Is this your first year as a freelancer or small business owner? Then this article is for you. Freelancers are legally required to file income tax returns if their income crosses $400 a year and goods and service tax if their turnover crosses $30,000 in a calendar year. Even if you don’t have a tax liability, you should file taxes, or you could face a penalty of as much as 10% of the unreported income. Apart from a penalty, the Canada Revenue Agency (CRA) offers many benefits to taxpayers like Canada Pension Plan (CPP) and Old Age Security (OAS). Timely tax filings lead to timely tax refunds.
Things Business Owners and Freelancers Should Remember Before Filing 2021 Tax Returns
So, it’s time to buckle up and do your taxes. Here are five things to get started for the 2021 tax filing.
Organize Accounts and Receipts of Expenses You Undertook as a Freelancer
The first thing you need to do as a freelancer is to record your transactions. You need to account for every inflow and outflow of money, be it a payment at the restaurant or gas station or receipt of payment from the client. There are many readily available excel templates and software for expense tracking.
But recording the transaction is not enough. You need to back your accounts with supporting documents like invoices, receipts, and tickets. A good way is to scan the documents and keep them in separate folders so they are easy to find. Then keep a backup of these scans on a hard drive and file the physical copy of those receipts. This might look tiring, but it can save you a lot of hassle if you come under the CRA’s scrutiny. Moreover, regular accounting will help you identify your tax liability and plan well.
Know the Tax Dates for Small Business Owners
Staying updated with tax dates is equally important as late tax filing can bring a significant penalty. For the 2021 tax year, the last date to file income tax is May 02, 2022, as the traditional deadline of April 30 falls on a Saturday this year. For freelancers and the self-employed, the tax filing date is June 15. But if you have a tax liability, you must pay the tax by May 2. You must pay advance tax on the 15th of March, June, September, and December.
Avoid paying taxes too early because the CRA assesses your returns. If you miss something, fixing it through adjustments is a hectic task. And if the CRA catches the mistake before you, the procedure could be lengthy. Hence, wait until March to collect all documents and start doing your taxes in April. However, if an error happens, do not panic. At such times, take the help of a professional accountant.
Canadian Government’s COVID-19 Benefits are Taxable
The CRA introduced several programs like the Canada Recovery Benefit (CRB), Canada Recovery Caregiving Benefit (CRCB), to provide financial relief to people living in Canada. If you took any of these benefits, add them to your taxable income. The CRA will consider these benefits as normal income, and you will pay tax on it depending on your tax bracket. For instance, if your taxable income after adjusting for COVID benefits and tax deductions is between $49,021 and $98,040, you will pay 20.5% tax. The CRA will give you a T4A or T4B slip, depending on your benefit type.
Work from Home Benefit Reduces Freelancers’ Taxable Income
If you work from home or operate your business from home, the CRA has a benefit that can significantly reduce your taxable income. For instance, you converted 25% of your house into an office. You can deduct 25% of the expenses you paid to run the home office, including rent and electricity. However, save the receipts for everything. If you haven’t saved receipts, the CRA is offering a temporary flat rate method only for COVID. Under this, you can deduct $2/working day up to $500 for the 2021 tax year.
Just ensure your expenses are eligible for the deduction. The CRA doesn’t allow you to deduct mortgage interest payments. Check with your tax consultant which method (temporary flat rate or old method) can maximize your work from home deductions.
Understand Your Tax Return Statement
After you have collected all the documents and researched the tax benefits, it’s time to address the elephant in the room. The CRA considers freelance income as income from the business. You need to complete Form T2125 Statement of Business or Professional Activities. You will need the T1 business income tax form and T4A or T4B slip for COVID benefits to complete the T2125 form. The CRA offers an online tax filing service and free tax clinics where volunteers help you file taxes. But these clinics are generally for low-income earners. There are various tax filing software packages where you can book an appointment with an expert.
However, if you have a heavy tax bill that you want to save on, you must find a professional accountant and tax adviser. The professional goes beyond preparing financial statements and filing taxes. They can monitor your income and spending throughout the year and guide you on good tax and financial habits.
Trust Edelkoort Smethurst Schein CPAs LLP in Burlington for Reliable Tax Advice
Filing income tax accurately and on time is essential for freelancers and business owners. At Edelkoort Smethurst Schein CPAs LLP, our highly skilled team of tax experts will prepare your business’ taxes to meet all tax obligations while seeking out every opportunity for deductions. Let our trusted accountants give you the peace of mind of knowing that your taxes will be filed precisely while meeting the appropriate deadlines. Please contact us online or by telephone at 905-517-2297