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Self-Employed Taxes In Ontario
When you are deemed self-employed as either part of a partnership or as a sole proprietor, you need to record the company’s income/expenses relative to how much you own of the company as a part of your tax return for your income. The total net income of your company’s partnership or sole proprietorship is then taxed based on your respective marginal personal tax rate for the current fiscal year. It works this way because the Canada Revenue Agency (CRA) doesn’t look at you and your company legally as separate entities. As a result, you need to include it in your returns. Thus, whenever you form a partnership or a sole proprietorship, you need to know your obligations for filing taxes and how to effectively pay what you owe.
By the end of this article, you should know how to effectively calculate your taxes when you are legally self-employed. That way, you can accurately pay the taxes you owe based on the law in Ontario.
Self-Employment Income Reported On Form T4A
Whenever you have an employer that you work for, you get a T4 form delivered during tax season. This is a form that effectively tells you how much you made in the current year and it gives you all of the numbers you need to use to file your T1.
When you are employed by yourself or if you are earning any income through a business, you are likely going to additionally receive a Form T4A. This is a form that includes all of the money you earned from the various jobs throughout the year.
Calculating Gross and Net Self-Employment Income Using The Form T2125
When you are self-employed, you will be required to fill out Form T2125. This form is the Statement of Business or Professional Activities. This is a piece of paper that will assist you in calculating your total gross income. This is the total money you made throughout the entire year. This form will also give any Canadian who is self-employed the ability to deduct any eligible expenses from the gross income to minimize taxable income so you don’t have to pay as much on income taxes. These deductions can be a major boost for anyone that is looking to minimize how much they have to come out of pocket during tax season because they effectively reduce the total taxes you need to pay.
On Form T2125, you can anticipate having to provide the details listed below:
- The source or sources of your company’s income.
- A description of your business. This should include what you sell whether it be products or services. You’ll also need to include the industry of operation.
- The income that stems from any business activities. This includes, but isn’t limited to any advertising traffic, affiliate sales, and any referrals made. All of the websites need to be included as per the CRA’s guidelines.
- Goods and Services Tax or “GST” and Harmonized Sales Tax or “HST.” That includes everything you received and paid.
- Any expenses that were incurred while you were operating your business.
Once you complete your Form T2125, you want to utilize both the net and gross income figures that you came up with to complete the T1 form.
You will be required to include all of your income when you are calculating everything for tax purposes. If you do not include all of your made income, you will typically have to pay a 10% penalty of the total number you failed to report after your original omission. Any repeated failure to report eligible income will typically result in you having to pay double the original penalty which would equate to 20% of the original amount. If you continue to fail after that, you will continue getting assessed more fees (usually doubled once again).
How Much To Set Aside To Pay Taxes?
Unfortunately, there isn’t a 100% accurate way to figure out how much money should be set aside throughout the year to pay your taxes during tax season. However, there are several factors that you can include when you are trying to keep abreast of your tax obligations.
In general, you want to put at least 25 to 30% of your income earned to the side for taxes. This can be a good amount because it should account for several of the taxes that you can expect to pay including CPP, Federal Income Tax, Provincial Income Tax, and HST or GST.
You will find that this number can easily change based on how your income changes and whether or not you jump or get lowered on the tax rate scale.
Tax Filing For Sole Proprietors
If you are currently deemed a sole proprietor because you are self-employed, you are going to need to file a personal income tax return. This return will be subjected to the same rates as someone who is employed. Any earned income through your business would be subject to paying out both federal and provincial tax rates at the applicable marginal tax rates at the time. Any of your business expenses that qualify can be used to deduct from your earned income for the calculation of your total profit as a self-employed individual. Any profit is considered business income and would be required to be added to your tax return.
Tax Filing For Partnerships
Any partnership wouldn’t be legally required to file additional taxes on earnings. Nor would they have to pay taxes at the partnership level if they don’t meet the right conditions. If the partnership grows beyond the scope deemed appropriate, it will need to file a partnership information return. This would require all of the partners to be issued slips. For this specific example, we will assume that the partnership isn’t required to file a return and all of the generated income is respectively split between all of the eligible partners and filed individually. All of the income including the credits and deductions and even losses would be divided between all of the partners based on the original partnership agreement. Different considerations could come into play if the partnership was dissolved that year.
Tax Filing Of Business Income Using Form T2125
Any of the company’s income minus the deductions will need to be reported on this form. This form is intended to supply the business’ income. It helps to calculate the gross income that’s required to send out a personal tax return. Along with this, it offers more structure for the deduction of business expenses from the total gross income amount that is listed to reduce the total taxable income. All of the details of the form include sources of the business’ profit, the description of the business, the business industry of operation, the income derived from any business activities, GST, HST, and any incurred expenses relative to the income.
Business Expenses
There are a lot of expense deductions when you are filling out taxes in Ontario for the self-employed. These deductions include benefits, wages, inventory, traveling, legal, cell phone, rent, maintenance, bank charges, supplies, advertising, and a lot more. If you are currently working at a home that’s designated for your business, you could potentially claim expenses for the interest you are paying on your mortgage along with repairs, utilities, rent, property taxes, upgrades, and more. Some may be eligible to claim vehicle expenses if it’s used for their business. These expenses could include gas, parking fees, depreciation, lease, oil changes, and more. The total amount that can be deducted can only stem from the home office’s proportion and the vehicle that is actively being used to generate revenue for the business. By using these expenses, you can effectively reduce income taxes which can result in big savings opportunities for self-employed individuals.
You can contact FSHAD CPA to ensure that you are accurately tracking your expenses and filing your taxes. That way you don’t have to pay more than you should on your taxes.
Canadian Pension Plan And Employment Insurance Contributions
When you are employed, your employer would deduct and remit contributions to the Canada Pension Plan or “CPP” and Employment Insurance or “EI.” They would do it for you so you don’t need to worry about it. However, when you are self-employed, that’s not the case. You are responsible for filing it yourself. You’ll need to not only calculate it but make the contributions yourself. These can be voluntary under different circumstances.
Any person who is between the age of 18 to 70 who earns over $3500 will be required to contribute to the CPP. Those who are employees automatically have a certain amount pulled from their pay to account for these contributions. From there, the employer matches the amount pulled. That’s not the case for those who are self-employed. Any self-employed Canadians will need to contribute both portions including the portion they would be responsible for as an employee and the portion responsible for the employer.
Tax Deadline
The deadline for filing the self-employed income tax return is June 15 for both the taxpayer and their spouse. That being said, any tax payable is fully due by the following April 30. Because of this, it’s always a good idea to complete and send out your tax return before April 30. This way you can reduce the chances of not paying it on time which can keep you from being required to pay interest. If the CRA finds out that your tax installment payments need to be made for the following year, they will let you know. You’ll find the dates for the installments are on the 15th of March, June, September, and December every year.
Prepping for your self-employment taxes in Ontario is no easy task. It can be very difficult. Because of this, it’s always advisable to contact someone that knows what they are doing. Going to a professional accountant is always recommended to ensure you are maximizing your tax savings potential.
FAQs
How Much Should I Be Setting Aside For Canada Self-Employed Taxes?
A good way to figure it out is by using SimpleTax’s calculator. This can help you figure out the average tax rate that you would need to pay. It will help you determine how much of your respective earnings would be needed to set aside to pay off your tax liabilities.
How Do I File Self-Employment Taxes In Canada?
You would be filing your self-employment taxes along with your income tax return. All of your business’s net deductions relative to your income need to be reported on the form. You would file the T2125 form as it helps with calculating the gross income needed to complete your taxes.
Can I Do My Taxes As Someone Self-Employed?
Yes, you can always do your taxes if you have the requisite knowledge and expertise. It’s always advisable to contact a professional. They can better help you understand your tax situation to ensure you are maximizing your tax savings potential.
How Do I File Taxes As A Freelancer In Canada?
Because a freelancer doesn’t have an employer, they are deemed self-employed. Because of this, they need to file their taxes as someone self-employed. These taxes are filed in conjunction with your income tax return. All of your income minus any deductions would need to be officially reported on the T2125 form. This form will help you calculate the gross income required to complete and send in your tax return.
This publication is produced by FShad CPA Professional Corporation as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.
