In today's economy, many people have self-employment “side hustles” to manage the rising cost of living. In Canada, you are responsible for paying taxes on any gig work, side jobs, freelance income, or other self-employment income. Unlike traditional employees, whose taxes are automatically deducted from their paychecks, these self-employed "freelancers" need to track their income and fulfill their tax obligations themselves.
Staying compliant with tax laws is not only a legal requirement but also crucial for maintaining financial stability and avoiding penalties. This applies no matter what your side hustle is—streaming; contract writing; driving for Uber, DoorDash, or Lyft; or, running a small business.
Fulfilling your tax obligations is an important part of managing your overall financial responsibilities. For instance, freelancers contribute to the Canada Pension Plan (CPP), which can provide retirement benefits based on contributions. Plus, managing your taxes can help you set achievable financial goals, plan for the long term, and steer clear of big, unexpected tax-related fines.
Understanding Canadian Income Tax
Income tax in Canada is a system where individuals and businesses pay a portion of their earnings to the government. This revenue is used to fund various public services and programs, including healthcare, education, and infrastructure.
The Canadian tax system is progressive, meaning that as your income increases, you pay a higher percentage in taxes. However, you don't pay the highest rate on your entire income, only on the portion that falls within each tax bracket.
Canada’s Federal Tax Brackets
Let’s take a look at tax brackets to understand how they work. For the 2024 tax year, the federal tax brackets in Canada are as follows:
Taxable Income (CAD) Tax Rate
0 - 55,867 15%
55,867 - 111,733 20.5%
111,733 - 173,205 26%
173,205 - 246,752 29%
Over 246,752 33%
Here’s how the progressive tax system works: if you earned $100,000 in 2024, you wouldn't pay 26% on the entire amount. Instead, you'd pay 15% on the first $55,867, 20.5% on the next $55,866, and 26% on the remaining $4,2672.
These represent only the federal tax rates; Canadians also pay provincial or territorial taxes, which vary depending on where you live. The combined federal and provincial/territorial tax rates determine your total income tax obligation.
Understanding this system is particularly important for self-employed individuals and freelancers, as they are responsible for calculating and remitting their own taxes, unlike traditional employees who have taxes deducted from their paychecks.
What Is Self-Employment Income?
Self-employment income is any money earned from offering services or products as an independent contractor, freelancer, or business owner, instead of income earned working for a traditional employer. This includes earnings from activities like freelance writing, graphic design, ride-sharing, selling handmade items, or running an online business.
Unlike employees who get a regular paycheck with taxes, CPP contributions, and Employment Insurance (EI) premiums deducted, self-employed individuals need to handle their own taxes. That means filing based on your gross self-employment income, your tax obligations, and your deductible self-employment expenses.
How Should I Report My Income?
In Canada, the CRA requires you to report all income earned. In addition to filing tax documents from your employer, you are responsible for filing your own tax information from your freelance work. There are no minimum thresholds for reporting self-employment income—all earnings must be declared, even if it's just a small part-time hustle.
Freelancers and side hustlers need to fill out a T2125 form (Statement of Business or Professional Activities) when filing their taxes. This form helps you report your business income and claim expenses related to your freelance work. If you have income from multiple activities — for example, if you both drive for Lyft and sell crafts online — you'll need to submit a separate T2125 form for each.
To be clear, through your work as a self-employed individual, taxes aren't automatically deducted from payments you get from clients. You're responsible for tracking income, and figuring out and paying taxes, CPP, and possibly GST/HST based on that income. To reiterate:
- Report any income earned: It’s important to report all income you earn, whether it’s a few hundred dollars from a part-time gig or thousands of dollars from self-employment, as required by the CRA.
- Track expenses: Many freelancers find it beneficial to keep detailed records of business-related costs, which can help with accurate tax reporting and determining potential deductions.
How to Track Your Freelance Income and Expenses
Just as it’s essential to be honest about your income, the same approach applies to reporting all your deductible work-related expenses. There are dozens of potential deductions that can help reduce your costs. That's why it's key to keep track of what you earn and what you spend.
Step One: Keep Accurate Records
Since taxes aren't automatically taken from your earnings, it's necessary to keep track of every payment you receive. You are responsible for reporting every dollar earned from freelance work to the CRA, no matter how small. Whether you get paid through direct deposits, PayPal, or checks, make sure to record each transaction. If you don’t report all your income, you could face penalties.
Many freelancers and side hustlers earn money from various sources like Etsy, Uber, Fiverr, or consulting clients. Be sure to track your income from each platform separately. Some apps and websites might give you year-end statements, but it's crucial to maintain your own records to know exactly how much you've made.
Consider using financial tracking software, apps, or a simple spreadsheet to log your income. The key is to make sure every payment is recorded and easy to access when tax time comes around.
Step Two: Track Your Business Expenses
Freelancers in Canada can lower their taxable income by deducting eligible business expenses, which helps reduce their overall tax bill. To claim these deductions, it’s important to keep thorough records of all business-related expenses.
Here are some common deductible expenses for freelancers and side hustlers:
- Home Office: If you use part of your home for business, you can deduct a portion of your rent or mortgage interest, utilities, and home insurance.
- Software and Tools: You can deduct any software or online tools needed for your business, like design software or accounting tools.
- Travel: If your freelance work requires travel—such as visiting clients or attending conferences—you can deduct transportation costs, including mileage, gas, or public transit fares.
- Professional Services: Fees for hiring an accountant, lawyer, or other professionals for your business are deductible. This also includes advertising fees and subscriptions to professional services.
The CRA requires proof for any expense you claim, so keeping receipts and invoices for all business purchases is crucial. Digital copies are acceptable, and many freelancers find receipt management apps helpful for organizing and storing receipts. Be sure to categorize your expenses correctly and keep detailed notes, especially if an expense is partly personal and partly for business, such as using a personal vehicle for work.
Step Three: Set Up a Separate Account
Opening a separate bank account for your freelance or side hustle income is a smart way to simplify record-keeping and stay organized. It helps you separate your business and personal finances, making it easier to track your earnings and expenses.
You can also get a separate credit card for business purchases to keep all your business-related expenses on one statement. Depending on your location, you might also be able to deduct the interest you pay on that credit card.
Stay Ready for Tax Season So That Your Tax Bill Isn’t a Surprise
One of the most important aspects of freelancing is setting aside enough money to cover your taxes. Since taxes aren’t automatically deducted from your income like they are for traditional employees, freelancers need to be proactive in saving for their tax bill.
Furthermore, to avoid a hefty tax bill at the end of the year, it's a good idea to save a percentage of your income for taxes as you earn it. Some individuals set aside a portion of their gross income throughout the year (I.e. 25-30%) to prepare for federal and provincial taxes and Canada Pension Plan (CPP) contributions. The exact amount depends on various factors, including your income level, tax bracket, and deductions.
While many freelancers manage their taxes on their own, there are situations where hiring a professional accountant can save you time, stress, and even money. Here’s when it might make sense to work with a tax professional:
- Complex finances: If you have multiple streams of freelance income, work with international clients, or have significant business expenses, an accountant can help ensure you’re claiming all the right deductions and staying compliant with CRA regulations.
- GST/HST requirements: If your freelance business earns more than $30,000 annually and you need to charge, collect, and remit GST/HST, an accountant can assist with the paperwork and filings to keep you on track.
- Tax optimization: A professional accountant can help you optimize your tax strategy, find additional deductions, and ensure that you’re contributing appropriately to CPP and other tax-related programs. This can result in significant savings in the long run.
Taxes can be a pain, but they become less painful when you prepare for them correctly. The key is keeping up with your income, deductions, and other tax requirements. You may find taxes don’t bother you at all as your tax efforts become routine.
The information in this article is general and for informational purposes only. It should not be considered financial or investment advice. Please consult a qualified financial advisor or tax professional to determine how the FHSA might fit into your financial plans.