Are you a freelancer or have a side hustle?
Are you prepared for the upcoming income tax filing for 2020?
Being a freelancer or having a side hustle means you are self-employed and need to report this income to the Canada Revenue Agency (CRA) no matter how small the amount. There are consequences of penalties and interest for not reporting. So, how do you keep on the good side of CRA?
The good news is CRA allows self-employed taxpayers an extension to file their tax return to June 15th, which gives you more time to prepare. The bad news is, if you owe income tax, that tax needs to be paid by April 30th, so you’ll need to know ahead of time if you’re going to have to pay tax.
Keeping records of the income earned and expenses incurred in your business is a key part of planning ahead. This can take many forms, but what’s most important to know is that the expense will be disallowed if there is not supporting documentation. The documentation can be maintained by keeping paper or electronic copies of receipts. A summary of those expenses, and your income, will be reported on your personal tax return.
Our suggestion is to keep your record keeping simple. Anything complicated usually means avoidance. Friends may recommend an online system, but if thoughts of it scare you, then work with an Excel spreadsheet. There are many options and we are happy to have that discussion to find a system that will work for you.
The expenses to operate your business are deductible if they have been incurred in order to earn income and are reasonable. There are two areas that are not quite as simple: meals and entertainment, and auto expenses.
Meals and entertainment are only deductible at 50% of the expense and require more documentation than other expenses. For each receipt you need to include who you had the meal with and what the purpose of the meal was.
Auto expenses are only deductible when you are using the vehicle for business. CRA requires a log be kept to determine what is personal and what is business. Again, keep it simple. If you are joined to your smart phone, there are many apps that could be used. If this is not your area of comfort, a notebook and pen in the car will work as well. Whichever method you choose, use it and be consistent. Some other common expenses in any business, are office supplies, marketing costs, cell phone, internet, training and professional development, fees and business license.
CRA will also allow you a deduction for the use of your home, if you work from home. This deduction needs a careful calculation to determine the amount of space used for your business and then again tracking the expenses for the operation of your home. Items that can be used in this calculation could include the following: water, heat, hydro, insurance, mortgage interest or rent, property taxes.
Your personal tax return reports income from all sources. This includes your self-employed earnings. With COVID-19, the Government of Canada provided many financial supports. One of these supports was the CERB (Canada Emergency Response Benefit) and you may have received those payments, so you’ll need to be aware that the benefit is taxable and there was no tax withheld from the payments.
As a self-employed taxpayer, you also need to track your invoices to your customers. One, to accurately report the income on the statement of business activities on your personal tax return and two, to recognize when you need to register to collect GST (Goods and Services Tax). CRA requires you to register to collect GST in the quarter after you reach $30,000 of taxable goods or services.
Be prepared for your tax bill. We all get excited at the thought of a tax refund when you file your return. As a self-employed person this will not be the case, but you can be prepared. We recommend setting aside 15-20% of what you receive in a separate savings account. If after you pay the taxes owing there is some left, you have created your own tax refund! It will be hard to watch this balance grow. But you need to remain steadfast in saving these funds. It is no fun to receive a tax bill and not have a plan to pay it.
We know filing taxes can be hectic if you are not prepared. It is not too late. Our Tax Team will analyze the nature of your business and other income streams and ensure you are deducting all the expenses you can along with claiming any tax credits you are eligible for. Contact us today to find out more about tax preparation for your freelance gig or side hustle.
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Photo Credit: Nick Morrison on Unsplash.