Welcome to the Gig Economy! What To Know for Tax Season
If you’re new to the gig economy, welcome! You’ve come to the right place to prepare for tax season.
Gig work taxes may look different from what you’re used to. They’ll also differ if you’re on payroll or an independent contractor. The gig economy can raise tax issues and unexpected payments if you don’t prepare. So, it’s important to understand all the rules before it’s time to file your tax return. That’s why we put together this article, to share all you need to know before tax season.
For more information on Canada’s tax regulations for gig workers, visit here.
Tax Terms to Know
What does it mean to be on Payroll?
If you’re on payroll, you’re on a company’s list of employees to be paid. The company is your employer of record and tracks your hours and earnings, and deducts taxes from each pay cheque. This article will refer to someone on payroll as a “payrolled employee.”
What is an Employer of Record?
An employer of record is the organization that serves as your employer for tax purposes. It could be the company you work for or a third party that dispatches you to jobs.
What is an Independent Contractor?
If you’re an independent contractor, you are considered self-employed. This means you perform work for other entities or individuals as a non-employee. You’re responsible for your own expenses and deductions as an independent contractor.
What is Self-Employed?
A self-employed individual is an independent contractor, partnership member, or sole proprietor. It means you work for yourself, even if you contract out to other companies.
What You Need to Know About the Gig Economy and Taxes
You could be one of two types of employees: a payrolled employee or an independent contractor. If you’re an employee of a company, you’ll be on their payroll; if not, you are an independent contractor. Each type has different rules and requirements for submitting your tax return.
For Payrolled Employees
When you’re on payroll, your employer of record will handle the accounting functions for you. Your employer of record is the company you work for, a recruitment agency, or a third-party app. If you’re a payrolled employee, that means your employer will:
Track your hours worked
Calculate your pay and distribute payments
Record total earnings, including wage, bonuses, vacation pay, etc.
Deduct income tax, CPP, and EI from each pay cheque
Send you a T4 to submit for the tax year
If you’re a payrolled employee, you’ll submit your T4 slip as you would at any permanent job. Depending on various factors, you may need to make a payment or receive a refund during tax season. But, it should closely match the deductions from your pay cheques.
For Independent Contractors
Since you’re self-employed, this is where tax season differs. As an independent contractor, the accounting functions fall on you. Your taxes aren’t deducted from your pay cheques, so you are required to pay them in your income tax return. You need to submit:
Record of earnings
Gig work details
Business expenses
You’ll need to complete quarterly tax installments if your self-employment income is over $30,000 per year. This means you’ll submit taxes quarterly instead of yearly. Be mindful of your earnings. However, the CRA will notify you if this applies to you.
Record of Earnings
You need to report all money you earned from gig work for the tax period. Keep track of each gig as you go to make it easier for yourself.
Tip: With AmbiMi, you can log in to your Stripe account to see your earnings and all transactions. Enter the date range you wish to see to show your total earnings.
Gig Work Details
Keep records of when, how, and where you earn money. Track your start and end dates of contracts, the total hours, the job title, and where it takes place.
Business Expenses
Self-employed individuals can submit business expenses incurred to complete gig work. You’ll need the invoices, receipts, or vouchers to support these claims. Some things you may be able to expense are:
Transportation costs
Tools or other equipment
Personal protective equipment
Workwear
Cellphone bill
Computer
Home office expenses
Please note that you can only submit these expenses if they are required to complete the role. For more information on what you can report, visit the Government of Canada website.
Tips for Independent Contractors
Keep your earnings records and details as you go, so it’s easier to submit when due.
Save money by claiming your expenses and keeping all your receipts in a central place (i.e., a binder of relevant costs).
Set aside a percentage of your earnings to pay taxes when due. The amount will depend on your tax bracket. WealthSimple has an income tax calculator that you can use to determine how much to set aside.
Now you’re prepared! Make sure you understand these rules and regulations to avoid gig economy tax issues. Then, all you need to do is start gigging!
This content is for informational purposes only and does not constitute financial, accounting, or legal advice, and shall not be relied upon by you in that regard.