How Do Freelance Taxes Work? Your Top Tax Questions, Answered

Career Advice

Ah, taxes. 

I’m not going to lie, when I first made the transition from being an employee to being a full-time freelancer, even the thought of filing taxes was enough to set me off. It felt similar to starting a final paper the night it’s due – anxiety-inducing (to say the least). 

Whether you’re freelancing full-time or doing it as a side hustle, I’m sure you have a long list of questions about how to file freelance taxes in Canada like…

  • How much money do I need to set aside?
  • What’s up with HST/GST?
  • Can I do my taxes on my own?
  • What expenses can I write off?

And if you’re thinking… 

Jasmine, just rip the band-aid off and tell me what I need to know, keep reading because I’ll be answering all of those questions and more without giving you a headache. 

*Disclaimer: While I’ve learned a whole lot about taxes over the years, I am not a financial advisor or CPA. The information in this post is the starting point I wish I had, but shouldn’t be used in place of consulting with a professional financial/tax advisor to make business decisions.

Okay – now let’s get into it!

How Do Freelance Taxes Work? Your Top Tax Questions, Answered

How much money should I set aside for my freelance taxes?

I know how tempting it is to spend your hard-earned money the moment you get it – but in the freelance world, not all of the money that enters your bank account is your money. Unlike a paycheck from an employer, money that you receive from freelancing doesn’t have income tax deducted. So before you buy that beautiful new patio set or those “must-have” headphones, you’ll need to set aside money for taxes. 

As a general rule, you should set aside 25-30% of the money you make from freelancing for taxes. I’ve found it best to separate that amount from what you earn immediately so that the number you owe doesn’t hit harder at the end of the year. 

How should I keep track of my earnings and expenses? 

There was a time when I would frantically search the internet for invoice templates (and not the cute kind), while also tracking my income in Excel. I’m so glad those days are long gone because I learned very quickly that staying on top of all the money coming in and out of your freelance business isn’t optional – it’s a necessity

If you’re anything like I was, then you might be storing this information all over the place, from iPhone notes to spreadsheets to scrap pieces of paper. And in that case, I’m about to make your freelance life a whole lot easier. 

When I first found Wave, it completely changed the game for me. The free platform allows you to track your expenses and income, manage your cash flow, create branded invoices and download reports. (I swear this isn’t sponsored, Wave is just that good). 

If you already have another system in place that works for you, great! Just make sure you’re keeping your receipts, invoices, and expenses stored somewhere safe (for up to 6 years, in case the CRA requests them) so that you’re not trying to gather a year’s worth of paperwork during or after tax season. 

What if I only made a few hundred dollars freelancing? 

Whether you make $500 or $50,000 as a freelancer, you need to file your taxes. If you’ve made under $30,000 in the calendar year, you need to fill out the T2125 form and claim all relevant expenses.

What the heck is up with HST/GST?

It wasn’t until a few years ago that I finally understood how HST/GST works, so if you feel left in the dark on this… 

Don’t worry, I’ve got a flashlight.

Here’s a brief breakdown:

  1. Registering for an HST/GST number

To keep things simple: If your freelance biz is making under 30k yearly, you don’t have to worry about registering for an HST/GST number. 

However, if you surpass that amount in a calendar yet, you’re no longer considered a “small supplier.” At that point, it’s up to you to register for an HST/GST number. This process is pretty much like the rest of freelancing in the sense that no one else is going to keep track of this for you or micro-manage as you do it. It’s completely up to you to make sure you know your numbers, and there are hefty penalties if you don’t. If you anticipate surpassing the threshold, it’s a good idea to get ahead of the game and register in advance. 

  1. Charging HST/GST

Once you’ve registered for an HST/GST number, you’ll need to start adding that % onto the invoices that you send clients – but remember that the tax you collect is the CRA’s money, not yours. This is where having a business bank account comes in handy. Not only will it help you keep your personal and business expenses/income separate, but it will also make the record-keeping process a lot easier.

  1. Filing HST/GST

Another important thing to keep in mind is that GST/HST is filed separately from income tax returns. The amount of GST/HST you have to remit to the CRA depends on how much you’ve collected from your clients. 

Should I hire an accountant or DIY?

It depends. Does the idea of doing your own taxes make you cringe? 

I’ll be the first to admit that math and numbers are NOT my strong suit. So for me, I know the value of investing in a good accountant far exceeds the cost. Not only do I save myself the headache and tears from trying to sort things out solo, but my accountant also knows exactly what benefits and deductions my business qualifies for. Beyond that, I can sleep easy knowing everything was filed right. Essentially, I went from absolutely hating taxes to actually feeling good about it. 

One thing to note: Hiring an accountant to file business taxes typically costs more than if you’re just filing a T4. 

On the flip side, there are lots of freelancers out there that prefer to handle filing taxes on their own – and if you’re one of them, follow a DIY taxes checklist to cover all your bases.

What kind of freelance expenses can I write off?

Sorry to disappoint, but business write-offs are not synonymous with “free.” So, that fancy new laptop you’re ready to splurge on? Yup, you still have to pay for that. It can count as a business expense though, which will help reduce your taxable income. 

A few other examples of deductible expenses include:

  • Cell phone and internet bill
  • Marketing costs
  • Office supplies
  • Travel expenses
  • Trainings and professional development 

There are a variety of other business expenses and car expenses that are claimable to the CRA, but this heavily relies on the nature of your business. Operate out of your home office? A portion of your internet and property tax might be eligible for this based on the square footage of your space. Need to drive to and from locations for gigs? Also might be eligible. This is where having an accountant could come in handy if you aren’t sure what you qualify for. 

Final Thoughts

Congrats! You’re officially more informed on taxes than I was when I became a freelancer. 

Jokes aside, taxes don’t have to be scary. The more you know, the easier it is to make informed decisions and feel confident about your money management. While I covered as much as I could in this post, I’m not a tax expert and encourage you to do your own background research.

Now, if you’re thinking…

This is great, but I have so many questions beyond taxes about freelancing.

I’ve got you, my friend!

As a freelancer, I know how important it is to have access to the tools, templates and mentorship needed to scale your business. This is why I created a Freelance Rate Calculator – a simple spreadsheet tool to help you figure out your freelance hourly rate based on your experience level and budget.

Give it a try!

Freelance Calculator