The tax rules for self-employed workers are more complex than they are for employees. It’s normal to have questions when doing your taxes. What expenses are deductible? What do should you include? Do you need to collect and remit sales tax? Our experts have the answers.
Here are three situations that apply to both salaried employees and people who are self-employed:
The T2125 form for people who are self-employed (and the TP-80 for Quebecers) is like an income tax return for your business. Include it with your basic return.
You’ll need to indicate:
By subtracting your expenses from your income, you’ll get your net business income.
Have your invoices on hand
When preparing your tax return, you’ll need to look at all of the invoices billed to your clients over the course of the year. By adding all those amounts together, pre-tax (if you have to charge tax), you get your self-employed income. That’s your total business revenue. It’s the amount you indicate on the forms for people who are self-employed.
A note about tax: If you’re newly self-employed and you make less than $30,000 a year, you can choose to not sign up for GST and QST, in which case you won’t have to charge them to your clients. Some services, such as medical services, aren’t taxed. Find out what applies to your situation.
As someone who’s self-employed, you obviously have work-related expenses. To calculate your taxable income, you have to deduct expenses from your revenue. Here are the rules you’ll need to follow.
All expenses aren’t necessarily eligible. Be sure you understand and follow the rules so you don’t run into any trouble if you’re audited and won’t have to pay extra tax plus interest.
The basic rule is simple: to be eligible, an expense must allow you to generate income.
You can deduct workplace-related expenses, the materials needed to produce your goods or deliver your services, and your office supplies, for example—all according to certain conditions.
Your eligible expenses include:
Good to know: It’s a good idea to take out disability or life insurance to protect your loved ones in the event of your death. But because these kinds of insurance don’t allow you to generate income (i.e., help you make money), they’re not deductible.
You can deduct some of the costs involved in business development.
The rule is always the same: the expenses must help you generate income. If a tax inspector audits your expenses, your receipts for meals out with friends probably won’t make the cut. Note also that business development expenses are only 50% deductible. They can include meals at restaurants with clients, as well as tickets for shows and sporting events if they’re used to build business relationships.
To be able to deduct residential expenses, you need to meet at least one of the following two criteria:
If either applies to you, you can deduct a number of residential expenses, such as:
But not your mortgage! Only the interest on your mortgage is considered an eligible expense.
You’ll need to calculate the percentage of your home that you use for work. For example, if you work in your office and it takes up about 15% of your total home space, you can deduct 15% of eligible home-related expenses.
Good to know: In some situations, an expense that’s entirely related to working from home can be 100% deductible, such as renovating your home office.
If you use your personal vehicle for work, you can include certain expenses in the deductible expense column. Regular commuting costs cannot be included.
You’ll need to keep a record of your mileage, with notes of your trips indicating the reason for each in case you’re audited by Revenu Québec or the Canada Revenue Agency. Just like you have to calculate the area of your home that you use for work, you’ll need to calculate the percentage of your vehicle use that’s work-related. You can then apply that percentage to all of your vehicle expenses, such as:
You can include what’s called “capital expenditures” in your company budget. Capital expenditures are for items that you’ll use for many years and that require a significant investment, such as a car or computer. They can also be for work done to improve such items.
Instead of deducting the entire expense in a single tax return, you’ll need to amortize the amount. Revenu Québec and the Canada Revenue Agency have predefined percentages for calculating amortization based on item category. The longer the lifespan of the item, the lower the percentage you’ll be able to apply.
If you’re filing a tax return as someone who’s self-employed, you’ll need to have your bookkeeping in order. There are a number of programs and apps that allow you to record expenses and revenue quickly and easily, often with your smartphone. Ideally, you should be keeping track of your expenses throughout the year to avoid any headaches when it’s time to file your return.
There aren’t any rules in this regard. Everyone has the right to do their own taxes or to have a professional do them. If you’re well versed in accounting, you could save money by doing them yourself, but if you make mistakes or fail to apply all of the rules to your advantage, you could end up paying more taxes than you actually owe. There are programs that make filling out your tax return easier, but some of the calculations are fairly complex and there are a lot of rules you need to know. When in doubt, trusting a good accountant is always a good option.
Being self-employed gives you more freedom in some ways, but it also comes with more responsibility. You must file a tax return based on your work situation. If you need help with tools and techniques that will make it easier to do your taxes, talk to our team.
We’re here to answer all your questions.
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