If you currently work with freelancers or plan to in the future, you might find yourself having questions about paying freelancers, since taxes for freelancers look slightly different than for your in-house employees.
Here are some things that you should know about when working with freelancers to help ensure that they are adhering to Canadian tax laws and regulations, while ensuring that your records are CRA compliant.
What Your Freelancers Should Know
It goes without saying that your freelancers are legally required to report their income to the CRA. However, if you are working with a new freelancer, here is some useful information that you can communicate to them to help ensure that they are CRA compliant and prevent unwanted fines.
Registering a Freelance Business
Freelancers are under no legal obligation to register their business as long as they are invoicing using their own name. In the event that the freelancer would like to invoice under a business name, they would need to register the business name in the province. Otherwise, it is sufficient to invoice simply with their own name.
Taxes are quite straightforward if the freelancer is making less than $30,000 of annual income from freelance activities. Taxes become slightly more complicated once the freelancer exceeds that amount.
Registering an HST/GST Number
Once a freelancer’s annual income from freelance work exceeds $30,000, they will no longer be considered a small supplier. Note that this amount is not calculated using the calendar year, but rather any 12 month period where the freelancer’s income exceeds $30,000.
Once a freelancer’s income exceeds $30,000 they will need to register for an HST/GST number and begin collecting taxes.
How much tax a freelancer collects depends on the company that they are invoicing and the province that the company is operating in.
- Ontario – 13% HST
- Quebec – 5% GST
- Alberta – 5% GST
- Saskatchewan – 5% GST
- Manitoba – 5% GST
- Newfoundland and Labrador – 15% HST
- New Brunswick – 15% HST
- Prince Edward Island – 15% HST
- Nova Scotia – 15% HST
- Yukon – 5% GST
- Northwest Territories – 5% GST
- Nunavut – 5% GST
This is important to remember, your tax rates should stay the same even if you hire a freelancer in another province. Knowing this will ensure that you are being taxed correctly, and that the business that is being conducted with the freelancer remains CRA compliant.
Tax Forms & Claiming Expenses
Generally, freelancers should set aside 25% of their income for taxes to pay for:
- Federal Income Tax
- Provincial Income Tax
- Canadian Pension Plan
- GST/HST (If they are registered)
This increases if the freelancer were to reside in a higher tax bracket. For a detailed breakdown of expected tax amounts, click here.
With that said, a freelancer is able to reduce their tax payable by filling in the T2125 Statement of Business or Professional Activities and claiming expenses such as:
- Office Supplies
- Bank Fees
- Vehicle Expenses (gas, insurance, repairs, oil changes, etc.)
The CRA provides a more comprehensive list of what can be claimed as business expenses.
We Can Help
Is it a bit daunting, when it comes to taxes and ensuring compliance with the CRA, it can become a pain to accurately track and keep your books up to date (especially if you are doing everything manually).
In addition to the tax considerations highlighted above, you may know that there are many tax questions to consider when running a business. It can become quite the headache to keep track of all of these considerations.
With that said, these pains, as well as other tedious processes in your small business, can be alleviated with the use of PaymentEvolution’s software.
Whether you are supporting your new freelancers and other employees by ensuring that they are informed of tax rules and regulations, or keeping track of your business payments, we are here to support you.
PaymentEvolution also has human resources experts who can provide support in compliance, staff relationships, and more, as well as an all-in-one payroll tool that allows you to automate and better track your payments to freelancers, business, and employees.