If you’re self-employed or contemplating it, take note that there are tax implications you may need to consider.
There are also non-taxation issues such as the mandatory Canada Pension Plan (CPP) contributions that will be added to your taxes due when you file the annual return.
A side business allows you to make some extra money that you can put away for a rainy day, family vacation, pool and outdoor area or a new vehicle. Anyone can start a side business doing something you’re passionate about, being your own boss and working on your own schedule. This is why it’s a popular way for people to make extra income.
The most common ways for people to make money on the side are; Home renovations, cleaning business’, baking, teaching piano or photography. No matter what your side business is, you MUST show your income on your tax return once tax season arrives.
Now that you are running your own business, it’s critical to stay organized and keep records of the money you make and spend. Store all documents in one folder/file and organize them by date, this will make life easier. If need, keep copies of all invoices you send clients and expenses/receipts you needed to do the job. Again, all documents need to be kept for 6 years. The CRA can request at anytime to see the documents, if you are selected for a detailed review
Income that is earned through a side business must be reported on your T1 (specifically form T2125): Statement of Business or Professional Activities. The income that is earned from your business activities will be reported on this form
and be added to your overall income.
You may be thinking “wonderful, I’ve got a higher income now however I have to pay taxes in a higher tax bracket” Not necessarily, business income is also subject to “work related” expenses. Mak Tax can assist you in figuring out what expense you can claim on your business return:
When do I charge my clients GST/HST?
Once your self-employed hustle starts earning over $30,000, you will need to register for an GST/HST number and begin charging your clients GST/HST.
The 2022 Federal tax bracket is noted below: It’s strongly recommended that you set aside 25% to 30% of your income to meet your tax obligations at tax time.
15% | on
the first $50,197 of taxable income, plus |
20.5% | on
the next $50,195 of taxable income (on the portion of taxable income over
50,197 up to $100,392), plus |
26% | on
the next $55,233 of taxable income (on the portion of taxable income over
$100,392 up to $155,625), plus |
29% | on
the next $66,083 of taxable income (on the portion of taxable income over
155,625 up to $221,708), plus |
33% | of
taxable income over $221,708 |
What about CPP & EI?
With Canada Pension Plan (CPP), there is a threshold that comes into play. If your net self-employment income (plus pensionable employment income) is more than $3500, you need to start contributing to CPP, both as an employer and employee.