Be Tax-Savvy – What You Need to Know about Taxes when Employed and Self-Employed
For most people, the start of the new year means fulfilling new year’s resolutions. However, for the tax-savvy population, it means getting started on your tax preparation. Though Canada has a deadline of April 30 for filing taxes, there is a good percentage of people who do their best to get a head start. This is a smart move since you don’t want to be doing taxes at the last minute, as being under pressure can lead you to make calculation errors or over-estimate tax reliefs, which in turn can lead to inaccuracies or costly penalties.
This tax year is all the more intricate if one’s financial situation has been affected by COVID-19 one way or another. For example, if one is among the millions of recipients of the Canada Emergency Response Benefit or CERB, they would have to ensure that this is reported as other income as it’s considered as taxable income.
What’s more, if one’s employment status has been affected by the pandemic, they should pay attention to how they file taxes as well. There are differences between filing taxes as an employee and filing as self-employed. Let’s see below.
Employee or Self-Employed?
For some people, their employment status is readily apparent. For example, chances are you’re an employee if you go to work (physically or remotely) at the same place every day, you have a boss that reminds you of your tasks and deadlines, and you get paid regularly (weekly or every two weeks). For some, it isn’t readily apparent, but chances are, if someone works at different places every day and you have control over your deadlines and you get paid irregularly (once a month), then chances are, you’re self-employed.
The Canada Revenue Agency (CRA) has more formal distinctions between the two, and the important points are noted below.
If one is an employee:
- They will often be directed and scrutinized, and many elements are effectively controlled of how and when the work is carried out.
- The results of the work and the method used to do the work are controlled.
- The method and amount of pay are controlled.
If one is self-employed:
- They usually work independently.
- They don’t have anyone supervising their activities.
- They are usually free to work when and for whom they choose and may provide their services to different payers at the same time.
Now comes the fun part: Filing taxes!
If you’re an employee, it doesn’t mean you can merely sit back and relax. You have to check your pay stubs regularly to see if your Employment Insurance (EI), Canada Pension Plan (CPP) and income tax payroll deductions are remitted to the Canada Revenue Agency as scheduled, along with your employer contributions. Your pay stubs also show your income tax deductions, which are based on the TD1 forms you filled out when you were hired, plus the tax tables provided by the CRA.
All of this information will also be detailed in the T4 or Statement of Remuneration Paid, which is normally handed to employees at the beginning of the year (Quebec, on the other hand, will have their own tax table). Once you have your T4 in hand, you’re ready to file your taxes.
If you’re self-employed, the steps to filing your taxes are more extensive. Note that it doesn’t matter if your business is registered or not; if you’re invoicing and getting paid under your name or under the business name, you’ll need to file your taxes.
The general rule when you’re self-employed is to set aside 25% of your income for taxes, which will fall on line 104 on your tax return where it says “employment income not on a T4 slip.” You’ll also need to fill out the T2125 form to indicate business activities that relate to your income and expenses, such as advertising costs, office supplies, travel, cellphone, internet, among others. Be careful to not claim personal use of any expenses. For example, if you use your internet for streaming movies or TV shows, you can’t claim 100% of your internet costs as business expense.
If your self-employment income is more than $30,000 annually, you must register for a GST or HST number so you can charge clients within Canada with the appropriate amount. For example, if you’re based in Vancouver, BC but you’re developing a website for a client based in Toronto, ON, your invoice should say your fee plus 13% HST, which is the percentage for Ontario.
The deadline for paying taxes for self-employed individuals is April 30, just like everyone else, but you have until June 15 to file your taxes.
So what are you waiting for? Time to get started on those taxes!