As the cost-of-living crisis continues to pinch Canadian wallets, many people are turning to side hustles and second jobs to help make ends meet. A report commissioned by H&R Block Canada indicates that 23% of gig workers don’t have a clear understanding of the tax implications of a side job.
Having a side hustle or second job has many advantages, but workers need to research the subject thoroughly and seek help from experts. The survey stated there is a lack of understanding within the industry on the income tax deductions and tax credits gig workers are entitled to. Nearly half of Canadian gig workers were willing to risk not declaring income at all.
BNA Debt Solutions’ Licensed Insolvency Trustees are available to answer questions and provide useful information on side hustles.
Often when starting a new venture, people don’t know what their responsibilities are. They don’t know what they don’t know. Many are self-employed for the first time and often not familiar with the Canadian Tax system. Many food delivery people are not financially sophisticated enough to know what they need to report.
Filing taxes for your side business is straightforward. You’ll need to complete a T2125 form, which is part of the T1 General Income Tax and Benefit Return.
The T2125 form collects essential information about your side hustle, including income and expenses. With the net income or loss calculated from your business using the T2125 form, this amount is transferred to the appropriate line on your T1 General Income Tax and Benefit Return, becoming part of your overall income. This total, including earnings from your day job, determines your tax liability.
Over the past five years, the Canada Revenue Agency (CRA) has made several changes to business expenses. Legitimate expenses, especially those that must be paid anyways, like home/office utilities, can reduce your income tax liability.
For example, home office expenses allow business owners & employees to claim a portion of a rent or mortgage payments as a tax deduction. There are detailed rules around what exact portion is allowed, but this must be paid anyway too. This mandatory payment can be used to lower your taxable income but there is a warning here. If you deduct these expenses from a residence that you own, you will be required to report this when you sell the home and they will be clawed back. If you rent, it isn’t as much of an issue.
There are numerous deductions and expenses eligible for claiming that can directly improve your financial situation. The key is a comprehensive understanding of your unique tax circumstances as every business is different. Tracking all business expenses and filing receipts to claim tax deductions is also critical.
There are many benefits to a side hustle or second job, but you cannot escape bookkeeping. Are you the type that can keep track of each 2-6 km work-related trip? Entrepreneurs like yourself can often feel bogged down by the tediousness of expense tracking. Fortunately, there are apps available that capture receipt data through your smartphone and avoid manual data entry. Some of our top picks include Expensify, QuickBooks Self-Employed, Shoeboxed, and Hurdlr.
These apps sync with your bank and credit card accounts to simplify categorizing expenses and submitting expense reports. There are even some that use GPS for mileage tracking that automatically record each kilometre with the touch of a button.
When selecting an expense tracking app consider these factors:
Higher tax brackets increase the percentage of tax charged. When reporting your taxes, the income from your side hustle or second job is combined with your main income. This amount minus allowable deductions and exemptions determines your federal tax bracket.
Business deductions can reduce your total income and lower your tax bracket. For example, if you have an annual income of $90,000 and your small business has an income of $80,000 with no expenses, the total of $170,000 puts you in the 29% rate tax bracket.
However, if that small business has expenses of $60,000 and your total income is $100,000, you are now in the 20% rate tax bracket. (these rates are based on the 2023 tax year). Lowering your taxable income is also achieved by contributing to a Registered Retirement Savings Plan.
Even if your side business fails to make a profit some years, it is possible to use this loss against any income you made that year. If you made $90,000 on your main job but you lost $20,000 on your side business, then your total taxable income is $70,000.
Running a side hustle requires filing a tax return once a year. Business owners quickly learn that receiving income of $1000 is not $1000 as taxes, GST, etc., must be deducted. The smart Side Hustlers puts money away each month, to avoid being hit with a big unpaid amount at the end of year.
The best ways to ensure accuracy and compliance when calculating your taxes include, using accounting software, hiring a professional accountant, using the CRA’s online resources, and making quarterly payments.
Canadians can access specific provincial and territorial tax credits and benefits by submitting their tax returns. These benefits include the GST (Goods and Services Tax) and the Canada Child Benefit. Reporting your earned income is necessary to qualify for various benefits.
If your side gig made less than $30,000 last year, you don’t need to worry about collecting or paying GST. Once you hit more than $30,000, you’ll need to register with the CRA and then pay more taxes when you file. Penalties such as CRA fines will result if payments aren’t made. Registering allows you to recoup the GST/HST you paid.
In 2019, 17% of Canadians were participating in the gig economy or had a side hustle, according to Made in Canada. Now 28% of Canadians participate. The cost of living remains high and with benefits like those listed above, participation is expected to increase even more.
Fortunately, BNA’s Licensed Insolvency Trustees are experts with income tax liabilities, deductions, and financial reporting. They will navigate you through muddied waters and provide business information critical for good decision-making.
Revenues from a side hustle or second job are taxable and deductions are available to businesses. Filing is straightforward with the T2125 form and claiming all legal deductions will lower total income and possibly lower your tax bracket (percentage of tax paid). Collecting and paying GST has clear rules. To best leverage all the advantages of a side hustle, seek expert advice from BNA’s Licensed Insolvency Trustees.
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