What Self-employed Contractors Need To Know About Taxes?
As an independent contractor, you can forget the standard 9-to-5 and set your own hours. Rather than earning an annual salary, it’s up to you to set the price of your work—and to sell it. Instead of receiving assignments from a manager, you get to choose who you work with and what type of work you do. Working as an independent contractor can provide you with great freedom when it comes to your schedule and income, but it can also make things more complicated during tax season. Understanding your income tax claim as an independent contractor can ensure that your business runs smoothly year-round and prevents costly surprises when tax payments are due.
Here are some of the things self-contractors need to know about taxes:
If you’re a sole proprietor or self-employed contractor, you must fill out your T1 General, that’s your standard personal income tax return.
You must also complete a separate T2125 “Statement of Business or Professional Activities”. This is where you specify:
The legislated deadline to file an income tax and benefit return for self-employed individuals and their spouses is June 15.
When it’s time to file your return, don’t risk your reputation and your business by intentionally underreporting your income. If you get caught evading tax, you may face fines, penalties, or even jail time. It’s not worth the risk.
If you owe tax or have to pay tax by instalments, take advantage of pre-authorized debit. This service lets you set the payment amount and dates in advance for the CRA to withdraw money from your account at a financial institution. A bad year can challenge your cash flow. If you are unable to pay all of your balance owing, you might be able to set up a payment arrangement using pre-authorized debit. To learn more about your payment options, go to cra.gc.ca/payments.
If you earn more than $30,000 a year (or four consecutive quarters or a single quarter) you also need to charge and collect GST/HST.
You then need to file GST/HST returns to the CRA. When you register for the GST/HST, the CRA will usually assign an annual reporting period. However, you may choose take advantage of optional reporting periods as well.
Business Expenses for tax deductions
As a self-employed contractor, it’s up to you to keep track of your income and deductions to calculate the taxes you will owe to the Canada Revenue Agency each year.
On your T2125, you report your business income and the expenses you can claim to reduce your taxable income. These expenses include but are not limited to:
Accounting, bookkeeping, and tax preparation fees
Keep Your Books
Running your own business means deducting the tax from your profits on your own. When you work for someone else, it’s their responsibility to deduct the tax amount from your salary. But when the profit and everything belong to you only, you will be the one keeping all your books. Yes, it sounds pretty hectic to do it all on your own. And that is why it is always recommended for sole proprietors or self-employed people to hire a professional bookkeeper.
We hope this information gave you a foundation for knowing how to file your taxes. However, from big businesses to small businesses to independent contractors, we understand that the tax process is intimidating.
At DM Tax Accounting Services, we’re experts in independent contractor tax laws. Our goal is to make tax season easy and stress-free for you while helping you minimize the amount of taxes you have to pay by ensuring that you maximize your deductions. Contact us to get things started.