Each time you make a quarterly payment, make a note of it for your records. You’ll need this information when you file your income tax return in April.
You may deduct your home office expenses.
It’s crucial to keep meticulous records of your expenses throughout the year. You can use these to reduce your total tax obligations. One of these potentially deductible expenses is your home office. If you’d like to claim a home office deduction, you must meet either of these requirements:
- Your home office is used exclusively for working. This means you cannot keep a treadmill in there or use it as a storage area for non-business-related belongings.
- You use your home office as the principal place of your business. Some personal use is allowed, but the calculations must be adjusted.
It can be tricky calculating the home office deduction, and it’s a good idea to consult an accountant. If you do wish to do the calculations yourself, then you’ll start by figuring out the total size of your home and the total size of your home office. Let’s say, for example, that your home office is 300 square meters. Your home is 1,500 square meters. Expressed as a percentage, your home office would be 20% of your home. This means that you can deduct 20% of some of the household expenses, like electricity. If you use your home office for personal matters, the calculations get trickier. You’ll need to figure out the percentage of time that you use the office for business, and then you’ll multiply this percentage by the first percentage.
Despite trickier tax returns, the freelance life can be immensely rewarding. Be your own boss, set your own hours, and choose the work you want to do. Become a freelancer today with help from Writers Work!