Freelancing has become a popular career choice for many Canadians, offering the freedom and flexibility to work on their own terms. However, with this freedom comes the responsibility of understanding and meeting your tax obligations as a freelancer. In Canada, freelancers are considered self-employed and must take responsibility for reporting and paying their own taxes.
As a self-employed individual, you must report all of your income on your tax return and pay income tax on that income. Your income tax rate will depend on the amount of income you earn and the province in which you reside. It is recommended that you set aside a portion of each payment you receive to cover your tax liability, as you will need to pay income tax on your earnings at the end of the year.
In order to accurately calculate your income tax liability, it is important to keep detailed records of all of your income and expenses. This includes any money earned from freelance work, as well as any other sources of income.
Expenses related to your freelance business can also be deductible when it comes to calculating your tax liability. Some of the expenses that you may be able to claim include:
Business supplies and equipment
Home office expenses
Marketing and advertising expenses
Professional development expenses
Software and subscription expenses
It is important to note that you can only claim expenses that are reasonable and directly related to your freelance business. Additionally, you must have receipts or other documentation to support your claims.
Canada Pension Plan (CPP) Contributions
As a self-employed individual, you are responsible for paying both the employee and employer portions of CPP contributions. The current rate for CPP contributions is 9.9% of your earnings, up to a maximum annual earning amount of $63,600 in 2022. You are required to make CPP contributions on your earnings if you are between the ages of 18 and 70 and are earning self-employment income.
CPP contributions help to provide retirement, survivor, and disability benefits to eligible individuals. The amount of CPP contributions you need to make each year is based on the amount of income you earn from your freelance business.
Employment Insurance (EI) Contributions
Self-employed individuals are not eligible for EI benefits, but they are still required to pay EI premiums. The current rate for EI premiums is 1.58% of your earnings, up to a maximum annual earning amount of $58,700 in 2022. You are required to make EI contributions on your earnings if you are earning self-employment income.
EI premiums help to provide benefits to individuals who have lost their job through no fault of their own. As a self-employed individual, you are responsible for paying the full premium amount, as there is no employer portion.
If your freelance income exceeds $30,000 per year, you are required to register for the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) and collect and remit HST/GST on your sales. If your income is below $30,000, you may choose to register for the HST/GST voluntarily.
When you register for the HST/GST, you will receive a business number, which you will use to report and remit the HST/GST that you have collected on your sales. If you have customers in different provinces, it is important to be aware of the HST/GST rates that apply in each province.
As a freelancer, it is important to keep accurate and organized records of all of your income and expenses. This includes invoices, receipts, and any other documentation that supports your tax claims. Keeping detailed records not only helps you accurately calculate your tax liability, but it also helps you to identify any potential deductions or tax credits that you may be eligible for.
In addition, you should regularly review your records to ensure that you are meeting your tax obligations and to identify any areas where you may need to make changes. This could include updating your invoicing processes, making changes to your expense tracking, or making adjustments to the amount of tax you set aside each month to cover your tax liability.
As a freelancer in Canada, it is important to understand your tax obligations and to take steps to meet those obligations. This includes reporting all of your income, paying income tax, making CPP and EI contributions, registering for the HST/GST if required, and keeping accurate and organized records of your income and expenses.
By taking the time to understand your tax obligations and to properly manage your finances, you can ensure that you are meeting your obligations and maximizing your deductions and tax credits. If you have any questions or concerns about your tax obligations as a freelancer, it is recommended that you speak with a tax professional for guidance and advice.