The Born Freelancer On Filing Self-Employed Taxes

This series of posts by the Born Freelancer shares personal experiences and thoughts on issues relevant to freelancers. Have something to add to the conversation? We’d love to hear from you in the comments.

Death…and taxes.

Both are said to be inevitable but only one requires you to file an update every year.

Well, so far as we know.

Tips on filing self-employed taxes

I’ve been filing my own self-employed business taxes all of my working freelance life. With the tax season rapidly approaching I thought I’d offer you a few of my personal favourite tips and associated thoughts on filing your taxes as a self-employed professional freelancer. I hope they will be of particular interest if you are new to the whole process and might act as an introductory springboard from which you will further investigate how best to prepare your own taxes.

Read the CRA’s business and professional income guide

A good place to start!

You can download it from the CRA website or read it online or even phone them to get the CRA to mail a hard copy to you for free. This is their complete guide for filing business income tax and it contains most—if not all—answers to your questions about filling out the requisite business income forms (which you can also find the same way).

Its information is very densely packed and sometimes very technically worded so don’t be intimidated by it. Read and reread it slowly at first, section by section and take frequent breaks as you do so! You will eventually be able to make some kind of sense out of it…hopefully.

Call the CRA with questions

On the other hand, sometimes the tax guide and the business income forms they ask you to fill out seem so densely worded they cause the words to fly around the room as you go cross-eyed. What do they mean? What am I supposed to do? How can I possibly be expected to understand this foreign language?

Often a phone call to the CRA can straighten out any basic misunderstanding of their tax forms or tax guide. Make sure to call a business inquiry line (listed on their website).

Be prepared for frequently long waits on hold (especially as tax time approaches) but eventually you will get the answers you need from a helpful agent, completely free of charge.

Hard to beat the price.

File on time

This seems so obvious but sometimes it is the obvious that is most easily overlooked. You can always correct or amend a submission but if you fail to file on time—and owe them money—you may be subject to fines that you could have so simply avoided.

Also, filing on time means being potentially eligible for various tax breaks and refunds for, which you would not qualify otherwise.

We self-employed freelancers don’t have to file until June 15th here in Canada, but I always file at the end of April like everyone else. Most HST/GST reports are due then as well so it makes sense to me to get it all done and sent off together.

Get an HST/GST business number

This is a very useful thing for the working self-employed freelancer to have. (If your annual income is under $30,000 it is optional. Above that amount it is a legal requirement. See the CRA website for up-to-date details).

Come tax time it can help you get another refund (if you qualify). It also helps characterize you as a professional as you will charge your clients HST/GST and have the necessary business ID number with which to do so.

If you don’t have one you should look into it even if you don’t yet legally require it. Registration will cost you nothing. The only downside is a bit of extra paperwork.

Filing/keeping receipts

This is vital for any working freelancer filing business income tax. Any expenses directly related to making an income are potentially deductible but receipts must be scrupulously kept.

I find it best to ask for a receipt for everything I buy. When I get home I can discern if it has any business application and is therefore potentially deductible, either wholly or in part. Then all usable receipts must be categorized and carefully sorted, ready to incorporate into your annual tax filing.

All receipts must be kept at least seven years in case the CRA wants to audit you. A durable method of keeping your receipts safe and organized must be created (such as obtaining a filing cabinet or plastic storage “tubs” etc.). It too should be deductible. Digital or digitized receipts should be securely backed up.

Segregate the work area in your home

One of the most useful tax deductions for the working freelancer is, in part, a result of work space in the home being dedicated entirely to operating your business.

An example: If you have a room in which you do all your writing and it occupies a tenth of your entire home floor space, you could potentially be able to deduct 10% of certain “home as business” expenses.

See the CRA business income tax guide for details.

There are different ways to calculate this but the designated space must be used for work only. You can’t claim the space occupied by the kitchen table even if you do use it to write on (after breakfast).

And anyway, having a dedicated work space should only improve your work and increase your productivity as you will face fewer distractions.

Well, that’s the theory.

Join a professional organization

Joining a professional organization like the Canadian Freelance Guild has numerous advantages (including more in-depth tax guidance, see CFG membership details). It may also help to further recognize and designate you as a genuine working freelancer and not just as a “hobby” freelancer.

The CRA frowns upon the latter and may disallow certain self-employed tax advantages if they feel you are not genuinely trying to make a living in your freelancing capacity.

Membership in such a relevant professional guild or organization should also be tax deductible.

Consider incorporating

There are numerous advantages to this if you are making enough to warrant the expense of filing incorporation papers. It’s also useful in the event you are working with partners as it legally binds you together. It can reduce your taxes and offer you protection from creditors amongst other advantages.

Whether you need to do it or not is best advised by a professional accountant.

Very few freelancers I know have incorporated. Those few exceptions that did are in partnerships doing extremely well, financially speaking.

Get an accountant

Does it all seem too much? Would you rather drill holes in your eyes with a rusty spoon than look at another income tax form? Perhaps you should consider getting a professional accountant who specializes in our unique tax status to file your taxes. (CFG members should contact the CFG for more specific advice.)

Something like half of the working freelancers I know use one. They will give you solid expert advice and relieve you of the headache of actually filing your taxes.

You will, however, still be responsible for keeping all your receipts and supplying your accountant with all the paperwork they will need in order to do the onerous work on your behalf.

It will cost you for their expertise but, since you are employing their services in aid of your work life, you should be able to deduct their fees.

Alternatively, going to a commercial tax filing franchise or free public pop-up tax clinic might or might not prove helpful. Most of these services are not necessarily trained to specialize in our specific self-employed tax problems. If you go to one, ask first before you commit to them helping you.

The takeaway

Filing your annual taxes is just another aspect of being a professional working freelancer.

It might not be the most glamorous part of our careers but it is one of the most important. It must be taken seriously and treated with the utmost care and attention. The real secret is to be as prepared and organized as possible and to leave yourself plenty of time in which to do the required calculations without panicking.

Unlike conventional nine-to-fivers we are favoured with many tax advantages they do not get.

The most obvious is our ability to deduct certain expenses that can be proven to be necessary in order to conduct our business and make an income.

I would like to add a final word of caution not to abuse this aspect of our tax circumstances. Reject any well-meaning but ill-founded suggestions to be more aggressively indiscriminate in your choice of expenses to deduct. Include only those deductions you feel 100% confident are legitimate and would withstand the scrutiny of any possible future CRA audit.

Not only will you be doing the right thing (legally) but you will be able to sleep better at night too.

Priceless beyond any deduction.

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What tax tips do you favour? Have you had any memorable experiences filing your self-employed taxes? Please share them with us using the comments feature below.