Freelancing: Complete Tax Guide for Freelancers in Canada 2022

July 18, 2022 Andrew AdolphAudits

Freelancing full-time or as a side-gig is a great way to generate income. Today, more and more freelancers are turning to websites like Fivver to make an extra buck.

Freelancing rewards those who despise repetitive work and climbing the corporate ladder. However, just because you work for yourself doesn’t mean the taxman isn’t waiting for you to pay up.

Freelancing is a form of self-employment, and if you want to do it correctly and avoid trouble, here are a few rules you should follow.

What Tax Forms Are Required By Freelancers In Canada?

As a freelancer, you are self-employed, which means you must use a special form to report your business income. For unincorporated businesses, the form is called a T2125 The T2125 calculates your business income for tax purposes, which gets reported in the income section of the T1 Income Tax return along with your other types of income, such as employment income.

Depending on your revenue (sales) amount, you may also have to register for GST/HST. However, there’s a pretty good chance the platform you are working for is handling the collection of sales taxes for you. But if you are doing work for people or businesses in Canada and your sales bring in more than $30,000 per year, then you also are required to register for GST and possible PST. 

You may be able to handle sales tax on your own. Or you may be too busy, or you may not be good at filling out government forms. Consider consulting a tax professional such as gatewaytax.ca to handle filing in order to avoid mistakes or paying penalties for missing filing deadlines.

There Is No Employer to Deduct Or Withhold Income Tax On Your Freelancing Income

When you freelance, the money you receive is your gross revenue and there are no taxes withheld. Therefore, you will usually owe the government money when you file your personal taxes. The government expects this to be reported by April 30 of the following year and paid in full by June 15. If you don’t know your tax bracket, a good rule is to set aside about 30% for income tax until you have a better idea of your tax bracket. If you have significant other income, set aside even more because this will push you into a higher tax bracket.

You Can Deduct Business Expenses from Income Earned by the Business

As a freelancer, you are a businessperson and entitled to deduct all the expenses you incur to generate business income. The general rule is that the expense can be tied to the revenue earning activity and is reasonable in the circumstances. 

Expenses are separated into two types: capital and current. Current expenses are expenses consumed during the operating year whereas capital expenses are split up and expensed over time. These include long-term assets that are used over a period of more than one year. The amount that can be written off is prescribed by the tax code and is called capital cost allowance. 

Some expenses need to be prorated. Anything you’re writing off that you use personally as well must be prorated so that you only write off the business portion. This typically includes automobile expenses and business use of home expenses. This is a particularly hazardous area people get in trouble with because people are notoriously bad at keeping the vehicle logbooks they are required to. How else are you going to prove business use of your vehicle if you aren’t keeping a record of your journeys? Thankfully, technology is beginning to help with this task.

Bottom Line

As much as tax accounts like to save you money by reducing your taxes, there’s only so much that can be done. As we say in the business: “if you’re paying income tax, it means you’re making money.” My clients don’t like this saying very much, but with good, up-to-date record keeping, you can maximize your deductions and minimize your taxes payable.

Interested in speaking to a real tax expert? To book a free meeting, call 604-240-6173 or email me at andrew@gatewaytax.ca. 

You can also visit us at https://www.gatewaytax.ca for additional tax resources.

Andrew Adolph

Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.