Tax Advice for FreelancersBrian Jang ON September 21, 2016
Who wouldn’t want to be a freelancer? You get to work where you want, when you want, and how little or much you want. Sounds great! But, keep in mind, all that freedom comes at a cost. With no payroll deducting your income tax, your chances of receiving a refund are pretty much next to nil. So, you’ll want to do everything in your power to take advantage of as many deductions as you can. Here is some handy tax advice for freelancers to help you do just that.
Hold on to your receipts and invoices
One of the best pieces of tax advice for freelancers is to save all your receipts and invoices. No matter how trivial you may think it is, hang on to everything. Whether you’ve purchased items online or in store, save your receipts and file them away. Even if you’ve billed out a $10 invoice for work, make sure you have a record of it on hand.
Understanding which receipts to hang on to can pay off huge in the long run. According to the Canada Revenue Agency, there are a wide variety of deductions freelancers can qualify for, from travel expenses to interest on business-related loans.
Putting in the time to squirrel away all your receipts and invoices will not only take the hassles out of filing your taxes late, but also ensures you have all the supporting documentation you’ll need in the event of an audit.
Save for your taxes
Freelancers will also have to budget for taxes. Unlike salaried employees, you’ll need to put aside a part of your income in preparation for tax time. But how much should you save? Well, a good rule of thumb is to set aside roughly 30 percent of your gross income. Sometimes it’ll be less or sometimes a little more, but a least you won’t be running around trying to come up with the money when your taxes are due.
Also, keep in mind that if you bill out for HST or GST, you’ll need to pay it back. So, it is a good idea to budget for that as well.
Contribute to an RRSP
One of the perks freelancers won’t get is the benefit of having a company pension plan. To help prepare for retirement, you will want to put a portion of your earnings into a registered retirement savings plan. Contributing to an RRSP decreases your personal income amount, and your money increases tax-free.
Hire an accountant
As a freelancer, you have to wear many hats. And sometimes, spreading yourself too thin can lead to missed opportunities—and no go-getting entrepreneur wants that. That’s precisely why hiring a professional accountant is a smart idea. They show you what expenses you can deduct, helping you get the best tax break possible.
To help you further navigate the sometimes choppy waters of running your own business, here are four tax questions frequently asked by freelancers.
Do you have to pay taxes on freelance work?
Yes, for both freelance and contract work.
What is the minimum amount of income to file taxes?
There is no minimum. The tax definition is if you are in the “adventure or nature of trade,” effectively meaning that if you are working in exchange for payment, then this income is subject to income tax.
Can you write off unpaid invoices?
Yes. Your income should be reported on a gross basis. This means that you are reporting the income from ALL your invoices issued during the year. When an invoice is unpaid, and deemed uncollectible, then this amount can be reported as a bad debt.
How do I file taxes for freelance work in Canada?
Freelance income must be reported on the T2125 Statement of Business Activities form of your personal tax return each calendar year. In addition, as a freelancer, you are able to claim certain types of expenses to reduce the income earned. This net amount of your income less expenses is ultimately what is subject to taxes.
If you are a freelancer looking for some helpful tax advice, contact BCJ Group, Chartered Professional Accountants today!