If you are self-employed, you are likely getting ready to submit your federal income tax return. Read on for an overview of federal income tax for the self-employed. Your province or territory will have requirements for their own returns, so be sure to check with your local tax portal online.
What taxes do the self-employed pay?
If you're self-employed, the same income tax rates apply to you as to other types of workers. You are entitled to certain deductions, however, that salaried employees can't make. You can find federal and provincial personal income tax rates in the CRA document Canadian income tax rates for individuals' current and previous years.
You are responsible for reporting all of your income. If you don't, you could incur a penalty of 10 percent of the amount you left out. If the CRA determines that you knowingly omitted to report income, or made a false report, the penalty is even higher. You would have to pay 50% of the amount left out or misreported.
If you are self-employed and do not earn a salary or wages from an employer, all your income is business income. The CRA defines business income as income you earn from:
A profession
A trade
A manufacture or undertaking of any kind
An adventure or concern in the nature of trade
Any other activity you carry on for profit and there is evidence to support that intention
A manufacture is a business that makes or processes goods. An adventure or concern in the nature of trade means any transaction you made that brought in income, but may not be part of your usual work. "Any other activity" is any method you use to earn income that doesn't fit the other categories.
How do I report my income?
If you are a self-employed or a business owner, you have to track your business income and expenses in order to qualify for deductions. Use Form T2125, Statement of Business or Professional Activities if you are self-employed, a business owner, or earn income through commissions.
Farmers and fishers use specific forms for agriculture and fishing. Find them on this CRA page, which also suggests you use the categories on the forms to organize your business accounting records.
Remember to support all of the entries on your oncome tax return by keeping a record of expenses and income. Hold on to original documents, including:
Sales invoices
Cash register rolls
Receipts
Fee statements
Contracts
Things like cash register rolls can pile up quickly, so find a system that works for you to keep these and other documents in order. You'll thank yourself come tax time, especially if the CRA asks to see them!
Make sure to keep separate records of income from any source apart from your regular work. Income from any of the following must also be reported:
Property
Investments
Taxable capital gains
Estates
Trusts
Employment
Pensions
How to calculate self-employment income tax in 2019
Let's turn to the CRA Form T2125, Statement of Business or Professional Activities to see how to calculate your self-employment income tax.
Check out marketing expert Michelle Mire's tips on small business deductions for both the US and Canada. Mire's research reveals that nearly all small business owners experience "stress and frustration associated with filing and completing federal taxes." So remember to take breaks!
On Form T2125 you'll be able to enter your business income and add up expenses. Current versions of the form include a section called "Internet business activities." You can list up to five websites you use to earn income, and the percentage of income you earn online.
The next few sections are for business and/or professional income. If you earn both professional and business income, you need to fill out a separate T2125 form for each. Otherwise, just fill in the section(s) that apply to you, and leave the other one(s) blank.
Form T2125: Parts 4, 5, 6 and 7
In Part 4, calculate your "Net income (loss) before adjustments" by applying the following eligible deductions to your gross business or professional income. Recall that you may only use the business portion of expenses.
Advertising
Meals and entertainment
Bad debts
Insurance
Interest and bank charges
Business taxes, licences, and memberships
Office expenses
Office stationery and supplies
Professional fees (including legal and accounting fees)
Management and administration fees
Rent
Repairs and maintenance
Salaries, wages, and benefits (including employer's contributions)
Parts 5 and 6 are for members of a partnership. You calculate your net income (loss) first by adding to the amount on your T5013 slip, Statement of Partnership Income, the GST/HST rebate for partners received that year. Then you apply your allowable deductions and subtract business use-of-home expenses.
Part 6 allows members of a partnership to enter expenses not included in the partnership's statement of income and expenses. Only enter these if you were not reimbursed by your partnership.
Part 7 may apply to many self-employed workers: Business use-of-home expenses. Here, you can deduct the business portion of eligible expenses such as:
Heat
Electricity
Maintenance
Mortgage interest
Property taxes
Other specified expenses
You subtract the amount that applies to your personal use of the property and apply any applicable CCA amounts.
If you have access to tax software it will do the math for you.
Vehicle expenses
Let's skip ahead a few sections to Chart A: Motor vehicle expenses. Self-employed workers and anyone who uses their car extensively to earn income can apply a deduction for mileage.
To complete Chart A, first, enter the total amount of kilometres you drove to earn income. Next, you enter the total amount of kilometres you drove, including personal use, during the whole fiscal year. Check out the Mile IQ app for a reliable way to track your mileage.
Once you've entered your mileage, you then add up any of the following expenses that apply:
Fuel and oil
Interest (Chart B - eligible amount from a loan used to purchase your vehicle)
Insurance
Licence and registration
Maintenance and repairs
Leasing (Chart C: eligible amount of your leasing costs)
Other specified expenses
Calculating deductible vehicle expenses
To find your total allowable motor expenses, divide the number of kilometres you drove for work by the number of kilometres you drove overall. Multiply your result by the total amount of expenses you added up.
Finally, deduct any allowable business parking fees and any supplementary business insurance that apply to your vehicle.
If you have tax preparation software, the program will perform most of these calculations for you.
What is the tax deadline for self-employed 2019?
All of the forms you fill out to report expenses and income are due with your T1 income tax return. People with self-employment income have until June 15th, 2019 to file their income tax return. April 30, 2019, is the date your balance is due on any taxes owing.
If you pay your income tax in instalments, these are typically due in March, June, September and December. People who earn income through self-employment, rentals or investments, certain types of pension, or through multiple jobs may have little or no tax withheld. This can lead to a CRA request to pay by instalments.
The CRA will send you an instalment reminder to indicate that you might need to pay your income tax in instalments. However, even if you receive a reminder in 2019, if your net tax owing is $3000 or less ($1800 or less in Quebec), you do not have to pay in instalments.
Reporting income
Most Canadian businesses are required to report income on a calendar-year basis. That means your fiscal year ends December 31. The rule applies to:
Sole proprietorships
Professional corporations that are partners of a partnership
Partnerships in which at least one partner is an individual, professional corporation, or another affected partnership
You might be allowed to have a fiscal year that ends on a date other than December 31. The CRA grants permission on a case-by-case basis. Only individuals, and partnerships in which all the partners are individuals, are allowed to use this alternative method of reporting business income.
Those not permitted to use the alternative method include:
An individual who is a partner of a partnership that includes a professional corporation as a partner
Partnerships that are partners of other partnerships
If you are registered for GST/HST, take note: with this method, your GST/HST reporting periods, filing, and balance due dates could change.
When to use Form T1139
You might also need to submit Form T1139, Reconciliation of 2018 Business Income for Tax Purposes if you started your business in 2017 or 2018 and have chosen to use the alternative method for the first time. Also use this form if:
You are a self-employed business person, including a self-employed commission salesperson, professional, a farmer, or a fisher
Your fiscal period does not end on December 31 and you need to calculate additional business income
You have chosen to go back to a fiscal year that ends on December 31
You need to calculate your business or professional income to report on your 2018 T1 tax return
