How to file your taxes in Canada if you’re self-employed
Man calculating his taxes at home

Unlike full-time employees, freelancers and self-employed individuals in Canada are mostly on their own regarding their taxes. While this may not be a big deal for some people, the process can be intimidating since there’s much more paperwork involved and often a tax bill that needs to be paid. But if you’re organized, filing your taxes when self-employed can be a straightforward process – just follow these tips.

Get familiar with the deadlines 

In most cases, unless it falls on a weekend, the personal income tax deadline is April 30th. However, self-employed individuals get until June 15th to file. That said, if you owe taxes, you must pay them by April 30th each year. Even if you owe taxes but don’t have the money available to pay right away, you should still file by the deadline. By doing this, you’ll avoid any penalties. Plus, you could potentially negotiate a repayment plan. 

Gather all your documents

Self-employed individuals will have a lot of paperwork, so hopefully you’ve kept detailed records. The first thing you’ll want to gather is all of your income statements, then follow that up with all of your expenses. Keep in mind that business owners can claim many expenses, so you’ll need to break things down into their relevant categories, such as meals and entertainment, office supplies, travel, utilities, advertising, and so on. Once you have all of your expenses separated, you can tally everything up, which will make the actual reporting process easier.

Calculate your GST/HST

Any self-employed individual who has earned more than $30,000 in a calendar year must register for a goods and service tax/harmonized sales tax (GST/HST) number immediately. Once you have that number, you must charge taxes moving forward.

When you file your taxes, you would file a separate GST/HST form. The GST/HST you’ve collected will offset any GST/HST you’ve already paid. For example, if you collected $5,000 in HST but paid $4,000 in HST, you’d owe the CRA $1,000 in taxes.

Decide how you plan to file

Filing your taxes has never been easier since you don’t need to do things by hand anymore. That said, you still have a few options: 

●      Do it yourself: If you want to keep your costs down, you can use free tax software to guide you through the process.

●      Use a tax preparer: During tax season, you’ll see tax preparers available at malls. This service can be good for anyone who gets stressed out about doing their taxes on their own.

●      Hire an accountant: If your taxes are complicated, or you’re looking for more tax advice, hiring a tax accountant to prepare and file your taxes on your behalf could be worth it.

It’s worth noting that if you choose to file your taxes on your own, you don’t actually have to do it by yourself. TurboTax offers TurboTax Live Assist & Review, where an expert can go over your taxes to ensure that you’re getting the best return. Alternatively, they offer TurboTax Live Full Service, where you can get your taxes done by a professional without leaving your home. They even have a version that’s designed for those who are self-employed. 

Add your business income

If you have a full-time job but have some freelance/self-employed income on the side, you’d still have to report it. All you need to do is fill out form T-2125, which is known as the Statement of Business or Professional Activities. This is where you would list your extra income and any expenses that you may have.

Pay your taxes

Anyone owing taxes can pay them directly to the CRA via online banking. Once you owe $3,000 or more, the CRA will require you to pay in quarterly installments. The CRA would take what you owed in the previous year and divide it by four, with the payment dates being the 15th of March, June, September, and December every year. Of course, these payments would be reported the following year, which would reduce your tax overall tax burden.

It’s also worth mentioning that if you’re a self-employed individual, you’re responsible for the entire Canada Pension Plan (CPP) payments (normally, employers and employees split the payments).

The bottom line

Filing taxes as a self-employed individual requires a bit more work, but if you have detailed records, the process shouldn’t be too difficult. As a general rule, you may want to set aside about 30% of your income for tax purposes. This way, you’ll have the funds available when the eventual tax bill arrives. If you want to reduce your tax burden, you could contribute to your Registered Retirement Savings Plan. Finally, be sure to hang onto all of your paperwork and receipts for at least six years in case you’re ever audited.

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.

Barry Choi is a paid spokesperson of Sonnet Insurance.
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