Self-employed? Here’s a helpful guide to filing your taxes.

March 25, 2024

Being your own boss has its perks, such as the flexibility to create your own schedule and an unlimited potential to earn business income.

But these advantages come with greater responsibility at tax time. As a self-employed worker, you’ll need to report your business income and expenses on your personal tax return.

How do I know if I’m self-employed?

Being self-employed means that you work for yourself and operate your own business or provide services as an independent contractor, freelancer, or gig worker. In this arrangement, you’re not considered an employee of another person or organization. Instead, you have control over the work you do, how it’s performed, and the way you conduct your business.

Working for yourself and being an employee at the same time is possible. Whether you work for yourself full-time or have a side-gig on top of being employed at another job, you’ll need to file a self-employed schedule with your tax return.

According to the Canada Revenue Agency (CRA), individuals are classified as self-employed if they engage in independent contracting, operate as a sole proprietor, or participate in a partnership while providing a service or product with the expectation of making a profit. The CRA generally recognizes three categories of self-employment:

1. Independent Contractor: As an independent contractor, you offer a specific service to another party based on a contractual agreement.

2. Sole Proprietor: If you operate your business alone and it’s not incorporated, you’re considered a sole proprietor.

3. Partnership: A self-employed partnership involves the operation of a business by two or more individuals working together.

What’s the difference between being self-employed and being an employee when it comes to my taxes?

1. Income Tax Deductions: As an employee, your employer deducts income tax from your paycheck based on your tax bracket and other factors. In contrast, as a self-employed individual, you’re responsible for calculating and remitting your own income tax to the Canada Revenue Agency (CRA) based on your business profits.

2. Canada Pension Plan (CPP) Contributions: Employees and employers share the responsibility for CPP contributions. Your employer deducts your share from your paycheck and contributes their share on your behalf. However, self-employed individuals are responsible for both the employee and employer portions of CPP contributions. You must make CPP contributions based on your business profits (after deducting all business expenses).

3. Employment Insurance (EI) Premiums: Employees are eligible for EI benefits, and their employers deduct EI premiums from their paychecks. However, self-employed individuals are generally not eligible for EI benefits unless they voluntarily opt in to the EI program. If you choose to contribute, you must pay EI premiums based on your self-employed earnings.

4. Deductible Expenses: As an employee, your deductible expenses are limited to certain employment-related expenses, such as union dues or professional membership fees, if eligible. However, self-employed individuals have a wider range of deductible expenses related to their business operations, such as rent, supplies, utilities, advertising costs, bank fees, insurance, and more. These deductions can help reduce your taxable income.

5. Reporting and Forms: Employees receive T4 slips from their employers, which summarize their employment income and deductions for the year. Self-employed individuals report their business income and expenses on the T2125 form, which is part of their personal tax return.

How do I calculate my self-employed taxes?

1. Determine your business income: Calculate your total business income by adding up the revenue you earned from your self-employed activities throughout the year. This includes any sales, fees, or other income generated by your business.

2. Calculate your business expenses: Identify and gather all eligible business expenses you incurred during the year. These can include costs such as office rent, supplies, advertising, professional fees, and vehicle expenses. Subtract these expenses from your business income to determine your net income.

3. Calculate your CPP contributions: As a self-employed individual, you’re responsible for both the employee and employer portions of CPP contributions. The CPP rate is a percentage of your net self-employment income, up to a maximum annual limit set by the CRA. You can use the CRA's CPP contributions calculator or consult with a Tax Expert to determine the exact amount you need to contribute. Schedule 8 will need to be attached to your tax return.

4. Calculate your income tax: Once you’ve determined your net self-employment income, you can use the federal and provincial tax brackets to calculate your income tax. The tax rates vary depending on your income level.

5. Consider other taxes and credits: In addition to income tax and CPP contributions, you may need to consider other taxes such as Goods and Services Tax/Harmonized Sales Tax (GST/HST) if your business is registered for GST/HST purposes. Also, look for any tax credits or deductions you may be eligible for as a self-employed individual, such as the Canada Employment Amount or the Home Office Expenses deduction.

6. Keep thorough records: It's crucial to maintain accurate and organized records of your business income, expenses, and receipts. This documentation will be essential for completing your tax return and supporting your claims if the CRA requests verification. Tip: scan your receipts as some ink tends to disappear with time.

Tax rules can be complex, so it’s best to consult with a Tax Expert or use our tax software specifically designed for self-employed individuals to ensure accurate and compliant tax calculations based on your specific situation.

What expenses can be deducted for self-employed taxes?

Expenses can be deducted if:

1. They’re reasonable.

2. They’re not personal expenses.

3. They’re incurred to earn income.

Common examples include:

· Advertising

· Insurance

· Interest and bank charges

· Legal, accounting, and other professional fees

· Office expenses

· Rent or use of home

· Salaries, wages, and benefits

· Supplies

· Internet and telephone

· Motor vehicle

When are self-employed taxes due?

If you work for yourself, the deadline for filing your tax return is June 17, 2024. However, it's important to note that any amount due must still be paid by April 30, 2024. To avoid late-payment penalties, it's recommended that you prepare your tax return well in advance of April 30th if you have self-employment income.

If you have any questions about your tax situation, H&R Block Tax Experts are here to help. Find an office near you to book an appointment today or file yourself with our easy-to-use self-employed tax software, help is always available if you need it with our Expert Help service.

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