Understanding income tax, sales tax, deductible expenses and important filing dates.
There’s really no way around this. Being self-employed means you’ll have to manage your own taxes and that can be daunting. You’ll need to know all the rules and regulations, including staying on top of when those regulations change. Any misstep can result in losing out on potential savings. More severely, miscalculations in your taxes can lead to repercussions from the Canada Revenue Agency (CRA). That’s definitely not something you want to deal with.
If you are self-employed, tax not only becomes a major part of running your business, but it also has a significant impact on your net cash flow. Tax for self-employed individuals can be further broken down into the following:
Self-employed income tax
Unlike full-time employees, self-employed individuals do not have their income taxes automatically deducted from their paycheques. This means you’ll have a higher cash flow to start, but remember: not all of that revenue is yours to keep. Come tax time, a portion of those funds will need to cover your income tax obligations. Owing tax, rather than receiving a tax refund, is often a new experience as you make the switch from employee to self-employed.
A good rule to follow is setting aside at least 20 percent of your gross income during the year. Doing this will help avoid an unmanageable tax bill at the end of the year. You should also be aware of expenses which you can deduct as business expenses to lower your taxable income.
Important income tax due dates
If you’re self-employed, the deadline for filing your income tax return is June 15th, but you still must pay all tax owing by April 30th. Also, you might have to pay quarterly instalments if your net tax owing is more than $3,000, In the current year and in either of the 2 previous years.
The due dates for quarterly payments are March 15th, June 15th, September 15th and December 15th.
Self-employed sales tax
In addition to income tax, you will likely be responsible for GST, HST, or PST. Collecting GST/HST isn’t mandatory for all self-employed individuals, but you need to know the rules. If you’re required to charge and collect GST/HST, PST or QST for sales related to your self-employment activities, this is what you need to do:
- Register for a GST/HST account with the Canada Revenue Agency. The process is simple and can be done completely online through the Business Registration Online (BRO) program. Also, if you’re selling goods in British Columbia, Manitoba, Saskatchewan or Quebec, you may need to register with respective ministries based on income in that particular province.
- Maintain proper records of sales tax collected, keeping in mind you’re just holding money that belongs to the government. Far too often, new GST/HST registrants forget to separate those funds and are faced with the consequences of poor recordkeeping.
- Track your expenses and sales tax paid on any expenses. This is important because part of that sales tax paid is recoverable.
Important sales tax due dates:
You’re also required to complete and submit a GST/HST, QST and/or PST return. Depending on your business, you may have to submit a return monthly, quarterly or just once a year. Take a look at CRA’s website for details related to GST/HST.
Similar to income tax, quarterly instalments will apply if your net tax owing is more than $3,000.
3 basic tax tips if you’re self-employed
Here’s a summary of what you need to do if you’re self-employed or a freelancer:
- Set aside money out of your gross income to pay income tax.
- Determine whether or not you’re required to register to collect sales tax.
If required, then:
- i. Register with CRA and/or provincial ministries.
- ii. Set aside the sales tax you are collecting from your customer as this belongs to the government.
- iii. Track your expenses and separate out sales tax as some of it is recoverable. Sorted can now track and account for the collection and payment of GST/HST, PST and QST so that you always know exactly how much you’ll owe come tax time.
- Know your filing and payment deadlines. Once you have set up your tax profile in Sorted, we can keep you up-to-date on your filing and payment due dates for both income and sales taxes.
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Nikhil Aggarwal is a CPA, CGA and a Tax expert. He strongly believes in transforming obstacles into opportunities and loves working with businesses, entrepreneurs and individuals. He has over 10 years of experience in accounting, taxation and technology. He has a proven track record of delighting the clients by finding over $20 million in tax savings. Nikhil has also completed Canadian In-depth Tax Course, which is the most comprehensive tax training program in Canada.