Self-employed? Here’s how to file taxes for a side hustle

Nathalie Hatter is one of those who’s still running her former side hustle. A corporate travel executive who planned company getaways, she watched as her career stalled in March 2020. “As soon as Canada advised Canadians not to travel, that’s when companies had to cancel their programs,” says Hatter, who lives in Oakville, Ont.

Hatter has elderly parents, so she needed a new job that would be socially distanced and flexible—like dogwalking. She ordered business cards and handed them out to dog owners in her neighbourhood. Soon, Hatter was relying on her earlier chef’s training to bake artisanal dog treats, which she sold at weekend farmers’ markets. Pivot Dog Biscuits was born. “I was selling out every weekend,” she says.

Now, three years on, Hatter’s dog treat business is thriving. She’s currently gearing up to pay taxes by the federal tax deadline of April 30. (It falls on a Tuesday in 2024. The filing deadline for self-employed people (and their spouses) is June 15, but any taxes owing are still due April 30. “I like to get my taxes in ahead of the curve,” Hatter says.

Having a side business can bring in a lot of extra income. It’s critical to track your business expenses and keep the receipts, so you can claim tax deductions. More considerations if you’re newly self-employed: Your extra income could push you into a higher tax bracket, lead the Canada Revenue Agency (CRA) to ask that you pay taxes in installments and/or require you to register for and start charging GST/HST (more on that below).

These changes might be more than you bargained for when you launched your side venture, but planning ahead, maximizing deductions and reducing your overall income can ensure you maximize your profits while meeting your tax obligations. Here’s how to make that happen.

Is your side hustle taxable?

Absolutely, unless your side hustle brings in just a couple hundred dollars a year (so it’s more of a hobby than a business). Beyond that, any business income is taxable, says Dean Paley, a Chartered Professional Accountant in Burlington, Ont.

To find out how much tax you owe, plug your income into an online tax calculator—Paley recommends Ernst and Young’s. Then add almost 12% for Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions. If your net self-employment income plus pensionable employment income is over $3,500, you must begin contributing to CPP/QPP—and, unlike salaried employees, you must pay both the employer and employee portions for CPP.

Sole proprietors—individuals who own a business that is not incorporated—have to report all business income on their personal income taxes using Form T2125, Statement of Business or Professional Activities. Even if the business fails to make a profit, you have to declare a loss, says Paley. “A loss gets deducted against any other income you made in that year,” he says.

If your side hustle generates sales of $30,000 or more (before expenses) within a calendar quarter or over four consecutive quarters (not necessarily a calendar year), you will have to register for a GST/HST number, as you are no longer a “small supplier” according to the CRA.

It’s a good idea to get your number before you reach $30,000, or you may find yourself paying GST/HST out of pocket or facing fines. And if you wait, you’ll have to start charging your existing clients or customers 5% to 15% tax (depending on their province, not yours) once you do hit $30,000, so you may as well get them in the habit of paying that extra cost early on.

What business expenses can you claim?

As a self-employed Canadian, you can claim a wide variety of expenses related to your business. Nathalie Hatter, for example, can deduct costs related to her home office, car, payment processing system, advertising and baking supplies.

Larger purchases such as a computer, office furniture or a vehicle used for the business are considered “depreciable property.” You can’t deduct these costs entirely in the tax year you bought them, but over a number of years. Each deduction is called a capital cost allowance (CCA). For her business, for example, Hatter can deduct such things as a new commercial mixer and steel racks.

Deductible expenses for side hustles

“The business can claim any expenses used to generate that business income,” says Paley. Here are the deductable expenses that Canadians with a side hustle can claim.

• employee salaries
• a portion of auto expenses
• office supplies
• software subscriptions
• home office expenses, such as a portion of mortgage interest, utilities, internet, property taxes, home repairs, cleaning costs and home insurance
• a portion of cell phone bills used for business
• advertising/marketing, such as a website, social media, posters or business cards
• business insurance costs/licensing fees, memberships and dues for business-related organizations
• shipping costs
• accounting and legal costs
• meals/entertainment for clients (50% deductible)
• premiums for private medical insurance
• travel expenses
• professional development activities, such as seminars or courses
• interest or bank charges on money borrowed for business

What you cannot deduct

Here are the items you cannot deduct as expenses of your side hustle for your income tax return:

• your own salary or wages
• interest and penalties paid on overdue income tax
• life insurance premiums
• clothing/grooming costs

How to track your business expenses and costs

Staying on top of your expenses year-round will help you manage cash flow and make tax time easier.

Hatter uses an Excel spreadsheet to track her business costs. She also saves all of her receipts and sets aside 25% to 30% of her income for tax payments, which experts advise, too. But she admits that with increased sales, she needs a more sophisticated accounting system. She’s looking to upgrade to an app that tracks her inventory, expenses and payments. Some options include QuickBooks, Square Invoices, Freshbooks, Momenteo and Kashoo.

Tax software programs like TurboTax and Wealthsimple Tax can also help remind you about and carry over unclaimed expenses from one tax year to the next. They can also alert you to home ownership and eco-related credits you may not be aware of.

If you’re unclear on anything, the CRA has a lot of tax information you can access. And if you want professional help, consider hiring an accountant or a bookkeeper—and remember, their fees are tax-deductible.

How to reduce your taxable income

Lowering your taxable income comes down to solid bookkeeping and some simple investment strategies, says Paley. There are also a few ways you may not know about.

One strategy is to split your income with a family member. If your partner or another family member works for your business and falls into a lower income tax bracket than you, you could deduct the amount you pay them as an expense. Your employed family members will pay tax on their own personal income, which is taxed at a much lower rate.

Another option is to make donations to registered charities. The federal Charitable Donations Tax Credit can total as much as 33% of the amount you donated.

But a common route is investing as much as possible in a registered retirement savings plan (RRSP), up to your annual contribution limit.

“For most people, an RRSP is the main one to invest in,” says Paley. That’s because an RRSP contribution can result in a significant tax reduction or even a tax refund. Plus, RRSP investments grow tax-free. (If you’ve maxed out your RRSP, you can contribute to a tax-free savings account (TFSA), but you won’t receive a tax refund for that.)

What’s most important is to stay on top of tax payments to avoid audits and fines, says Paley. “The government has gone after certain groups,” he says. “And penalties are not that fun.”

Read more about personal income taxes in Canada:

• The final tax return after death: How it gets done in Canada
• The tax implications of working abroad for residents and non-residents of Canada
• U.S. withholding tax in an RRSP for Canadians
• How are you taxed when you sell a small business?