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I’ve been a freelancer for a few years and I’ve never filed my taxes. Am I going to jail?
Rounding it up
Make tax season easier for your freelancer soul by starting early and thinking ahead with the right documentation.
Mind the details; don’t forget about recurring expenses that are automatically deducted, like design software for artists. These matter!
Missing a year of filing happens to the best of us, but don’t fear the late file. The penalties might be frightening but the solution is simple: just file your taxes.
Get backup when you need it; most online tax filing programs are not optimized for freelancers so it’s best to hire an accountant who’s well-versed in freelancer taxes.
Everybody likes healthcare, everybody likes having paved roads and highways for our food and other goods to travel to our favourite stores. But nobody loves tax season.
For freelancers, this time of year can be particularly daunting. Running your own business— as, say, an artist, writer, designer, or contractor — allows for freedom and flexibility, but it can make for a complicated tax return. You’re your own boss, so it’s up to you to account for the taxes—there’s no accounting department, you do your own payroll, and there’s no tax deductions on each paycheque, meaning you pay any taxes you owe in a one time lump sum.
If you work openly and honestly with the CRA, you probably won’t be going to jail. They just want the taxes paid—and that’d be pretty tough from behind bars. Even if you’re not taking a trip to the big house, there are penalties to late-filing, of course. While the interest rate on unpaid taxes is only around 1%, the government charges between 5% and 17% of the total taxes owing as a late filing fee. If you’re chronically late making payments and owe significant back taxes, the CRA might garnish your wages, taking up to 30% of your income before it even gets to you. They also might, in an extreme case, seize funds directly from your bank account.
It’s scary stuff, yes. But fear not! If you work with the CRA, keeping them in the loop on your payment plans and on your filing plans, chances are slim that it’ll come to that. Being prepared, and filing your dang taxes, are the easiest ways to get back on track.
Here, we take a look at seven tips to help you ease into tax season this year, and every year.
1. Start early
Okay, sure — this isn’t going to help you now, with under two months until the filing deadline. (Remember, this year’s filing date has been extended to June 1st, 2020.) But the most important thing about personal finances — and the best way to make things easier for you in the long run — is to be prepared.
Keep your documents (like receipts, invoices, and RRSP and other investment statements) organized. Figure out a way to make this part of your routine, setting aside time during the week, month, or quarter to take care of this kind of paperwork.
You’ll also want to build a buffer, in case you owe the Canada Revenue Agency taxes for past years (or this one!). As a baseline, it’s wise to automatically set aside 20-25% of your earnings to cover yourself.
If you’re on track to make close to or more than $30,000 in freelance income a year, it’s also wise to register for HST/GST numbers, depending on your province. In most provinces, HST/GST kicks in on commercial income over $30,000, but if you wait until you’re making more than that you might get dinged for back-dated GST/HST, which means opening new tax invoices with clients on work you’ve already done. It, to be frank, sucks.
If you’re charging GST/HST, the most important thing to know is that this particular money is not yours. Set up a place to put the tax you charge your client where you will not touch it so that you can pay it with your personal income return.
"If you work openly and honestly with the CRA, you probably won’t be going to jail. They just want the taxes paid—and that’d be pretty tough from behind bars."
2. Take yourself seriously
“Freelancers often don’t go into their work with the idea of running a business,” says Tova Epp, a senior tax preparer (and actor) for Artbooks, a Toronto-based tax office that specializes in serving artists and entrepreneurs. “We go into it because we want to make art, or something like that. And then this tax part creeps up, and it’s just not related to what they do.”
Running your own business, whether you planned to or not, can be stressful, but the reality is that if you think about the goals of your business (running the best in-home dog groomer service ever!) seriously, it’s worth it to think about the business of your business seriously too.
Track your expenses, and routinize doing the necessary paperwork (keep and file those receipts for wholesale non-toxic doggy shampoo!). Build time in your work schedule to track invoices and do paperwork, including setting up automatic savings to cover your tax bill. (KOHO goals can help make this easy peasy.)
3. ...but not too seriously
It’s important, Epps, says, when preparing to file your tax return as a freelancer to understand that — in many cases — “your business practices might be different than what the CRA views as a business.”
For instance, if you’re a performance artist and your work delves into scent, requiring you to expense perfume, it might be a hard sell. Likewise, if you’re a freelance UX designer, the CRA might not understand why you need to claim so many software subscriptions.
“An important thing is being able to articulate what your business is.” That means, essentially, being prepared for an audit: if the Canada Revenue Agency were to ask you to explain an expense, Epps says, would you be able to draw a direct line between that expense and your profitability? If yes, claim it.
Even though something may seem like it was significant to your business, the Canada Revenue Agency might disagree; the line you draw between the expense and your profitability shouldn’t take any detours. Taking a client for coffee or lunch? That’s justifiable. “Is it reasonable for an actor to write off all their clothes, because they want to look great all the time?” Epps jokes, “No, it's not reasonable. Because everybody wants to look good all the time.”
4. Think ahead
If your tax return shows significant anomalies year over year, you may end up under review or audit. For instance, if you land a very large one-time project contract that doubles your income in a particular year (congrats!), that might raise an eyebrow or two. Epps says to consider what’s coming down the pipeline in future years, and looking back at past years, when filing your current return. Are things going to spike in a way that might alert the CRA to a significant discrepancy? If so, be prepared for an audit with documentation in the form of receipts, invoices, and careful spreadsheets.
“Is it reasonable for an actor to write off all their clothes, because they want to look great all the time?” Epps jokes, “No, it's not reasonable. Because everybody wants to look good all the time.”
5. Read between the lines
One of the most significant oversights that freelancers make with their claims, Epps says, is for expenses that are automatically deducted or billed per month — like design software for artists, for instance, or PayPal fees for merchants who sell their wares online. “I encourage clients to make sure they're looking at their credit card for those recurring billings that you don't really see,” she says. “Those kinds of monthly things are small but they can add up to being quite a lot.”
6. Don’t fear the late file
It happens to everyone (including, ahem, me): you might miss a year of filing. Or more than a year. Or more than a few years. It’s not great—for your business or for you. Over time, the fear of late penalties can be paralyzing. But there’s only one way to break this cycle: just file your dang taxes!
If you do owe back-taxes, the percentage of the late file penalties will only grow the longer you wait. But if you don’t, you might be in for a surprise: Epps says that, often, she’ll work with clients on a first late return, on which they’ll see a return of a few hundred dollars, which will then motivate them to get the ball rolling on any further late files. It can be daunting and difficult to get your receipts in order, but if you set aside a Saturday and just get it done, you’ll feel way better than if you let it hang over you forever.
7. Don’t do it alone
According to Epps, most online or software-based tax filing programs are not optimized for freelancers — they’re made for individuals with a day job and very few complicated claims or expenses. It’s best to hire an accountant with experience working with clients whose businesses are similar to yours. You can eventually learn how to file your own return, but because your specific business has nuances that are particular to the way you conduct yourself as a freelancer, it helps to have a professional in your corner.
Big chain accounting firms will often take the cost of preparing your tax file out of whatever money you get back on your return. Smaller, boutique firms, like Art Books, will usually have an initial meeting to go over a single year’s tax file to assess how prepared you are with your documentation, and see how complicated your tax return will be. Expect to pay somewhere in the ballpark of $250 - $400, depending on how prepared you are and the complexity of your returns.
Taking the plunge and late filing can be scary, but if you set yourself up for the future by tracking your expenses, saving your receipts, and squirreling away money to cover what you owe, it’s totally do-able. It sounds counter-intuitive, but when you take the first step to filing (late or otherwise!), you’ll feel much calmer than if you avoid it.
An accountant can definitely help clarify what to claim, and a solid financial coach (like, say the in-house coach at KOHO) can help you figure out a plan for paying back taxes and saving for what you might owe in the future. If it turns out that you do owe a large amount of back taxes, the CRA can help you figure out a payment plan. It’s not exactly... fun, but filing even several years of back taxes doesn’t have to be so scary. Not fun, but totally do-able.
Rebecca Tucker is the author of A Matter of Taste. Her journalism has appeared in the Globe and Mail, Vice, Reader's Digest, and the National Post.