Tax debt concerns for the self-employed

19 Jul

The employment landscape is changing in Canada, as well as in the rest of the world. In the past, self-employed workers were quite rare, but nearly 3 million people in Canada work for themselves. According to some reports, 45% of Canadians could be self-employed by 2020. This increase could be due to the difficult job market or simply because there are more resources and opportunities available to do what you do. want. life. These self-employed people can do a variety of things, from owning a business to being an entrepreneur to almost anything you want. Being independent and being your own boss has many advantages. You can set your own hours, work when you want, as much as you want, and more. On the other hand, there are also disadvantages. Your income may fluctuate and you may need additional insurance, usually covered by your employer. However, perhaps the biggest disadvantage to self-employment is the reporting of your taxes. Although you simply get a T4 slip when you are an employee, you do not get the same luxury as a freelancer. Most self-employed people will use a T2125, among other things, possibly to calculate their taxes. As a result, your taxes can be a bit more complicated and difficult to manage. Making taxes as a freelancer or freelancer can be confusing, but not everything is bad. Here are some tax tips for people with low incomes. This article will examine many different concerns to watch out for if you file taxes as an independent. Some of these things will be things that you will have to do, others that you can do, others to watch and some more general tips for taxing as an independent.

Keep track of your money

Keep track of your money

When you work for yourself, many different clients send you money. As a result, your income can vary tremendously from month to month. So it can be difficult to keep track of income, who paid you, who did not pay you, bills and the like. It’s best to keep some kind of spreadsheet that tells you what will happen, when it happens, and so on. This will become easier as you progress as a freelancer, but this can be difficult to manage at the beginning.

Do not wait, save money for your taxes

Do not wait, save money for your taxes

Some self-employed people may forget that, unlike employed people, they do not pay taxes every time they are paid. So, instead of April and having to raise thousands of dollars to pay your taxes for the year, you should save money all year long in a separate account to prepare for tax time. This number will vary, but most people say to put aside about 25% of your income to pay your income tax just to be safe.

Make sure you know how to pay your taxes

Make sure you know how to pay your taxes

Even if an employee pays a little tax each time he is paid, this is not the case for the self-employed. We are responsible for paying our own taxes. Generally, we will pay them once a year during the tax period (when most people will be reimbursed), but this is not always the case. Some people whose net tax is $ 3,000 in concurrent years may be required to pay their taxes by installments. This means that you will basically pay taxes 4 times a year in smaller amounts as opposed to a single payment. It’s done to protect the CRA and make sure you can make your payments. Here is a great resource to check if you are curious to know more about installment payment.

You will pay more taxes, but not much

If you’re self-employed, you may feel like you pay a lot more taxes than your friends or family who have a regular job of 9 to 5. Well, that’s just a sort of truth . What makes it true is that a person in a traditional job pays only 4.95% of the CPP contribution each year, while a self-employed worker pays 9.9%. The reason is that your employer normally covers half of it, but if you are your employer, you are responsible for both halves (be sure to check this link for a more detailed overview of CPP contributions). Although many think that you are paying more taxes as a self-employed person, this is only a 5% supplement to the CPP (which you will eventually get back anyway). Standard federal and provincial tax brackets apply normally whether you are self-employed or employed. The reason you probably think you’re paying more is because you pay everything at once (or in installments) and not a little outside of each pay check.

You should take advantage of the deductions you can claim

One of the good things about taxes when you are self-employed is the different deductions you can claim. You can deduct half of the cup of coffee you had at a business meeting, fuel costs, equipment costs, and even a portion of your rent / mortgage interest or electricity bill if you have a home office.

However, it is important to be reasonable when deducting expenses. If you try to describe personal expenses as business expenses, this could eventually trigger an audit and cause you serious problems. In addition, you will of course have to follow your various expenses throughout the year to be able to make specific deductions. Fortunately, many programs and applications can help you track your expenses and bills.

Keep receipts for at least 6 years

Once you have finished preparing your taxes in a given year, you may want to discard all your old receipts for expenses, bills and bills, but that’s not a good idea. The CRA may have an audit that can last up to six years in the past, so it’s a good idea to keep the documents at least as long to ensure your safety in the unfortunate event of an audit. So, basically, everything included in your 2016 return should not be discarded or destroyed until the end of 2022 at the earliest. If you do it earlier, you risk being checked and having problems when you can not prove your claims or expenses deducted from your return.

Consider the incorporation

Consider the incorporation

When it comes to incorporating, there are two reasons why people do it. One is to protect yourself and your liability, the other for tax purposes. Of course, not all freelancers or company executives need to incorporate, but you have a choice. If you do a lot as a corporation (and therefore find yourself in a higher tax bracket), incorporation can save you a lot of money. This is because corporate profits are taxed at around 20% overall, which is much less than if you earned a lot in taxes.

Ask a professional

It can be difficult to manage your taxes as a freelancer and sometimes it’s easy to miss some deductions or other important items in your return. In addition, if you do it wrong, your return can also cause you trouble. Rather than spending hours fighting your taxes and missing something, it may be wise to hire a professional. It is often quite useful and affordable and there is a good chance that the costs are largely covered, with what they can save on your taxes.

 

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