Tax Tips For Gig Workers In Canada

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Tax Tips For Gig Workers In Canada

Written by Veronica Ott
Fact-checked by Caitlin Wood

Tax Tips For Gig Workers In Canada

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Canada Gig Workers Taxes

Many Canadians are capitalizing on a boom in freelance positions and side hustle gigs to earn some extra income while enjoying the flexibility to set their own work guidelines and standards. However, one challenge for freelance workers is that any extra income they earn is subject to taxes. Freelance taxes apply to self-employed individuals, freelancers, and sole proprietorships.

Do I Have To File Taxes As A Gig Worker?

Regardless of the amount earned from your side hustle, you are required to report it to the CRA when tax season comes around. By the definition of the law, any act of purposely not reporting income is considered tax evasion. 

While it is unlikely that the CRA will come after you for very small amounts, it is better to be on the compliant side and abide by tax legislations. One day you might be earning more money so you may as well take the time to learn about how gig workers are taxed now when your income is small. 

Gig workers can invoice under their own name as there is no legal obligation to register a business for freelance work. However, if you choose to invoice under a business name then that business must be registered in the province you are operating in.

Plan Your Taxes

Regardless of whether you are self-employed, a freelancer, or are taking on gig work as a small business, it is crucial to keep a record of all income and expenses. Expenses related to the course of carrying out your business can be deducted from gross income to allow you to save on taxes. For example, an Uber driver can deduct expenses on their vehicle from the money that they earn driving with Uber. 

It is important to stay organized, as expenses incurred while working on your gig may sometimes be forgotten about if your general practice is to compile everything at the end of a week, month or even year. There are numerous apps and online tools to help you keep a digital version of all your receipts and to help you track your business income and expenses.

It is also highly recommended that gig workers separate their business and personal finances. For starters, it can help your small business seem more legitimate to clients while allowing you to keep a better track of business income and expenses. By separating the two, you can avoid the headache of having to sort through your personal spending to find business expenses when tax season comes around. 

Also, expenses are more easily justifiable to the CRA as there would be less confusion about what is a business deduction and what is a personal expenditure. In the world of tax, it’s a big no-no to deduct personal expenses against self-employment income. 

Deduct What You Can

Depending on how your business is classified, different deductions may be available to you. You might have to do some research to determine what category you fall under. 

For example, if you are renting out your property on Airbnb you may be considered either a hospitality business operator or a landlord depending on the services that you provide during your guests’ stay. If you simply provided your guests with access to the property, then you would be considered a landlord and any money earned is rental income. But should you provide services such as breakfast, laundry, or cleaning, it would be considered a hospitality business. The scope of your services will determine the classification of whether the income generated from your home is considered to be rental income or income from a hospitality business in this case.

Continuing with the same example, money earned from Airbnb arrangements considered to be rental income will allow you to claim housing expenses. In this case, expenses such as mortgage interest, utilities, property tax, maintenance, and repairs are all eligible deductions. 

Need some funding to cover a business expense, check out the types of loans available for gig workers.

However, one thing to keep in mind is that expenses will need to be prorated so that the amounts are proportionate with the part of your home that you rent out and the length of time for which it was rented out. For example, if you only rented out half of your home for six months of the year, only 25% of the total eligible expenses can be deducted (50% for half of the space rented x 50% for half of the year).

This might seem like information overload so another option is to hire an accountant when tax season arrives. If you choose this option, keep all of your invoices and receipts, including personal items. Those will be used by an accountant to minimize your taxes

Quarterly Tax Installments

For freelancers who earn more than $30,000, it is required that they register for a GST or HST account, once they surpass that threshold. To clarify, only freelance income is applicable toward this threshold and income from regular employment is not considered as part of the calculation.

If you pay annual taxes of more than $3,000 as a gig worker, you’ll be required to pay your taxes in quarterly instalments. The only exception to this rule is if you live in Quebec. If your tax owing is $1,800, you’ll be required to pay tax in instalments. With a GST or HST number, you will need to start collecting taxes on your gig work. The applicable tax rate is based on which province your client’s tax base is in. For example, a Toronto business would charge their client in Montreal the GST rate of 5% for Quebec.

GST or HST that you collect must be paid to the government. The good news is, you can reduce the amount that you owe the government by the amount of GST or HST you paid toward business expenses. Again, keeping a record of all your invoices and receipts will help you calculate the GST or HST payable. 

Filing Your Taxes

The deadline for filing self-employment income to the CRA is June 15, 2020, and the payment date for the current tax year is September 1, 2020. These are not the normal deadlines, but these dates are in place currently due to the COVID-19 pandemic. 

You will be taxed on your net income which is your total income minus all eligible expenses. In addition to filing the T1 form, you will also be required to fill out the T2125 form which is the Statement of Business or Professional Activities. This form will outline all of your business activities including income and expenses. 

Something to keep in mind is that expenses will be prorated for the portion of the expense that was dedicated to your business. For example, if only 25% of your cell phone usage was related to freelance work, then only 25% of the cell phone bill would be considered to be a deductible expense.

Click here to see general tax filing concerns self-employed individuals have. 

Frequently Asked Questions

How much money should I set aside for my taxes?

Typically, the rule of thumb is that you should set aside 25% of your income for taxes. If you are in a higher tax bracket or collect GST/HST, then you may want to set aside a bit more, closer to 35%.

What if I have American clients?

Income generated from clients outside of Canada still needs to be reported to the CRA but these clients do not need to be charged GST or HST. However, it is recommended that foreign income be separated in the event of an audit.

Should I do my taxes myself?

You should consider working with a tax professional or accountant if you are new to self-employment or have complex income and expenses. Tax professionals and accountants can help minimize your tax payable and maximize the benefits that you are entitled to. However, understanding the taxation system in Canada is a powerful tool, especially as a business owner or self-employed individual. If your income and expenses are quite simple, it might be worth your while to take a stab at filing your taxes on your own. As your business grows, your knowledge of taxes will grow, making you a stronger entrepreneur. 

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