Whether you consider yourself a freelancer, entrepreneur, contractor, or troll under a bridge, it’s important to know how that might affect you after year end - that’s when the Canada Revenue Agency will want to know how much money you made (and we’ve been hearing they’re particularly tough on trolls).
We’ve prepared this guide with all that in mind! Read on to find out how to reduce your tax anxiety and prepare yourself for the ins-and-outs of self-employment in Alberta.
Self-employment means you work for yourself. Don’t just take our word for it though - per the CRA:
Indicators showing that the worker is a self-employed individual
- A self-employed individual usually works independently
- The worker does not have anyone overseeing their activities
- The worker is usually free to work when and for whom they choose and may provide their services to different payers at the same time
- The worker can accept or refuse work from the payer
- The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship
As we can see from the above, a self-employed person does not necessarily have to work alone, but independence is a key part of that. The people or businesses who hire you to perform work can control certain aspects of the work being done, but this is typically outlined in advance (and preferably written down in a contract). There are probably lots of self-employed people you already know and receive services from, like your hairdresser, your Uber driver from last night, your wedding photographer, or even your tattoo artist!
Your contractee(s) should never act like a direct employer, as this can present certain legal challenges for both parties. During typical employment, an employer is responsible for compliance with local labour laws and paying tax remittances on your behalf, whereas a self-employed contractor will perform their duties and be paid a fee based on an agreement between the two parties.
That being said, if you have incorporated your business (ie. you have a formal business name ending in Inc., Ltd., or something else stated on your incorporation documents) you should stop reading here! This guide is for sole proprietors, partnerships, contractors, and individuals who have not created a separate legal entity for their business. Send us an email at email@example.com » for more information on tax obligations for corporations!
It is relatively easy to end up in a self-employed circumstance - for example, let’s say you offer to run your friend’s business’ social media page, and in return they are going to pay you twenty dollars an hour. This could technically be considered self-employment income! On a purely legal basis, the CRA expects you to report all of your income in a year. This may not include doing odd jobs for friends for a few bucks here and there, but if you are earning thousands of dollars doing work for someone we recommend you start reporting it to avoid trouble!
As a self-employed person, you are typically responsible for all taxes you may owe. This means that after year end, you will need to fill out form T2125 Statement of Business or Professional Activities » as part of your regular tax filings. Form T2125 outlines your income, expenses, and other related amounts for the prior taxation year. This is where good record keeping comes into play!
You’ll want to make sure you hold onto copies of all invoices you have issued to your customers, plus receipts from all associated business expenses. You even have the opportunity to claim payroll expenses and the wages of any employees you have on your direct payroll. As a self-employed individual, your taxes will be based on your net income after deducting applicable expenses. Here are the latest expense categories per the CRA:
- allowance on eligible capital property
- bad debts
- business start-up costs
- business tax, fees, licenses and dues
- business-use-of-home expenses
- capital cost allowance
- delivery, freight and express
- fuel costs (except for motor vehicles)
- interest and bank charges
- legal, accounting and other professional fees
- maintenance and repairs
- management and administration fees
- meals and entertainment
- motor vehicle expenses
- office expenses
- other business expenses
- prepaid expenses
- property taxes
- salaries, wages and benefits (including employer’s contributions)
- telephone and utilities
If you have only ever previously been employed, you may think taxes are a lot simpler - and you’d be right! Employers will typically send you a T4 that outlines what you were paid in that previous year and what they took out of your pay to cover taxes and other deductions. Self employed individuals do not receive a form like that, meaning the onus is on you to make sure you are tracking these amounts and preparing to pay taxes and other remittances out of pocket once you have filed your T1 tax return and all applicable forms.
There are calculators online that can help you determine a good estimate of what your tax bill might be after year end, but in general we recommend putting away twenty to thirty percent of what you earn to have on hand for your tax obligations - this will help cover things like federal and provincial taxes, CPP and EI (if applicable), and even possibly GST you may have collected and need to remit after year or quarter end (only if applicable). This reserve of money will be critical particularly if you do not have a lot of expenses during the year to reduce your taxes owing.
A great perk of being self-employed means you can pull funds from your business (even if it’s also your personal bank account - though we usually recommend trying to keep things separate) as “owner’s draw” whenever you like! The money is yours and not as strictly regulated as paying yourself as a business owner under a corporate structure. This is where it can get a bit dangerous if you’re not keeping some money set aside for your taxes after year end, as you use the funds in your bank account for personal expenses and other things. We go over some major differences (plus pros and cons) between self-employment and incorporation on our blog post here »
Let’s go over the biggest items you’ll need to worry about as a self-employed person in Alberta:
- Income Tax Reporting: As outlined previously, you’re on the hook for your self-employment income minus expenses. We typically recommend reserving anywhere between twenty (20%) to thirty percent (30%) of your income to cover your tax bills and any other surprise expenses. A separate savings account may help with this!
- Deductible Expenses: Knowing what you can and can not reasonably expense for the tax year helps you plan for the future, since your expenses will all occur during the tax year and not when you are doing your taxes after the year is done.
- GST Registration: You’ll need to register for GST when you meet the threshold of $30,000 in revenue. Once you are registered, you will need to charge GST on your client invoices. We go into more detail about all of that on our blog post here »
- Paying Quarterly Installments: If you have taxes owing of $3,000 or more in two consecutive years of self-employment (ie. $3,000+ owing in 2021, $3,000+ owing in 2022), you will need to pay your taxes in installments. These are usually calculated using the latest tax amount owing divided by each quarter of the year, and includes prepaying some amounts towards the next year in the following first quarter. This is one way the CRA collects regular tax payments and helps avoid hefty, surprise tax bills in the future.
The simplified math of how your income tax is calculated:
Business Revenue (ie. total amount invoiced in the year)
MINUS: Business expenses
Taxable income (calculated based on the tax brackets for the year)
As a self-employed business owner, the best tools at your disposal for lowering your taxable income on your tax return will be your business expenses. Get in touch with us » if you need help determining whether a business expense is justifiable!
One other thing to be aware of as the owner-operator of a self-employed business is that you have extra time to file your taxes (typically up until mid-June) although any amounts you owe are technically outstanding as of the end of April, even if you haven’t filed or calculated your balance as of then. The dates for these deadlines typically shift based on what day of the week they land on, but they rarely change substantially. You can see the 2023 tax deadlines on our blog post here »
Proper bookkeeping is a must for self-employed individuals in Canada. Thankfully, a simple spreadsheet can help you do most of the heavy lifting!
If you have trouble with data entry, documentation, and record keeping, a bookkeeper » can help - they’re also an applicable business expense for your taxes! Clean bookkeeping means less headaches in the future, especially in case of an audit by the CRA. If you’re still on the fence about whether you should hire a bookkeeper or not, we go into that in way more detail on another blog post here »
Speaking of spreadsheets, we have a free Google Sheet template you can use here:
Our template auto-calculates your profit and loss for the year based on the revenue and expense entries you make in the related tabs. It’s a great way to start keeping track of everything! With your invoices and receipts entered, you’ll have a better idea of what your taxable income will be, which is the portion you will be taxed on anywhere from 15% to 33% (see the CRA website » for up to date tax rates and brackets).
For your business expenses, we recommend keeping digital copies of all receipts in case of an audit - if you were audited and weren’t able to provide proof of purchase (ie. an itemized receipt showing what was purchased, when, how, etc.) the CRA may disqualify the expense which would increase your tax liability and possibly open you up to penalties, interest, or fines as well. Many contractors and business owners will write directly onto receipts the reason for the purchase so there is no ambiguity at tax time or during a CRA audit.
There are many self-employed budgeting and bookkeeping applications out there! Remember to save your receipts if you are paying for software for your business. The cloud (ie. Google Drive, Dropbox) is also an excellent place to store your scanned digital receipts for quick sharing to your bookkeeper or accountant. Don’t forget to name your files something descriptive - we recommend including the purchase date and place of purchase at the very least.