Filing a tax return with self-employment income requires more due diligence than filing with only employment income.
Self-employment income is scrutinized more closely and audited more regularly by the Canada Revenue Agency.
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As an employee, all of your required income information is found on a single slip (i.e. a T4 slip) provided by your employer. If you are self-employed, gathering the information you are required to report isn’t always easy. As well, there are rules and requirements a self-employed taxpayer must follow that do not apply to employees.
Here are some important things to consider when you have self-employment earnings to report:
It is particularly important for self-employed taxpayers to maintain organized records of income and expenses each year, especially if business use of home amounts are being claimed. The CRA often asks taxpayers to provide support for reported amounts, and if the information is well organized it makes this task significantly easier (and increases the likelihood of CRA ruling in your favour). This can be challenging when business expenses are mingled with personal ones (e.g. using one credit card for business and personal expenses), so proper record keeping is a must.
Business Use of Home
Self-employed individuals may be able to deduct a portion of their repair and utility bills, property taxes, and mortgage interest if a portion of their home is dedicated to business activities. The CRA allows a deduction based on the area of the home used for business, so if you have a 100 sq. ft. home office in a 1,000 sq. ft. house, you can effectively deduct 10% of the annual cost of home ownership from your business income earned in the year.
Canada Pension Plan (CPP) and Employment Insurance (EI)
Generally, self-employed workers are not required to remit EI premiums as they are not eligible to claim EI benefits. However, there are special EI benefits available to self-employed taxpayers in certain circumstances, including:
- Maternity/parental leave;
- Leave for illness or injury; or
- Compassionate leave (taking time off work to care for a critically ill relative)
In order to qualify, you must register and begin paying premiums at least 12 months in advance of applying for benefits.
As a self-employed individual you are required to remit both the employee and employer portion of CPP. The amount of CPP owing is calculated during preparation of your return, and amounts due must be remitted by April 30th .
Should You Collect GST?
Self-employed individuals may have to charge their customers GST if they have more than $30,000 of taxable sales in the year. This requires the taxpayer to register a GST account with the CRA, file an annual (or quarterly) GST return, and remit the taxes collected. If you are required to charge GST from your customers and fail to do so, you will be required to pay the tax out of your own pocket.
In recognition of the additional time required to organize records and paperwork, the CRA provides self-employed taxpayers a later filing deadline (June 15th ). This deadline also applies for GST returns, if required.
Note that amounts owing to CRA by self-employed taxpayers (including income tax, CPP, and GST) are due by April 30th (even though your tax return isn’t due until mid-June!), so remitting an estimated amount of taxes owing by April 30th is a good idea if you wish to avoid interest charges.
Any over-remittance will be refunded by CRA once they have assessed your return. Spouses of self-employed individuals also have until June 15th to file their returns, but the same April 30th payment deadline applies.
Having your return professionally prepared reduces your risk of being audited by CRA and eliminates the hassle of preparing the schedules on your own.