Welcome to the gig economy! Tax tips for self-employed workers.
February 10, 2023
Being a freelancer, independent contractor, or gig worker is like running your own business. You won’t get a T4 slip that reports your income for the year, so it’s up to you to figure out what you made, and what you have to include on your return. But don’t worry! H&R Block is here to help. Whether you’re earning extra cash by delivering groceries through Instacart, or if being an Uber driver is your main source of income, here’s what you’ll need to know about filing your return as a gig worker.
- How do you know if these tips apply to you?
- Reporting income
- Work-related expenses
- Charging GST/HST
- CPP/QPP and EI
- Key filing dates
- If you get audited
How do you know if these tips apply to you?
If you do something with the intention of making a profit, then it’s considered “a business” according to both the Canada Revenue Agency (CRA) and Revenu Québec. You’ll need to report your business income on your return. Some examples of this type of income include:
- Side hustles like selling handmade candles on Etsy or running a local dog-walking service
- Occasionally running errands for extra income through platforms like TaskRabbit or food delivery apps like SkipTheDishes and Uber Eats
- Renting out your home or cottage through accommodation sharing websites like Airbnb
- Working as a freelance artist or programmer
If the name of your business is followed by lnc., Ltd., or Co., then your business is incorporated, and some of the tips in this article won’t apply to you. Find an H&R Block office near you so one of our Tax Experts can help you file a T2 Corporation Income Tax Return instead.
Keep your records.
Since you’re running your own business, it’s important to stay organized and keep record of the money you make (and spend).
Make a habit of storing your documents in a folder and sorting them by date. If applicable, keep copies of the invoices you’ve sent clients, and receipts for expenses you needed to do your job (for example, the cost of gas or work-related supplies).
Be sure to keep all your documents for at least 6 years – the CRA and Revenu Québec can request to see them at any time if your return is selected for a detailed review.
You need to report your income (yes, even if you earn cash).
No matter how you generate income from gig work, it needs to be reported on your return using the Statement of business or professional activities (T2125 and TP-80). Unclaimed income can result in significant penalties.
Even if your total income isn’t higher than the basic personal amount (meaning you won’t owe federal taxes on it), there are advantages to reporting what you’ve earned on your return. The government needs this information to determine your eligibility for federal and provincial/territorial tax credits and benefit programs, such as the GST/HST Credit and the Canada Child Benefit. If you don’t include all your income on your return, you might miss out on these benefits. Reporting your total income will also establish more room to contribute to investments like your RRSP or TFSA.
Keep in mind, if you sometimes make money off of a hobby, that doesn’t mean it’s a side gig. For example, let’s say your hobby is photography and you take pictures at a neighbour’s family reunion one spring, as a favour. They pay you $150. Closer to Christmas, you take some headshots of your niece for an acting school application, and she pays you $75 as a thank you. These occasional earnings aren’t considered self-employment income and they don’t need to be reported. However, if you often make money off of your hobby (for example, if you’re regularly paid to take headshots of your friends), that’s a sign that your hobby is actually a business, and your income needs to be reported on your return.
Save on taxes by claiming your work-related expenses.
Did you know that you might be able to claim your work-related expenses to reduce the taxes you owe? Depending on the type of gig you have, you might have expenses that you can claim on your return.
Common expenses for ride-sharing drivers might include maintenance costs for your vehicle (such as replacing your brake fluid or installing winter tires) and the cost of supplies you provide to your passengers (such as water or snacks). Similarly, if you’re renting your home and need to stock toilet paper for your guests or pay for a cleaning service after their stay, you might be able to claim these expenses as well.
Find an H&R Block office near you so one of our Tax Experts can help you figure out what expenses you can claim on your return.
Figure out when you need to charge GST/HST.
You might be wondering if you should register your business to collect the federal goods and services tax (GST) and in some provinces, the harmonized federal-provincial tax (HST).
Once your gig starts earning over $30,000, you’ll need to register for a GST/HST number and begin charging your clients GST/HST.
Here are four scenarios for when it comes time to charge GST/HST:
- Scenario 1: You get a GST/HST number right away.
If you have a sense of how much revenue you’ll make, you might decide to become a GST/HST registrant as soon as you start your business. This applies to you if you’re expecting to exceed the $30,000 threshold at some point in the near future. You’ll want to receive any GST/HST paid back from the government on your business expenses, especially start-up costs.
- Scenario 2: You make $30,000 in a period of 90 days.
Sometimes, you think you’ll be a small supplier, but then your business takes off and you make more than $30,000 in a specific three-month period (also known as a quarter). In this case, the day the sale goes through that took you over the $30,000 threshold is the day you’re no longer considered a small supplier. You have to charge GST/HST on the sale that put you over the $30,000 limit, and on any sales after that, even if you haven’t registered yet. You’ll have 29 days to register for a GST/HST number with the government from the day of that sale.
- Scenario 3: Slowly but surely, you make over $30,000.
Sometimes, you decide to remain a small supplier, but your business is steadily growing and bringing in revenues in excess of $30,000 over the course of four (or fewer) previous, consecutive quarters. You’ll be considered a small supplier for those four calendar quarters, plus the next month. But – your first sale after that additional month, and all sales after that, will have to include GST/HST. Again, you’ll have 29 days from the first day of the second month to register.
- Scenario 4: You make $30,000 in 2 quarters.
In this scenario, you decide to remain a small supplier, but your business brings in revenues over $30,000 by the end of two consecutive calendar quarters. You’ll be considered a small supplier for one month after you exceed the $30,000 limit, and then you’ll have to start charging GST/HST on all sales after that additional month. You’ll have 29 days from the first day of the second month to register.
Note: Ride-sharing drivers (including Uber, Lyft and Eva) in every province need to register for a GST/HST number right away. In Québec, drivers must register for QST also. This doesn’t apply to drivers who only do deliveries (for example, if you have an Uber Eats gig, but never drive passengers).
What about CPP/QPP and EI?
This is where some thresholds come into play. For example, if your net self-employment income (plus pensionable employment income) is more than $3,500, you need to start contributing to the Canada Pension Plan (CPP) or Québec Pension Plan (QPP), both as an employee and an employer. The CPP/QPP contribution you need to make on self-employment income is calculated on the Schedule 8 form.
Employment Insurance (EI), on the other hand, is optional for self-employed workers in all provinces and territories except Québec. This means by default, you don’t have to pay EI premiums on your self-employment income (except in Québec).
As a gig worker, you can opt into the EI program by registering with the Canada Employment Insurance Commission. You’ll be able to register for special benefits such as:
- Maternity and parental benefits
- Sickness benefits
- Family caregiver benefits (for children and adults)
- Compassionate care benefits
For eligibility requirements and more information, visit the Government of Canada’s EI special benefits for self-employed people guide.
Note: Self-employed workers aren’t eligible for regular benefits, which provide financial support to workers who are laid off or lose their job.
How does your full-time job factor into this?
Your full-time job has no direct impact on how you report the income you earn from side gigs. Your full-time job also won’t count towards the $30,000 threshold for registering for a GST/HST number.
However, having two (or more) sources of income means you could find yourself in a different tax bracket and you could have to pay more tax this year than you did last year.
Take advantage of extra time to prepare your return.
Earning self-employment income makes your tax situation a little more complicated. Luckily, the CRA and Revenu Québec give you a few extra weeks to file your return. Your deadline to file is June 15.
Keep in mind that if you owe federal taxes, your payment is still due on May 1, 2023. If you’re a Québec resident who owes the provincial government money this year, the deadline to pay your balance is May 1, 2023.
If you and your spouse are preparing your returns together and only one of you is self-employed, you can still file both returns by June 15 as long as any balance owing is paid by May 1.
If you file late and you owe taxes to the government, the CRA and Revenu Québec (if applicable) charge interest and late-filing penalties on the amount you owe. Visit this H&R Block Online Help Centre article for more information on what happens if you file your return late.
What happens if you get audited?
There are a few things that the self-employed can do to trigger an audit.
People who are self employed and don’t receive a T4 slip from an employer have a higher likelihood of getting audited, for a few reasons. One is that checking someone’s income against their work T4 is pretty easy – it either adds up or it doesn’t, so it’s harder to make mistakes or hide other income if a company is also sharing wage information with the CRA. Secondly, self employed income isn’t taxed at the source, meaning you're doing calculations on your own income and then paying the government what you think is your tax burden. It has more room for error.
Your tax return is way more or way less than it was in previous years.
For whatever reason, you’re claiming you earned more or less than you have in previous years running your business. It could be pandemic-related, supply chain related or just the amount of time you had available to dedicate to your business. Whatever the reason, if you know you’re filing for way more or less this year, just be prepared for an audit. See below about record keeping.
In previous years, you’ve had tax returns with errors.
If you’ve erred before, the CRA could suspect you’ll err again. There is a good chance you’ll be on a list for years to come, so be prepared in advance for that audit notice.
Your claims seem excessive.
Many people claim their home office or vehicle as a business expense, but if yours seems like it’s too high to make sense, the CRA will check into it. For example, you might have a dedicated home office and claim that space, which is usually based on square footage of the room compared to the house. If you’re claiming one floor of your house as the office, you’re likely to talk to the CRA. Or, if you are an Uber or SkiptheDishes driver, you’ll definitely claim car expenses. But if you claim 100% of your cars use as a business expense, the CRA is going to want to speak with you. It’s pretty rare that you’d only use your car for work and nothing else, you see? Anything they might find fishy, as compared to your previous filings or others in your situation is likely to raise questions.
You're claiming losses from your business year after year which you are using to reduce income from other sources.
If you are continually claiming business losses, the CRA will want to make sure your business is in fact a commercial enterprise.
The CRA randomly checks a certain percentage of returns.
You might just be an unlucky one!
What’s the first indication the CRA is auditing you?
An auditor will contact you by mail, phone or both. And – scam check – they won’t text you or email you. While we’re on the topic of scams, they also won’t ask you to pay with a gift card or cryptocurrency, so if you get a call like that, hang up. The CRA doesn’t use pressure tactics to get funds from you, and especially not before an audit takes place.
What does the auditor need?
The auditor may ask to do the audit at your office, home office or your representatives office. If not, they’ll conduct it at a field office. If the office is not in your region, they’ll ask you to send your documents in. Here’s where your expert record keeping comes in.
Ultimately, they want to see your records so they can ensure they match with what you put into your return. This could include seeing invoices, receipts, past years’ filings, credit history, property ownership information, spouse or common law partner’s return or anything else indicated on your return. Be patient, as the auditor might need further information or clarification from you.
Agree or disagree.
Once the auditor looks through your information, they’ll either confirm that your initial filing was correct, provide you with a letter of completion and close your file. If they find inaccuracies, they will file a notice of reassessment which will tell you how much more you owe – or how much your refund is increasing, though that’s an unlikely scenario. You don’t have to wait for this notice though; the auditor can tell you how much it will be so you can pay it without waiting.
And if you disagree with their findings, you can file an objection. But note that you will need to provide further documentation to prove your claim. You have the later of one year after the filing deadline for the tax return and 90 days from the mailing date of the Notice of Reassessment to file an objection. If your objection is disallowed, you can appeal to the Tax Court of Canada.
Tips to avoid being audited
Here are some things to keep in mind so that you can avoid being audited, or be insanely prepared for an audit should one arise.
- Excellent record keeping. All business owners know that they should keep their records, invoices, receipts and any other financials in clear and accessible order, and that the government requires you to keep these records for 6 years. But in practice, things might get busy, or might move around. There are excellent record keeping software products available to help manage. If you’re using electronic records and filing, ensure you have a backup hard drive or cloud storage in case anything happens to your tech. And if you’re using paper copies, we recommend backing them up on your computer as well, just in case.
- If you can avoid being a cash-based business, do that. If you’re a cash-based business in this day and age, the CRA is likely to take a closer look at your return. Reason being, cash is rare, and electronic point-of-sale is much more common. However, businesses like hair salons and restaurants are often cash-based or at least more balanced between cash, debit and credit payments. And though you may walk the straight and narrow line of the law, others before you have taken advantage of cash payments and not claimed total revenue, so the CRA is aware.
- Don’t have an unreasonable amount of family members on the payroll. Are your parents, spouse and children all accountants in your law firm? Are they really? It’s strange that your son Rick is both an accountant and a full time mechanic. If too many people in your family are paid and claimed employees of your business, and especially if they have other sources of income, the CRA might check in on that.
Side gigs might be a great way to earn some income, but they also make figuring out your tax situation more complex. That’s why we’re here! Get help from the largest network of reliable Tax Experts by choosing one of four convenient ways to file: File in an Office, Drop-off at an Office, Remote Tax Expert, or Do It Yourself Tax Software.