Last updated: Oct. 4, 2017
There are a lot of benefits to being an independent contractor, in addition to being in control of when and where you work, having flexible hours, and, hopefully, a higher income.
As an independent contractor, you’re also responsible for keeping track of all your income fulfilling your income tax obligations with the Canada Revenue Agency (CRA).
To help minimize the amount you pay to the CRA it’s important to know how to get the most of your deductions.
Below is a list of some of the top tips for paying the least amount of tax when you’re an independent contractor.
Keep Track of Business Expenses
When you work for someone else, it’s up to them to make sure they take enough income tax off your pay.
When you’re a self-employed, it’s up to you to keep track of your income and business expenses.
The first thing independent contractors need to do is keep track of the money that is coming in and going out.
Whether its money spent on a business license, developing a website, advertising, or buying tools to perform your trade, you can claim reasonable expenses you paid to help make the business profitable.
Your business expenses reduce the amount of income tax you have to pay, leaving you with more money in your pocket or to invest in your business.
If you use part of your home to conduct your business or to meet clients, you may be able to deduct some of your maintenance costs, home insurance, electricity, etc. You may also be able to deduct some of your rent or mortgage interest.
With all of these expenses and receipts, it’s imperative that you have an effective way to keep track of your business income and expenses. It could be in a spreadsheet or bookkeeping software. The more detailed the better.
Having accurate, up-to-date records will also make it easy if the CRA has any questions for you. Independent contractors need to keep all records and supporting documents for 6 years after the last tax year they relate to.
Register for GST/HST Accounts
If you make more than $30,000 a year (or over four consecutive quarters or a single quarter) you need to charge and collect GST/HST.
GST/HST is paid on most goods and services sold or provided in Canada. Even if you don’t earn enough to register for a GST/HST number, you may want to get one so you can claim tax credits on the GST/HST you paid on your business expenses.
Take Care of Tax Returns
When you work as an employee it’s a little easier to do your taxes. Your employer gives you a T4 slip with all the information and you file it on or before April 30.
It’s not quite as easy for independent contractors.
The deadline to file an income tax and benefit return for those who are self-employed is June 15. But, if you have a balance owning, you still need to pay that amount no later than April 30.
It might be tempting to underreport your income to save on paying taxes. But if you get caught, you could face fines, penalties, and even jail time. That’s why it’s so important to understand all of the deductions available to you.
A professional tax consultant can help ensure you take advantage of all available tax credits and deductions. Using legal tax loopholes to minimize the amount you pay to the CRA is legal. Tax evasion is not.
T5018 Information Return
The construction industry employs more than 1.2 million Canadians. A lot of people that work in construction are independent contractors so it’s important for businesses to understand how to file T5018 statement of contract payments with the CRA.
In the Canadian construction industry, any payments made to subcontractors must be reported on a T5018 Statement of Contract Payments.
This rule applies to any business in which more than 50% of its business income comes from construction activities. Payments to independent contractors and subcontractors can be reported on either a calendar-year or fiscal-year basis, and are due 6 months after the reporting period.
A T5018 slip must be filed for any payment over $500. If the total payment to an independent contractor is under $500, there is no need to complete a T5018 slip.
One T5018 slip is filed for each independent contractor and a summary slip is also reported to the CRA.
Failing to file a T5018 will result in penalties. And it can get costly. The CRA issues late filing penalties based on the number of T5018 slips filed late and the number of days late. The late filing penalty continues to accrue interest until paid in full.
If you think the T5018 process is too difficult and it’s easier to deal in cash and avoid paying taxes, if you get caught, you could be hit with serious fines or face criminal prosecution.
Ask for Professional Help
Canada’s tax code is in a constant state of flux, and even in a best-case scenario, can be confusing. Right now, though, the federal government is set to implement a number of major changes to Canada’s small business taxes.
Those changes to the small business tax law have made it even more confusing. And small business owners, including farmers and independent contractors, are afraid of losing a number of tax breaks.
To ensure you’re filing your taxes correctly and taking advantage of every tax deduction and loophole, ask for help from a professional tax consulting team that specializes in trades and independent contractor taxes.
For the past 65 years, the tax experts at FBC have worked exclusively with small business owners, tradespersons, and those in the agricultural sector by helping them file their taxes accurately and on time, minimize the amount of taxes they pay, and maximize their assets.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.