Ever since I started my Sole-Proprietorship business, Self-Employment taxes have been a major question for me. I say major because I absolutely don’t like taxes and sometimes you can get in real trouble with Canada Revenue Agency (CRA). Even though I have a decent understanding of taxes, I have an irrational fear about them when tax season rolls around the corner.
Self-Employment taxes in Canada apply to small businesses, freelancers and self-employed individuals like me. Probably even you if you are reading this. All of the information you need can be found on the Canadian Revenue Agency website, but this post is meant as a quick overview when it comes to taxes for people like me and you, who want to work as self-employed or freelancers.
Should I be filling as a Self-Employed?
Yes, of course, you should. As soon as you start making any income, you are required to report it to the CRA. Even if you have only made a few hundred dollars, you should still report it as not doing so would be considered tax evasion. It is unlikely the CRA will come after you, but that’s not something I would take my chances with and would advise you to.
There is no legal obligation to register your business as long as you are invoicing under your name. If you prefer to invoice under your business name, then you are required to register your business name in your province. However, to be realistic your clients will most likely not care how you invoice them as long as they know who they are paying. Banks on other hand could have terms that do not allow business activity on your daily personal account.
Keep in mind you need to keep a record of all of your income and expenses that relate and keep a small divided folder for paper receipts. There is also a handful of apps available that I will tell you about going forward. Owing taxes is arguably a goal for anyone in a small business since it means you are earning income.
Filling taxes as a Sole-Proprietor
As a general rule, you should always set aside 25% of your income for taxes (set aside more if you are in a higher tax bracket and collect GST). You are taxed only on your net income which is your total income minus all your expenses. Look for lines 135-145 on your tax return for self-employment income on lines 162-170 for gross self-employment income.
You will also need to fill out the T2125 form. This is a statement of your business activities which covers your income and expenses. A full list of expenses you can claim is listed on the CRA website but generally speaking, you can deduct any reasonable expenses that are related to the cost of your business. For casual sole-proprietor, the following are things you will want to claim as expenses.
- Advertising
- Wireless and Internet bill
- Meals and entertainment (work-related)
- Office supplies
- Travel
Note that personal use of any expenses cannot be claimed. So if you use your home internet only 20% of the time for small business-related assignments, you can claim 20% of your bills. If those deductions make your head spin, don’t worry, there is a simple solution to make your life easier. TurboTax solutions for self-employed walk you through the tax filing process while prompting you with self-employment questions. This ensures you get every business deduction you are entitled which in turn means more money in your pocket.
GST Registration
Sole-Proprietorship taxes remain fairly simple when your income is less than CAD 30,000 since you are still considered a small supplier. As soon as you pass that threshold, you must register for a GST number. The CRA is not keeping tabs on you. It is totally on you to keep track of your income and to register when you need to – if you don’t. you will be penalized later.
To be clear, the CAD 30,000 threshold only applies to sole-proprietorship income. It does not matter if you are making more from your second regular job, you only need to get a GST number if you make more in your sole-proprietorship income.
Once you have your GST number, you will need to start collecting taxes. What you charge depends on what province the business and the customer you are charging has its tax residence. For example, although I am based in Calgary and I do work for a client or a company based in Vancouver, I charge them 5% GST.
Once you have registered for your GST number, you can choose the quick method when it comes to reporting the taxes you have collected. This method mainly benefits service-based sole-proprietorships since it will simplify things when you are doing your taxes. Regular small businesses may want to stick to the traditional methods to maximize their credits.
Also, note that if you owe more than $3,000 in taxes in a year, the CRA will require you to start paying your taxes every quarter.
Alberta’s Sole-Proprietor with clients outside of Canadian jurisdiction
You don’t need to charge clients and companies located outside of Canada any taxes since they are zero-rated according to the CRA. However, any income you earn from those clients still needs to be reported. GST registration applies to your income. As mentioned, you register once you earn CAD 30,000. Even if all of your clients are outside of Canada, you still need to register your GST number once you hit that $30,000 threshold.
Again, you don’t charge any of your Internationally based clients GST. When filling in your taxes, you list how much GST you have collected. Add in your input tax credits and you are done. Nowhere on your tax return do you say where certain revenue comes from? That being said, when doing your bookkeeping, you should separate any foreign income so you have a record in case you are ever audited.
Keep track of your expenses
For the longest time, I tracked everything manually in Numbers, but that is because I happen to like spreadsheets and did not have a business bank account. Admittedly, this takes up a lot of time, so recently opened an eBusiness account at BMO and tested out Waves Accounting and QuickBooks Self-Employed both have a mobile app for Android and iOS.
As the name implies, it is built for people who are self-employed or have small businesses and comes with features that make tracking your expenses easier. You can connect the software right to your bank account and with a quick swipe, you determine if expenses are personal or for business. What I like is how you can set categories which are based on the T2125 for from the CRA. That is the form used to claim your sole-proprietorship expenses so you can see why things instantly become easier to track.
Other features that QuickBooks app have that will appeal to sole sole-proprietors and freelancers include the automatic mileage tracker, the ability to take pictures of your receipts directly within the app, and expected taxes which is based on your income and expenses.
Note that connecting the app to your bank account technically voids your consumer protection, but Intuit (who developed QuickBooks Self-Employed and own Mint, TurboTax) uses bank-level encryption so your security is their number one priority.Just to be safe use business accounts and personal account separate.
Using a business credit card
A common question freelancer and small business owners ask me is if they should get a business credit card. It’s sort of personal choice but it also depends on your situation. However, by separating your business account and personal you have access to both worlds.
If you are a freelancer and only making limited income and have few expenses, you can use your regular credit card. You will just need to manually separate your personal expenses from your business ones when doing your taxes.
Now, if you need to make regular purchases to run your business, it is definitely beneficial have one. Business cards typically give you a higher credit limit and you get a longer period to repay your bills. You also get detailed reports on your spending which will be helpful when you do your taxes.
A business credit card can also be helpful if you know you have major expenses coming up.
Do your taxes at home with the help of professionals
Even after reading this post, many people still have many questions. Some have questions about their specific situations. while others wonder if they should work with an accountant. I personally think it is worth working with an expert, but that does not mean yu need to spend a small fortune. You can get professional advice from the comfort of your own home thanks to some services made available by both Waves Accounting and TurboTax.
- TurboTax Asist & Review Self-Employed
- TurboTax Full Service Self-Employed
TurboTax is the only Canadian tax preparation software designed specifically for self-employed individuals. With TurboTax Assist & Review Self-Employed, you file your taxes online, but you have access to an expert who knows all about self-employment issues. What I mean is you can ask one of TurboTax’s experts question while you’re filing your taxes. They will even review your taxes for you before you hit submit.
If you are still intimidated by filing your own taxes, use TurboTax Full Service Self-Employed as you can just have an expert file your taxes for you. This is all done virtually so there’s no need to leave your home.
If you have questions, you can ask them here. Happy reading!