Note: this guest post and contest is sponsored by my friends over at H&R Block. I’ve been filing my taxes as a freelancer with H&R Block for the past few years, and I can say from first-hand experience, it’s been a really simple process.
It is becoming more common to hear Canadians say “I am freelancing.” It may not offer job security but it can deliver flexible hours, a chance to work on multiple projects and, more importantly, the opportunity to be your own boss.
But earning income as a freelancer does mean more paperwork at tax time, since no one will be sending you a T4 slip. And trying to piece together receipts a year later is not recommended. If you are getting ready to take the leap into freelancing, here are some tips to make your tax return easier:
- Every business receipt means less tax paid: Your business expenses are deducted from your business income. The more expenses you record, the less income on which you have to pay tax. Forgetting or losing receipts on a regular basis will impact your tax bill, so get receipts.
- Your home office expenses may not total as much as you think: If you have an exclusive-use area for your office in your house or apartment, you can claim a portion of expenses like rent or mortgage interest, insurance, utilities and property tax. So if you use 10 per cent of your home as an office, you claim 10 per cent of the costs. For example, if you pay $1,000 a month for your apartment, you can claim $100 a month as a business expense.
- Be reasonable: Claiming 90 per cent of your house as an office will most likely lead to a review of your return. You are allowed to claim reasonable expenses you incurred to earn your income.
- Single connections: If you only have one internet connection or phone line into your home, you cannot claim the whole cost as a business expense. The Canada Revenue Agency (CRA) expects you to have some personal use of a single connection, so you may claim the percentage used for business purposes. If you have an exclusive-use business phone line or internet connection, then you can claim the entire bill.
- No withheld tax, so expect to pay: How much you pay will depend on what other types of income and deductions you have. However, as a general rule of thumb, self-employed Canadians should save 30 to 40 per cent of their income for tax purposes. Do not expect your business expenses to eliminate your tax bill.
- CPP payments: If you earn more than $3,500 in the year, you will pay both the employer and employee portions of your CPP premiums.
- EI is an option: The government introduced an Employment Insurance (EI) program for self-employed Canadians but you have to register for it. And once you are in, you cannot opt out, so make sure you understand what you are getting yourself into.
- Record your mileage: Contrary to popular belief, there is no flat rate mileage amount for self-employed taxpayers. You need to a keep a logbook to track your business kilometres. Based on the percentage driven for work, you can claim a portion of your gas, insurance, maintenance and registration as a business expense. There is a simplified logbook option but you have to have kept a logbook for at least one year before you can use this option.
- Know how to calculate the GST/HST: If your total revenues from taxable supplies are more than $30,000, you will need to register, collect and remit GST.. You are allowed to claim the GST and HST you paid on your business expenses as Input Tax Credits (ITCs). These ITCs then reduce the amount you remit.
- Don’t wait to start bookkeeping: Freelancing can be a scary prospect so it can be tempting to think you will spend money on bookkeeping once you get a few more clients. Even if you just keep a simple spreadsheet, you need to have a system set-up from the day you start working for yourself. Trying to sort out 12 months of receipts as the tax deadline looms will increase your chances of making an error or omission.
You will report your business income and expenses as part of your personal tax return by using Form T2125, Statement of Business Activities. You do not need to attach your receipts to the form but you should keep your records for seven years in case the CRA reviews your return. Without proof of the expense, the CRA will disallow the deduction, so every piece of paper counts.
Here is your chance to win 1 of 3 copies of H&R Block’s Online Tax Software!
- You MUST use Rafflecopter to record all of your entries.
- I am giving away three (3) codes to file your taxes online with H&R Block. Each person who enters is only eligible to win one (1) prize.
- Only open to Canadians.
- Contest closes March 21, 2013.