Being an independent contractor offers benefits such as flexibility in your work schedule and income, but it can also create complexities during the tax season. Understanding your income tax claim as an independent contractor is crucial to ensure that your business functions seamlessly throughout the year and to prevent unexpected expenses during tax payments. Unlike the personal income tax return due to the Canada Revenue Agency (CRA) on April 30, the self-employed business income tax return must be filed by June 15.
Here are some common tax season mistakes and tips to avoid them:
Unsure of your employment status
Distinguishing between being an independent contractor and an employee can significantly affect your Canadian income tax, especially if you believe you're a contractor. You may assess your employment status on the CRA website, but here are the general criteria of a self-employed individual:
- Have near-total control or independence over your work output, schedule and hours
- Own or provide your tools (supplies and equipment) for the job
- Take on the risk of any monetary losses when agreeing to a contract
Additionally, self-employed individuals are not viewed as integral parts of the businesses they work for. As a result, they do not receive any employee benefits and are responsible for Canada Pension Plan (CPP) contributions and EI premiums. For more information, visit Service Canada.
Not setting aside money to cover taxes
Unlike employees, independent contractors don't have their income taxed upfront, so they must calculate and pay their income taxes as a lump sum or in instalments. CRA provides current information on individuals' federal and provincial income tax rates on their website.
It's recommended to keep track of your total income throughout the year and use these figures to estimate your tax liability for the year. Contractors should put aside enough money to cover taxes on their gross income so they don't have to worry if their deductions are lower than expected.
Charging your client GST/HST
If you are an independent contractor or self-employed and expect to make more than $30,000 in annual revenue, you will need to charge your client sales tax. Depending on the province you reside in this will be HST or GST plus provincial sales tax. Including sales tax on your invoice is required by law and helps to maintain your status as an independent contractor.
What can you claim as non-taxable business expenses
As an independent contractor, you are entitled to claim a range of business expenses that are non-taxable. However, the eligibility of expenses depends on the nature of your business. For instance, if you have a dedicated workspace at home that you use solely for work, you may claim a portion of your rent and utility expenses equivalent to the ratio of that workspace to your home's total area. However, you can't claim home-related expenses if you primarily work on your client's premises.
Other eligible expenses may include office supplies, repairs and maintenance, insurance, motor vehicle expenses, licences, memberships, professional fees, etc. Again, it's crucial to ensure that you can prove that the expenses are job-related.
If you are unsure about your deductions or have a complex situation, the cost of an accountant or bookkeeper is often worth it. They are going to help you identify and claim all eligible expenses including the fees you pay to for accounting, bookkeeping and tax preparation.
As a small business or an independent contractor, you are eligible for a virtual Liaison Officer Service if you need clarification about your taxes. You may request a liaison officer visit via phone, videoconference, or webinar.
Agilus encourages our candidates to discuss their financial position and the pros and cons of independent contracting with a professional expert. Since everyone’s situation is different, the above is a guide and things to consider and not specific tax advice.
If you are nearing the end of your current contract or looking for work as an independent contractor, Agilus can help you. We hire more than 10,000 qualified candidates a year for our clients across Canada and we can help you. Please view our job board for current openings or build a profile on our website and join our more than 900,000 strong work community.