The amount of tax you need to pay will depend upon how much you earn. There’s a chance that you can be pushed into a higher tax bracket and pay even more tax because of the income earned from your full-time role. You also must pay Canada Pension Plan or Quebec Pension Plan (if you live in Quebec) premiums.
You must pay the employee and employer portions if you earn more than $3,500 annually from your side hustle. For the CPP, that’s 5.7% each or a total of 11.4%. For the QPP, that’s 5.4% each or a total of 10.8%.
You should also consider getting a GST/HST number. While not required, it’s necessary if you earn $30,000 or more from your side business. If you don’t charge this to your clients and make $30,000 or more, you’ll have to pay this yourself. That can add up if you have a good year. You can’t (and shouldn’t) ask your clients to pay this after they’ve already paid your invoice.
How To Take Advantage of Tax Deductions
There are many ways to pay less tax. Contributing to a registered retirement savings plan (RRSP) is one of the easiest methods. An RRSP contribution reduces the amount of income earned. For example, if you earn $60,000 and contribute $4,000 to your RRSP, you must only pay taxes on $56,000 instead of $60,000.
Hiring a family member allows you to deduct their salary as a business expense. They will be responsible for paying tax on their income and not you.
You should also file your return and pay what you owe on time. Not doing so will lead to a penalty of 5% on the amount due plus an extra 1% for every month you file after the due date to a maximum of 12 months.
The other option is to claim business expenses on your tax return to reduce the amount of income earned. More details on what’s deductible are described below.
What Expenses Can I Claim and What Isn’t Deductible?
There are many side hustle tax deductions, such as marketing and advertising, business start-up costs, home-based business insurance, office expenses, interest and bank charges, and accounting and legal fees.
If your business is in your home, the Canada Revenue Agency (CRA) will allow you to claim business-use-of-home expenses. That means you’re allowed to deduct expenses for the business use of a workspace in your home if it’s your principal place of business or the space is only used to earn business income, and it’s used to meet clients.
Some expenses that can be deducted include a portion of your heating, electricity, mortgage interest, and property tax costs. You may want to consider working with an accounting professional to determine how to calculate how much space is used for your business.
The CRA also has a comprehensive list of business expenses that can be used as a tax write-off for your side business. However, there are some items you’re not allowed to claim, such as:
- Clothing. While it’s important to dress your best when meeting customers or prospective clients, clothing isn’t considered a business expense by the CRA.
- Eating out. If you decide to work from a coffee shop for a day, the food and beverages you consume aren’t deductible. However, they are deductible if you meet a client and discuss business during that time. Also, food and beverages are deductible if you’re a self-employed rickshaw driver or courier because of the nature of your work.
- Personal expenses. Buying office supplies that are used by your children can’t be claimed. Neither can a new laptop if it’s for personal use. However, you can claim the costs of a computer if it’s used for work partially or all the time. You need to determine what percentage of time it’s used for your side hustle.
- Other items. There are many other items that can’t be deducted, including your salary, income tax penalties and interest, and most life insurance premiums (there are exceptions for farming and fishing).
Tracking Expenses and Invoices
A tax deductions worksheet is helpful for a home-based business to keep track of your expenses. It can be in Excel, Google Sheets, or another spreadsheet program. You can also use accounting software such as QuickBooks or FreshBooks.
It’s also important to track when you’ve sent an invoice, whether it’s been paid, and the GST/HST amount. That is important because a November 2022 invoice paid in January 2023 is considered income for the current year, not the previous year. Also, any GST/HST collected will need to be paid within one month of the end of the current quarter and not the last quarter.
Tax Filing and Payment Deadlines
Running your own business means you have more time to file your taxes. While the tax deadline is April 30 for most employees, you have until June 15 to file (these deadlines are later if either day falls on a weekend). However, if you owe money to the CRA, you must submit your payment by April 30. Check out small business tax filing tips to learn more.
Having your own business is a great way to earn extra money. However, it does come with some additional administrative work and makes your tax return a little more complicated. Also, don’t forget to protect your side hustle and your finances with a business insurance policy.