To work independently is more popular now than ever before. There are millions of Canadians and Americans who work full time as consultants, freelancers and as owners of tiny one-man businesses. While working this way can be greatly empowering, there are certain compromises that one needs to accept. A slightly difficult tax filing process is one of the areas that present a challenge.
When you just work a regular job at a company, you only need to fill out a tax return and you’re done. When you work for yourself, though, there’s far more to filing a tax return than this. The upside of the deal is that independent workers get many more deductibles than people who work for others. Any business travel or money spent on office equipment and supplies, for instance, is a possible deductible.
If this is your first year filing taxes as an independent worker, this is what you need to know.
If you are the sole proprietor of your business you need to file a regular tax return including a Schedule T2125 Statement of Business Activities to report whether your business has been profitable. The Gross receipts or sales field on the first line of the Schedule T2125 form asks for information on the income made through the previous tax year. Your annual revenue, as evident in your clients’ invoicing, needs to appear here. The CRA expects you to keep track of it all – cash, checks or anything else (including barter transactions).
Independent workers are only expected to pay taxes on their net profits. If you can keep track of every business-related expense you make over the year, the Schedule T2125 is a very generous tax form. It gives you many ways to reduce your taxable income with deductible expenses. Here are a few examples of the kind of business expenses you get to deduct.
Travel expenses – When you need to travel to another city for business, the plane tickets, airport parking, hotel rooms and restaurant meals are fully deductible.
There are fixed allowance limits for travel expenses of different kinds. If you often drive on business, for instance, you are allowed a deduction based on the percentage of business kilometers compared to total kilometers driven in the calendar year (this is all you get for everything you spend on the car – for gas, wear and tear, insurance and so on).
Office expenses – Guide T4002 details what you get to deduct of your office-related expenses. In general, anything that you spend on office equipment, furniture and consumables is acceptable. With large purchases that last years, the convention is to amortize the cost of each purchase over its life.
Miscellaneous deductions – There are many other areas that offer potential deductions to the independent sole proprietor. If you buy individual health insurance for yourself or your family, the premiums paid are completely deductible. Gifts to other businesses and contributions to a tax-deferred retirement plan are possible deductions, too.
If this is your first filing, you could get overenthusiastic about putting in every claim you can think of. It is generally considered a good idea to be conservative about the deductions you claim, though. If you have a question about whether something is deductible, you need to find a good tax preparer familiar with freelancers and small business to help navigate these complex laws. Poorly thought out deductions could invite a CRA audit.
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