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No matter what you do for a living, one thing is sure. Eventually, you will have to pay taxes on the income you earn throughout the year. Typically, the more money you make, the higher your annual income tax bill will be. However, your tax return will also be greater and you may even be eligible for some benefits that others aren’t.
That said, what some taxpayers might not realize is that you’ll have to file a different tax return if you’re not an employee of a traditional business. In fact, if you’re a consultant, freelancer, or another type of contract worker, paying your income taxes may be a bit more complicated.
As mentioned, there are a few significant differences between paying taxes when you’re self-employed and when you’re on a company’s payroll.
For instance, paying taxes is a bit easier for the average full or part-time payroll employee because their employer will simply deduct a portion of their bi-weekly paycheck and send it to the Canada Revenue Agency on their behalf. Afterward, the employee only needs to file their T4 slip and wait for their return.
On the other hand, consultants and other self-employed individuals must monitor their own earnings and figure out exactly how much they owe the CRA per annum. In turn, they must have the appropriate funds set aside when tax season rolls around, rather than having their income deducted in automatic installments.
According to the CRA, these are the 4 key components you would use to determine whether you qualify as a consultant or payroll employee:
Now that you’re able to figure out if you qualify as a consultant or payroll employee, let’s talk about some of the personal and financial advantages that come with both statuses, whether they relate to taxes or not:
All this said, being a consultant may have more disadvantages than being a payroll employee because you won’t qualify for any sort of medical or financial benefits, including job security. If and when your payer needs to make cutbacks, your contract will probably be one of the first to go, while a payroll employee can file unemployment.
As mentioned, perhaps the main disadvantage of being a payroll employee is that you’ll have less flexibility in terms of how much income you’re making, what hours you work, and who you work with. You also have less control over how much you’ll pay in taxes and how large your return will be every year.
Check out these tax tips for independent contractors and gig workers.
Remember, if you’re an independent contractor, your taxes won’t automatically be deducted from your paycheck throughout the year, so you must save up as much money as possible before the next tax season arrives.
Although the specific amount you need will fluctuate according to how much revenue you pull in, it’s recommended that you save up at least 25% of your total earnings. You can also get a basic estimation by finding out which tax bracket you fall into.
Here’s a quick look at the federal tax rates and brackets for 2022:
Tax Rate | Description |
20.5% | After $50,197 the tax bracket begins |
26% | After $100,392 the tax bracket begins |
29% | After $155,625 the tax bracket begins |
33% | After $221,708 the tax bracket begins |
These days, the vast majority of Canadian workers would still qualify as payroll employees. Then again, the last few years have seen a significant surge in the realm of self-employment, especially in the months following the COVID-19 pandemic.
So, if you’re thinking about taking on some independent contract work or starting your own business entirely, it’s also essential to be aware of the main tax advantages and disadvantages that are associated, such as the ones below:
In the end, there are both benefits and drawbacks that come with paying taxes as an independent contract worker. Although you’ll have to file all the necessary paperwork on your own, the process is relatively simple. Here’s how you get started:
The first thing you must do is fill out Form T2125, otherwise known as a Statement of Business or Professional Activities. This form will help you to declare any income and expenditures you made from self-employed commission sales. On it, you will find various spaces to identify things like:
Before you get started, keep in mind that the exact documentation you’ll need to file during tax season will differ according to how much income you’re earning, as well as the general financial state of your business.
While you may have just finished paying your federal income taxes, it’s good to have an idea of what your income and employment situation will be like when the next fiscal year comes to an end. If you’re having trouble with this, it may be wise to speak with a certified professional so you can pay your tax bill without a hitch.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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