A few years back, I was working a side hustle.
At that point, I was just establishing myself in a steady job and like most ambitious university grads, I was taking on any work I could get in my field. This freelance job was good. It fit in well with my schedule and gave me an extra $250 a month in my bank account. That was groceries, that was beer, that was money put away into savings. It was sweet.
But it wasn’t sweet when I rolled into H&R Block at tax time to be informed that because of that extra $250 a month, I would have to owe on my taxes. Not like $50 owe, more like over $1,000 owe. I was not pleased.
Turns out, no taxes were taken out of that $250 a month, since it was an American company. It also fell under “contract” work. Which I guess was a double whammy.
I felt pretty stupid. How did I not see this coming? Nobody ever told me about this. Is this why grown-ups hated taxes so much? I get it now.
It turns out I wasn’t alone, I’ve since had several friends who work in different fields experience the same thing. It’s also a situation that Owen Green, co-owner of Saint John accounting firm Adams Green, has seen often. Whether you’re freelancing occasionally on the side or you’re fully self-employed, there are things you need to watch with your income to avoid owing at tax time.
“They get called a bunch of different names, but generally, if you’re working not for a single employer and not incorporated, then you fall into that category of ‘self-employed.'” says Green. “Whether it’s artists or musicians or graphic designers. It could be an accountant or a lawyer as well. The rules are essentially the same.”
We had Green to take us through some of the key things freelancers and the self-employed should know to avoid owing money this tax season.
Ask for help
This is an obvious one. If you don’t know something, ask someone who does. But Green says a lot of people are afraid to seek the help of a professional accountant because they think they are going to charge them for a conversation. That’s not necessarily the case.
“I think a lot of people don’t because they assume it’s going to cost them a bunch of money when in reality if you go into an accounting firm and say, ‘look, I’m thinking of starting a business?’ then they’re going to chat with you for an hour and find out what it’s all about and give you some guidance before the clock ever starts running,” he says. “They want your work down the road. They’re not making money off of giving you pointers up front.”
If you’re just starting out freelancing or starting your own business, it’s important to speak to a professional about what your options are when it comes to managing your income.
“I think it’s important to have that sounding board to make sure that you’re on the right path. That then gets into two of the biggest questions that I get from people, which are ‘do I incorporate?’ and ‘Do I need to register for HST?’ ”
Let’s get into that, shall we?
Ah, the Harmonized Sales Tax. You pay it all the time on most of the goods and services you buy, but do you need to charge it for the services you offer? That depends.
If the income you’re making is under $30,000, legally you do not need to charge HST to your clients. But that doesn’t mean you shouldn’t register for that HST number.
“Most people dwell on the question of ‘when am I going to pass that magic $30,000 mark?’ when you have to charge HST but don’t stop to consider whether they should,” says Green.
“Because not only does registering mean that you’re charging your customer HST, it also means you can claim the HST that you’re paying, which the CRA doesn’t allow you to do if you’re not registered.”
That HST money you get back can ultimately help you with your taxes and can help prevent you from owing.
Whether you should sign up for HST can depend on a few different factors. One being who exactly your customers are.
“If your customers are going to be other businesses that are registered for HST, then they probably don’t really care if you’re charging them for HST, because they are going to get it back,” says Green. “If your customers are individuals who are going to have to absorb that HST, then you get into a pricing issue where it’s 15 per cent more than they’re paying.”
Another thing to consider is how many business expenses you incur that have HST to provide the services you offer. If you’re not sure, talk to a professional.
“I’d make sure you have this discussion and do this analysis before you start spending a bunch of money because CRA won’t let you go back retroactively and claim it.”
To incorporate or not incorporate?
There are benefits to registering your business as a corporation, which is probably a topic for another story. But if you expect to make more than you need to spend on your personal needs, it’s something you may want to consider.
“The incorporation is really dependent on the individual and what it is you’re doing and how much money you expect to make. That is territory where I’d really recommend you sit down and talk to somebody and get some expert guidance there,” says Green.
Being incorporated can be beneficial if you’re not planning on spending all you earn.
“The big difference between incorporating and not, in a corporation, you pay a lower rate of tax until you take the money out,” says Green. “If you expect to be in a position where you don’t use all the money that you earn in a year, then you’re better off incorporated because you pay that lower rate of tax, versus if you’re self-employed and not incorporated.”
Just Plan For It
If you only plan to freelance occasionally, a simple way not to get surprised at tax time is to just put the money aside to pay what the taxes would be on your earnings.
“You always want to make sure you’re setting aside money to pay the taxes,” says Green. “There are various websites that have online calculators you can use to estimate how much you’re going to owe so that you know you’re putting the right amount aside.”
Look for things you can claim
While I was hyperventilating at the H&R block when I got the initial $1000+ number I owed, the gracious employee was diligently going through a list of questions with me.
“Did you use your car for your freelance job?”
“What about your phone?”
I did use my phone. I went and printed off all my phone bills from the previous year to claim. This brought the amount I owed down significantly. I still owed, but certainly not as much.
“Don’t take for granted [the fact that] what you receive from your client is what you’re going to have to pay tax on. If you go into your tax software under the ‘self-employment section’ you’ll see a list of valid business expenses,” says Green. “There’s telephone, vehicle, you can claim a home office. Figure out as many things as you can that you can deduct off of those customer receipts.”
It can be a lot to keep track of, but there are some inexpensive tools that can help keep you organized.
“If I’m counselling someone who is just starting out, if possible, if it’s in your budget, create a separate bank account, buy some accounting software, there are relatively inexpensive apps for taking pictures of receipts that make it easier to find things later,” says Green. “As much as you can pull that information out of your personal stuff the better so come the end of the year, you’re in a better position.”
If you didn’t know a lot of this stuff, don’t feel bad. A lot of people don’t. Green says there is a lack of awareness. But as more and more people rely on “contract” and freelance work for the majority of their income, people need to know this information.
“I do think there is a lack of education around this. I think personal financial planning should be part of the school curriculum at some point,” says Green. “With us moving in this direction of the ‘gig economy’ what gets taught needs to change.”
This is something Adams Green wants to help with. The firm also runs The Wheelhouse, a co-working space in uptown Saint John. Green says they have plans in the works to host a series of financial planning workshops that cover these kinds of topics.
“We don’t have the details yet on specific course offerings, but I do think it’s important. You’re not the first person that’s come to me asking these questions,” he says.
“I think as a society we do need to do better at educating people. It’s taken for granted that people are going to figure this out on their own and the reality is often times you find yourself in situations you didn’t expect to be in.”