Claiming Gst/hst From Business Costs
Because you are responsible for making all purchases for your business, you can also claim back the GST/HST on purchases and expenses you use, consume or supply in commercial activities. This means you can claim purchases like your business license, creating a website for your business, buying ads, buying tools and supplies. These claims even extend to your home if you use a room in your home for meetings with clients or conducting business. Youll be able to deduct portions of your electricity, mortgage, internet, and maintenance costs directly related to that room in your home.
Not Being Sure Of Your Employment Status
The nature of Canadian tax law means that theres sometimes a grey area concerning whether youre self-employed. Before you file your taxes, ensure that your work fits the general criteria for filing tax as self-employed. To be considered self-employed, you should:
Self-employed individuals also arent considered to be an integral part of any company they work for. Your presence may enhance your clients business success, but your hypothetical absence shouldnt pose a threat to that business.
Its also prudent to make sure that any contract you sign clearly identifies you as an independent contractor and not an employee. If you understand your position as a contractor, keep track of your expenses, and set aside some money for taxes owed during the year, you should be able to avoid surprises when you file your taxes.
References & Resources
Flexibility And The Pay Opportunities Come At The Cost Of Job Insecurity And Tax Downsides
Its a modern revolution instead of getting a full-time job, an increasingly large number of people are working as contractors. Organisations as diverse as the public sector, smaller companies and large multinationals are embracing the concept of hiring contractors.
In some sectors, its individuals themselves driving the change, but in others, such as tech, companies are opting to staff whole functions with contract workers.
Google for example, has about 7,000 employees in Ireland but it is estimated that about half of these are contractors, while Facebook outsources some of its content moderation to contractors.
Recruitment firm CPL, which recruits many of these contract workers for multinationals, is booming from the growth in this side of the business. Its flexible talent division had a headcount of some 12,296 workers last year, while fees from this side of the business accounted for 68.4 per cent the total gross profit last year.
But while the benefits to the employer are clear more flexibility in scaling up and down your workforce as demand requires without being subject to employment law a potentially cheaper way of hiring given there is no requirement to offer company benefits and no need to pay employers PRSI the benefits to the employee are not as evident.
Why contracting can be better
Greater flexibility: Contracting also offers you greater flexibility. You can move between companies more easily, and thus work on a greater variety of projects.
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How To Fill Out The T5018 Summary
Use the summary to report the total of the amounts that you reported on the related T5018 slips or provide a document which includes all the summary information shown below, along with your listing or printout of the payments you made to subcontractors.
Report all amounts in Canadian dollars and cents even if amounts were paid in another currency.
The totals you report on your summary have to agree with the totals you report on your slips. Errors or omissions can cause processing delays.
Tax Topics For Freelancers Contractors And Consultants
OVERVIEW
As a freelancer, independent contractor, or consultant, you have a variety of tax issues to considerincluding ways to trim your tax bill.
For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.
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Individual Tax Identification Number
The IRS issues Individual Taxpayer Identification Numbersor ITINs to individuals who are required to have a U.S.
taxpayer identification number but who do not haveand are not eligible to get a Social Securitynumber from the Social Security Administration.
ITINs are not valid for employment and should notbe used on workers Forms W-2s.
They do not provide eligibility for Social Security benefitsor the Earned Income Tax Credit.
An ITIN is a nine digit number beginning with the number9 formatted like an SSN.
How Is An Independent Contractor Paid
After an organization has properly classified their new worker as an independent contractor and established the terms of compensation, its time to set up the actual payment process. Every situation is different, but the general steps are as follows:
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Are Written Agreements Necessary
It is ideal to use a written agreement before performing any work for a client or employer. This will help to avoid any disputes by outlining the description of the services to be performed. This agreement should clearly state what tasks the contractor is to perform. The agreement will also include what tasks will be performed and how much the contractor will be paid for his or her work.
A contractor agreement can also help demonstrate that the person is truly an independent contractor and not an employee. It also shows the IRS that the contractor and the hiring firm are embarking on an independent contractor relationship.
Do I Pay Canadian Tax On Us Income
If you are a Canadian freelancer with an American client or even if you are an independent contractor who works remotely for a U.S. company, you are exempt from paying U.S. taxes. That being said, as a self-employed worker, you must report all income to the CRA regardless of where your clients are located. On the other hand, if you commute to work for an American company or if your employer provides you with work equipment and benefits and decides when and where you work, you are most likely not self-employed, but an employee. Because U.S. companies are required to withhold tax on all payments made to their employees, you could find yourself in a situation where you are being taxed twice: once in the U.S., and once in Canada. To avoid this, Canadians who work for American employers should make sure to fill out a W-8BEN form.
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Whos Considered An Independent Contractor
Modern work and business relations can be complex. How do you know if the IRS considers you an independent contractor or an employee?
At a high level, the IRS considers you an independent contractor if the business or person paying you has the right to control or direct only the result of your work, and not what youll do or how youll do it. If the person or business thats paying you does get to tell you what youll do and how youll do it, then the IRS says you might be an employee and not an independent contractor. But this can be a complicated question, and whether you are an independent contractor or employee depends on the facts in each case.
As an independent contractor, youre automatically considered self-employed by IRS standards. But not all self-employed business owners are independent contractors.
For example, you may sell products you make online. Since you control the results of your work deciding what products to make, how many, when youll make them and when theyll be available for sale you probably wouldnt be considered an independent contractor.
Examples of professions where people offer their services to the general public and may be considered independent contractors include the following:
- Doctors
- Accountants
- Subcontractors
If youre an independent contractor, youll generally file an IRS Schedule C or C-EZ with your tax return.
Can I Get A Qualified Business Income Deduction
The 2017 tax law included a tax deduction for small business owners, called the “Qualified Business Income deduction.” This deduction is 20% of qualified business income in addition to your usual business expense deductions. Independent contractors can take this deduction for tax years between 2018 and 2025. The deduction may be limited or not applicable for higher-income business owners. Check with your tax preparer for more information.
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Not Knowing What You Can And Cant Write Off
As an independent contractor, you can legally claim a wide range of costs as non-taxable business expenses. What you can or cant claim as an expense largely depends on the nature of your business.
For example, if you work from home and have a dedicated space that you use only for work, you may claim a percentage of your rent and utility costs equal to the ratio of that space in relation to your homes overall square footage.
On the other hand, if your contract defines you as an independent contractor but you do the majority of your work on the premises of a clients company, you cant claim your home rent or utilities as an expense.
Likewise, a freelance writer could feasibly claim office supplies, such as printer ink, paper and computer repairs. A non-union background performer might be able to claim a percentage of a gym membership if theyre frequently required to perform physical feats on the job.
You should only claim expenses that you can prove are related to your job. You can use accounting software to keep track of business expenses.
An Introduction To Umbrella Companies
There are two main ways to handle this untaxed income, by either using a third-party umbrella company or by using your own limited company.
Umbrella companies are simply payroll companies. If you use an umbrella, youll become an employee on the payroll of the umbrella company, alongside other contractors and consultants. When your client pays your invoice, they pay into the umbrella companys bank account. The umbrella company then takes this payment, calculates, deducts and pays to HMRC all the taxes due, then pays the balance to you. Theyll pay it directly into your personal bank account, and youll get a payslip. Your tax is taken care of.
Theres a small point to keep in mind. Your client will pay you a gross rate, from which youve got to not only pay your employee taxes, but you also need to pay the employer taxes from this. Youre picking up the bill as both employee and employer and it all needs to come from your contract rate.
Example
An umbrella is very easy to set up, and very easy to use. The main downside of an umbrella is the cost and lack of flexibility. All of your income passes straight through the umbrella, and is paid to you as a salary. Whilst it is straightforward, it does mean youre missing out on flexibility and the ability to optimise your taxes.
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When You Have Specific Staffing Requirements
Contract workers might not be right for your business if you have to maintain specific business hours and when you need workers to change shifts regularly. You also dont have the flexibility to upskill and retrain contractors, or to ask them to do different tasks than the ones you hired them to do.
Taxes For An Independent Contractoran Example
An independent contractor works for several clients in 2020 and earns in total $27,000 for the year, as shown on the 1099-NEC form received from clients for the 2020 work. They have no other income, but their spouse has a full-time job, and they file a joint tax return.
They complete a Schedule C for their 2020 business taxes, and their net income from their business is $18,000 after deducting allowable expenses. This amount goes on Schedule 1, Line 3, then to Form 1040.
They must also pay self-employment tax on $16,623 of their business income. The result of the Schedule SE calculation shows they owe $2,543.32 for self-employment tax. They get credit for this amount of Social Security benefits. Half of this amount is deducted.
To avoid tax penalties for late payment, the spouse could increase their withholding from their work, or the independent contractor in our example could begin making estimated taxes, taking the full amount and paying one-fourth each quarter .
Again, they have until June 15, 2021, if they reside in Texas, Louisiana, or Oklahoma, or any other area that’s been declared a disaster due to the severe winter storms of 2021.
This is just one example of how independent contractor taxes might work. Your situation might be different, so check with a tax professional, or use one of the tax preparation software programs to help you prepare your taxes.
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You Still Have To Pay Into The System
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Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Kirsten is also the founder and director of Your Best Edit find her on LinkedIn and Facebook.
When you work for someone else, that employer takes Social Security taxes out of your paycheck and sends the money to the Internal Revenue Service . But things work a little differently for people who are self-employed. If you fall into this category, keep reading. This article will help you understand how to calculate the Social Security taxes you owe.
Preparing Your Books For Tax Filing
Even if your business is only a part-time venture, you should still have a bookkeeping solution in place. Most providers are DIY solutions meaning you need to import transactions, ensure theyâre categorized correctly, and review them constantly to get your financial information. But some providers are completely automated.
After you âcloseâ your books after the end of the yearâbring all accounts up to date, and finish record-keeping for the financial yearâyou can quickly determine your income.
You need to know your income in order to file your taxes. If you havenât closed your books, you may find yourself scrambling to get all your information together so you can file a Form 1040 before the tax deadlines.
If your books are well-organized and you have separate ledgers tracking different categories of business expenses, youâll also find it easier to track your deductions for the year.
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How Can I Avoid Tax Underpayment Penalties
In general, tax underpayment penalties kick in when you owe more than $1,000 in unpaid taxes. You can avoid penalties when you pay the smaller amount of:
- 90% of this years tax liability
- 100% of last years tax liability
For example, say you paid $10,000 in taxes last year. If you make four equal payments of $2,500 during the year, you should avoid underpayment penalties, regardless of this years income.
Always put aside enough money to pay your taxes. Dont wait to make large tax payments once a year divide your estimated annual tax liability by four and make quarterly payments.
Filing Your Taxes: Diy Or Hire A Pro
If youre debating between filing your own taxes as an independent contractor or hiring a tax professional, consider your business income and expenses. If you have a straightforward tax situation with few deductions, then itll be less expensive to use a tax filing software yourself. On the other hand, if your business expenses are complex, you have a high income or subcontract work to other independent contractors, it may be worth the investment to hire a tax pro to avoid any mistakes or errors in your filing.
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Quarterly Estimated Tax Payments
The U.S. tax system is a pay-as-you-go tax system, meaning you need to make tax payments regularly throughout the year. When youre an employee, your employer is responsible for withholding income taxes from your paycheck and sending it to the government.
So, how does an independent contractor pay taxes? When youre an independent contractor, paying the government regularly throughout the year is your responsibility. You do this by making quarterly estimated income tax payments. You can estimate how much you need to pay the government each quarter by guessing what your total income for the year will be or by using the amount youve paid in estimated taxes the previous year.
You wont know exactly how much tax you owe until you file your personal tax return at the end of the year. But youll want to spend time estimating this because if you underpay your estimated taxes, you could be subject to penalties.
And dont forget to pay estimated taxes to your state. Aside from making federal estimated income tax payments, youll be required to pay your state throughout the year as well.
