Tax tips for freelancers
By Carys Mills
Freelancing can be scary, especially when you start trying to figure out your taxes.
J-Source talked to some tax and industry experts for some tax tips to get you started.
One of the first things to figure out is whether the work you do for an organization, or multiple outlets, makes you an employee or a business in the eyes of the government. This makes a difference when it comes to whether you need to collect HST and if you have deductible business expenses.
“We look at, first off, making sure that they’re self-employed versus employed,” said Doug Morgan, a Nova Scotia H&R Block franchise owner.
It might sound obvious. But some contracts or situations can make employment status a bit murky. For that reason, media union CWA Canada has put together a questionnaire for determining whether people are independent contractors or employees, which will be distributed at its Getting Treated Fairly at Work workshop in Toronto Wednesday night.
If you can’t choose where you work from or what hours you work, for example, you might be considered an employee and not an independent contractor, according to the 10-question checklist.
Income taxes and GST/HST
If you’re a freelancer, you’re essentially running your own business, which means you need to start doing some math.
“If you’ve determined you’re self-employed, you can’t just sort of bury your head in the sand … obviously you’re going to have tax to pay because no one’s remitting on your behalf,” Morgan said.
That means you need to figure out how much you’ll owe in income taxes at the end of the tax year and set it aside or pay it in installments. (Some general information about income taxes is here.)
As well, if you make more than $30,000 through your business in any one-year period, you need to register for a GST/HST account and charge that tax to the people you sell your work to, Morgan said. The exact percentage varies by province. In Ontario, it’s 13 per cent and in Nova Scotia it’s 15 per cent, for example.
Business owners can also register for GST/HST accounts voluntarily, even if they don’t ever expect to make more than $30,000 a year. There are a few factors to consider, though, including charging the extra fee and having to be on top of that paperwork.
Morgan said he’s heard some clients worry that will make the price of their work appear more expensive to clients, although large businesses should end up getting that money back themselves.
Amanda Mills, the founder of the Artbooks tax office for artists and entrepreneurs, in Toronto, said some of her clients prefer to be registered because it means their business expenses become exempt from HST.
What to do with HST
“HST isn’t money out of your pocket as long as you handle it well. Basically, every bit of HST that you get is not your money,” Mills said. “What I tell clients is, ‘Treat that money like a hot potato. Don’t let it land in the bank account. It’s not yours.’”
Mills said she advises some clients to pay the HST they’re collecting to the CRA each month, so they don’t end up spending the money.
“If you didn’t set it aside through the year, you’ve got issues,” Morgan said, adding another option is to pay the CRA quarterly or collect the money in a separate bank account.
“If you’re on top of your HST, it puts money in your pocket, it doesn’t take it away. A lot of people are confused about that,” Mills said. “The reason it puts money in your own pocket is because you no longer are responsible to pay for the GST on your (business) expenses any more. That’s the difference.”
She gave an example of someone buying a computer. If you don’t have your own business, you have to pay the GST. But if you have a business, a GST/HST account and the computer is a legitimate business expense, you can get that GST back, she said.
Whatever you do, keep track of your money, invoices and tax.
Morgan suggests seeing a tax professional to get things straight. Ultimately for HST, he said, people need to keep track of how much they collect and pay out. Keeping files of business expenses and invoices is also essential, he said.
Mills suggests freelancers create numbered invoices for all their work. Print at least two copies of each, she said—that way, one can be kept as a record and the other for accounts receivable to help keep track of what’s been paid and what hasn’t been.
Don Genova, a freelance food journalist and president of the Canadian Media Guild freelance branch, said he keeps every receipt “religiously.” That includes receipts for gas, parking, office supplies and grocery bills that include food he uses for work to test recipes.
“After the first couple years you realize what you’re spending on that qualifies as deductions and then you kind of organize yourself,” he said.
“It’s something that you do need to keep on top of because it’s very easy to get behind on it and then suddenly if you don’t pay on time, it’s like you’re throwing money out the door, if you’re paying interest and penalties.”