Freelancing gives you more career freedom but it usually means additional work at tax time. And if your records are less than stellar, you should take some time to get your receipts and invoices together to create an accurate record. Remember, every eligible receipt means less tax you have to pay, and since no one sent you a T4, you are probably going to owe money.
You will report your business income and expenses on a T2125 Form as part of your personal tax return. The good news is your return is not due until June 15 (although interest on any amount owing will still be calculated from April 30), but here are some tips so you are not scrambling at the last moment:
- Be reasonable: You are allowed to claim expenses that you incurred to earn business income. And you need to have receipts for your expenses.
- Keep a mileage log: There is no flat-rate mileage amount for freelancers. You need to keep a logbook to track your business kilometres and then calculate expenses based on the percentage you drove for business during the year. There is a simplified option but you have to have kept a logbook for at least a year before you can use it.
- Entertainment expenses: You can claim business lunches or other meals, but only 50 per cent are claimed as an expense. But your golf games with prospects or clients do not qualify.
- One connection: If you work from home and only have one phone line, the Canada Revenue Agency expects there to be some personal usage, so you cannot claim 100 per cent of the cost as a business expense. The same applies to your internet connection. You need a dedicated line or connection in order to claim the entire expense.
- CPP payments: If you earn more than $3,500, you will pay both the employer and employee portions of the CPP premiums. The amount will be calculated when you file your return, so you do not remit this separately.
- Installments: If you owe more than $3,000 in both the current year and one of the two prior years, the CRA will begin asking you to make tax installments rather than waiting until you file your return. If your income fluctuates every year, you may opt not to pay the installments but if you don’t and still have a tax bill, you may have interest charges when the CRA issues your Notice of Assessment.
- Calculating the home office: You must be reasonable in your estimation of how much space your home office takes up in your house. If you claim it is 75 per cent, then you are probably going to get reviewed by the CRA. There is no published guideline so you need to do an accurate estimate based on square footage. And if you think your home office expenses will offset most of your income, it may not be so. You can claim a percentage of expenses like utilities, mortgage interest or rent, property taxes and insurance. Mortgage principal is not eligible.
Remember, every business receipt represents less tax you need to pay, so keep them safe. If the CRA reviews your return and you cannot produce a supporting receipt, your claim will be disallowed.