Developing your Skills, Financial Insights | April 24, 2018
Avoid These Common Tax Season Mistakes for Independent Contractors
Written by Guest Blogger
Written By: QuickBooks
Working as an independent contractor can provide you with great freedom when it comes to your schedule and income, but it can also make things more complicated during tax season.
Understanding your income tax claim as an independent contractor can ensure that your business runs smoothly year-round and prevents costly surprises when tax payments are due. Here are some common tax season mistakes and some tips to avoid them.
Not Knowing What You Can and Can’t Write Off
As an independent contractor, you can legally claim a wide range of costs as non-taxable business expenses. What you can or can’t claim as an expense largely depends on the nature of your business.
For example, if you work from home and have a dedicated space that you use only for work, you may claim a percentage of your rent and utility costs equal to the ratio of that space in relation to your home’s overall square footage.
On the other hand, if your contract defines you as an independent contractor but you do the majority of your work on the premises of a client’s company, you can’t claim your home rent or utilities as an expense.
Likewise, a freelance writer could feasibly claim office supplies, such as printer ink, paper and computer repairs. A non-union background performer might be able to claim a percentage of a gym membership if they’re frequently required to perform physical feats on the job.
You should only claim expenses that you can prove are related to your job. You can use accounting software to keep track of business expenses.
Not Setting Money Aside for Owed Taxes
Many individuals who make the switch from employee to contractor are taken by surprise when they suddenly owe taxes at the end of April, instead of getting a refund.
As an independent contractor, your income is not taxed up front, leaving the burden on you to report how much you made and to pay income taxes in a lump sum or by installment.
The Canada Revenue Agency’s website offers up-to-date figures on federal and provincial income tax rates for individuals. Keep track of your overall income throughout the year, and use these figures to estimate how much tax you’ll owe at year’s end.
Ideally, you want to set aside enough to cover taxes on your gross income, so you won’t have to scramble for cash if your deductions are lower than expected.
Not Being Sure of Your Employment Status
The nature of Canadian tax law means that there’s sometimes a grey area concerning whether you’re self-employed. Before you file your taxes, ensure that your work fits the general criteria for filing tax as self-employed. To be considered self-employed, you should:
- Have near-total control over your work output, schedule and hours.
- Own or provide your own tools for the job.
- Shoulder the risk of any monetary losses when you agree to a contract.
Self-employed individuals also aren’t considered to be an integral part of any company they work for. Your presence may enhance your client’s business success, but your hypothetical absence shouldn’t pose a threat to that business.
It’s also prudent to make sure that any contract you sign clearly identifies you as an independent contractor and not an employee. If you understand your position as a contractor, keep track of your expenses, and set aside some money for taxes owed during the year, you should be able to avoid surprises when you file your taxes.
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