Being your own boss certainly grants you the flexibility you deserve with self-employment. But with flexibility comes responsibility, particularly regarding taxes. Filing your self employment tax in Canada might seem confusing at first, but once you understand the process, it becomes much easier to manage. Whether you’re a freelancer, a consultant, or a small business owner, this step-by-step guide will lead you through how to correctly file self employment taxes and stay compliant with the CRA.
Understanding Self-Employment Taxes in Canada
When you work for yourself, you are responsible for reporting and paying taxes on your earnings. That means no employer is withholding tax on your behalf, so you’re responsible for calculating, filing, and paying self employment tax by yourself.
Your self-employed income tax Canada is only based on your net income, which is the amount left after deducting eligible business expenses from your total earnings. Common deductible expenses include office supplies, home office, travel expenses, and marketing expenses. Under the CRA self employment tax system, you declare the total income on your self-employed tax return (T1 General Tax Form) and complete Form T2125 for all the activities related to your business or profession.
The Canadian self employment tax rate has both a federal and provincial portion, which also covers the amount contributed to the Canada Pension Plan. As self-employed individuals have to pay for both the employer and employee parts of CPP, one should consider that additional expense.
Step-by-Step: How to File Self-Employment Taxes
The process of how to file self employment taxes is simpler when you follow the right steps.
Gather all your records: this includes invoices, receipts, bank statements, and expense documentation. You’ll need these to calculate your total income and deductions. Next, you’ll start completing your self-employed tax return using Form T2125.
Next, you calculate your business income and deduct all eligible deductions. This gives you your net income, which forms the basis of your self employment tax owing amount. Next, you prepare your T1 General tax return and, on that, you report your total self-employed earnings.
You have to register for a GST/HST registration for self-employed if the annual business income earned is more than $30,000. This lets you charge and collect sales tax from clients and remit it to the CRA.
The CRA incentivizes filing online using certified tax software, but you can mail in your return, too. Pay your taxes by April 30 or by June 15 if you or your spouse/common-law partner has a self-employment income, though payment is still due by April 30 to avoid interest.
If you are unsure of some calculations or compliance with CRA, an accountant specializing in personal income tax accountant in Mississauga will help you in filing correctly and maximizing your deductions.
Deductions and Expenses You Can Claim
Knowing what deductions you are eligible for could greatly lower your self employment tax burden. The CRA allows self-employed individuals to deduct reasonable business expenses that directly relate to earning income. These may include advertising, rent, insurance, vehicle expenses, and utilities.
You also claim a portion of your home expenses under CRA self-employed deductions if you operate from a home office: heating, electricity, internet, and property tax. You can deduct mileage, maintenance, and insurance proportionally for using your vehicle for business.
And don’t overlook the self-employed accounting Canada practices of being self-employed in Canada: make clean, organized records in case the CRA audits you. It is also prudent to set aside a certain percentage of your income each month for taxes and CPP so that you are not surprised at year-end.
Managing Taxes for Freelancers and Sole Proprietors
Many Canadians who earn an income through freelancing, consulting, and small businesses find themselves in the taxes for sole proprietors category. If you’re not incorporated, business income is considered personal income, and you report it on your personal tax return.
Freelance taxes in Canada are actually pretty simple once you realize you pay on net profit, not gross earnings. Filing accurately will save you from penalties, interest, and lost deductions.
Staying Ahead of Self-Employment Taxes
Being organized and planning ahead will make filing self-employment tax less stressful. Keep all your receipts and transactions in a digital file; track your income on a monthly basis, and use accounting software.
If either your income is irregular or you anticipate owing more than $3,000 in taxes, you may want to make quarterly installment payments to avoid a large bill at tax time. In this way, you can avoid problems associated with filing and take advantage of the self-employment CRA rules.
Final Thoughts
Doing your own taxes needn’t be daunting if you are a self-employed Canadian. Once you understand how to file self employment taxes, the process becomes routine. Whether you’re filing for a side hustle or running a full-time business, being aware of deductions, deadlines, and responsibilities helps you stay ahead.
If managing your taxes feels daunting, don’t hesitate to consult with a professional. Partnering with a professional ensures that you get the most from your deductions and accurate reporting so that you can rest easy. In the end, it will keep you ahead of self employed taxes Canada and more into building your business instead of year-end surprises.