Freelancers Filing Taxes

How to File Taxes If You're a Freelancer

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Last updated on May 24, 2021 Comments: 10

Nothing is sure in life but death and taxes, so there’s no getting out of having to file and pay your taxes, especially as a freelancer. In Canada, freelancers are legally required to file their income, however small it is. Don’t think about trying to play the system; if you don’t declare your income, you could be fined up to 10% of the amount you didn’t report.

Fortunately, filing taxes as a freelancer is usually fairly straightforward. We’ve written this step-by-step guide to encourage and support you through the challenge of filing taxes. If you need more information or have questions about specific situations, you’ll find all of the answers and forms you need on the Canadian Revenue Agency (CRA) website. Let’s get started.

1. Set Yourself Up for Success

You’ll find it much easier to complete your tax return each year if you set things up efficiently at the very beginning. First of all, decide whether to work under your own name or a business name. If you’re using your legal name, you don’t need to register as a business, but if you use a business name, you’ll have to register it as a legal business and you should consider opening a business bank account.

Next, start as you plan to go on by keeping an ongoing record of all your income and business expenses. It is up to you how you choose to do this; you could use one of the many business apps to record income and expenses electronically or download an Excel template for income and expense tracking. Keep all of your paper receipts in a dedicated folder, too.

Our Recommended Tax Software

2. Budget for Taxes

If you prepare to pay your tax bill throughout the year, you won’t get a huge shock when tax season comes and you’re faced with finding the money for a lump sum payment. It’s best to set aside 25% of your income as it comes in for your tax bill so that you’ll have the funds available to pay it when the time comes.

3. Understand Your Tax Return

Like every Canadian, you’ll need to complete Form T2125 Statement of Business or Professional Activities, which is a more detailed list of your income and expenses as a freelancer. If you kept good records during the year, you shouldn’t find it too hard to complete these forms, and the CRA guide T4002 gives more details about the process.

The CRA offers an online tax filing service, so you can e-file your tax return entirely online, and go back to make changes, if necessary. You can also auto-fill your tax return using last year’s figures to speed up the process.

Don’t throw away your spreadsheet and receipts when you’ve finished completing the tax forms, because you may need to send them into the CRA, too.

4. Calculate Deductible Expenses

Your taxable income is your net income, which is the total amount that you earned in the last calendar year, minus the total of your deductible expenses in the past calendar year. That means that it’s worthwhile keeping track of every deductible expense because it reduces the amount of tax you’ll have to pay.
Which expenses are deductible?

Deductible expenses include:

  • Office supplies
  • Marketing costs (e.g., printing flyers, paying for online ads, etc.)
  • Resources you need for your business, e.g., a new laptop, a better microphone for client calls, a massage chair, etc.
  • Mobile phone and internet bill
  • Meals and entertainment that you need as part of your business, like buying a sandwich on your way to a client in a different city
  • Travel costs, e.g., gas to drive to a client, or the cost of a train ticket
  • Ongoing training and professional development, such as the cost of attending a conference

What Is the Home Office Deduction?

According to Canada’s tax laws, if you work from home, you can deduct the costs of running your home office. You need to be careful because you can’t claim anything that you used for your personal needs as part of your home office deduction. Instead, you’ll have to calculate what percentage of your home bills pay for your business needs.

You’ll base your home office deductions on the size of your home office. For example, if your home office occupies 20% of your home’s square footage, you can claim 20% of your home bills as deductible expenses. Deductible bills for your home office include:

  • Water bills
  • Heating bills
  • Home insurance
  • Mortgage on your property
  • Phone and internet bills
  • Property taxes

Get Help With Tax Software

If the idea of having to calculate your home office and other deductible expenses makes you feel confused and overwhelmed, there’s a way to make it easier. Tax return software can help you to do this much faster, taking over the complicated calculations for you. Some tax return tools can also help send your tax return in to the CRA on your behalf.

Many freelancers use companies like H&R Block to help handle their taxes. In fact, one of our writers, Jordann Brown, discusses how, as a freelancer, she loved how easy it was for her to fill out the business income section of the software and book an appointment with an expert to go over her tax return. She was left feeling 100% confident her tax return was filled out properly and that there was “no money was left on the table.”

5. Maximize Your Pension Allowance

Make sure you set up your own pension as a freelancer

As a freelancer, there’s nobody paying into a pension on your behalf. That means that it’s your responsibility to prepare for your retirement. Make it a habit to contribute a set amount to your RRSP every year. These are deductible expenses, and your money grows tax-free to fund your lifestyle later on.

6. Pay Your GST/HST

Goods and Services Tax (GST) is a federal tax that’s levied on goods and services purchased in Canada. It applies to most products and services. Harmonized Sales Tax (HST) is a consumption tax that is levied in provinces that charge a provincial sales tax (PST) as well as GST, in order to combine both taxes into a single, value-added sales tax.

Like other businesses, freelancers have to collect GST or HST on the services and products they sell, and then pay that tax to the government. The good news is that you can also claim “input tax credits” on GST/HST that you paid on goods and services you need to run your business. That means that you can deduct the GST/HST that you pay on resources for your business from the final amount of GST/HST that you need to pay to the government. Filing a GST/HST return is an important part of your tax obligation.

Are you exempt from GST/HST?

If your gross business revenue is below $30,000 over each tax year, you’re considered a “small supplier,” which means you’re exempt from charging and paying GST/HST. Your gross revenue is the amount you earn before deducting expenses.

If your income exceeds $30,000 in a calendar year, you need to register for GST/HST. You can do it over the phone, by mail or fax, or online at the CRA website, where you will find all of the information you need about the process.

How to calculate GST/HST

If you are liable to collect GST/HST, you’ll need to calculate it at the correct rate. GST/HST is calculated according to the province of your client, not your province, so if you have clients in a few different provinces, you might have to handle a few different rates. Consult the CRA website to get the correct rate.

GST/HST only applies within Canada, so if you’re a freelance designer who works for clients in the US, for example, you won’t need to charge them GST/HST.

How to file your GST/HST return

Once you’re registered for GST/HST, you’ll need to file a GST/HST return, either monthly, quarterly or annually – the frequency is up to you. You also need to remit GST/HST payments, usually at the same time as you file your GST returns.

You’ll need your invoices to complete your GST/HST return; just remember that you have to remit GST/HST for every invoice that you submit, even if it hasn’t yet been paid to you. Visit the CRA site for all the details about filing your GST/HST return.

Filing Taxes as a Freelancer in Canada Doesn’t Have to Be a Headache

Filing freelancer taxes is a necessary evil, but it doesn’t have to be a big headache. If you set things up to track your income and expenses carefully from the beginning, consult the CRA website for guidance and the relevant forms, and use business software to simplify the process, you should be able to file and pay your tax returns unscathed.


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Author Bio

Sarah Pritzker
Sarah Pritzker has been writing for GreedyRates since 2017, and loves learning about the latest trends in Canadian personal finance. Topics of particular interest to Sarah include investing, debt consolidation, debt counselling, and rewards programs. When she's not researching credit cards or loan repayment strategies, Sarah is most likely hanging out with her husband and three kids.

Article comments

Stephen Williams says:

This was very helpful – thank you for summarizing. I’m in the process of starting a freelance writing business and have a contract lined up with a former employer, so I’m fortunate to hit the ground running. I’m a little unsure about registering for GST/HST. I know with this first contract I will likely make over $30K in 2022, so I assume I should just do it; but what happens if I don’t end up making over $30K and have collected the taxes from my client(s)? Cheers.

Daniel from GreedyRates says:

Hi Stephen,
Congrats on the start of your new business and contract! If you’ve registered to collect GST/HST, you’re required to remit the HST regardless whether you hit the $30K threshold or not. Hope this helps; Success to you in the year ahead.

Alice says:

I’ve been offered a remote marketing internship position with a company based in Korea. I was wondering if this would also count as freelancer work? If not, how would I report this income? Are there additional documents I should be provided with for my tax return other than payslips?

Daniel from GreedyRates says:

Hi Alice,
First off, congratulations on what sounds like a fantastic opportunity to both gain valuable experience and and see the world! The first thing you’ll want to do is call the CRA before you go and ask them to to determine your residency status.

Assuming you are a Canadian citizen leaving temporarily to work in Korea, you would be considered a factual resident of Canada for tax purposes (you’re still a Canadian on the hook for income taxes). You will need to report your income from sources inside and outside Canada for the year. You’re also eligible to claim any federal / provincial credits and deductions that apply to you. Here’s the Government of Canada’s take on the subject. Good luck with the new gig!

Alice says:

Hi Daniel!

I am not leaving for Korea; it is a remote position so I will be still in Canada. I was told that I’d technically be treated as a freelancer, so I wanted to double check on the income tax part because this is the first time I’ve had a position like this.

Daniel from GreedyRates says:

Hi Alica,
My mistake! I’m sure it will be great exposure nonetheless. As a freelancer you’ll still need to file your taxes and report your income to the CRA come tax time. To prep in advance, here’s How to File Taxes if You’re a Freelancer.

Wendy McConachie says:

I’m doing a lot of travelling to do research for a book I expect to write in 2-3 years. How do I deal with those expenses, since I don’t have any income to charge them against this year?

Daniel at GreedyRates says:

Hi Wendy,
According to the CRA, you’ll need to “have carried on a business in the fiscal period in which the expense was incurred” in order to claim an expense as a start-up cost for your business. As you build your business, consider consulting or hiring an accountant to help navigate the finer points of tax filing. Last thing you want is the taxman after you.

Frustrated says:

I wish there was a way to downvote results from Google, because this article was completely useless

Aaron Broverman says:

I’m sorry you feel that way frustrated. Do you mind telling us what your issue is? Maybe we can help or correct it…