Guidance on running a freelance business in Ontario, Canada
November 7, 2024 5:20 AM Subscribe
I'm stepping away from my current role and for a period of time, maybe a long time, will be trying to structure a life around freelance work. Lots of questions: how much should I set aside for taxes? What are the laws on deductions? Do I need fancy-assed Business Software, or can I just make things work with spreadsheets and diligence? Can you recommend a book, website, or other resource that has an A-Z for setting up as a freelancer in Ontario?
This is a "services for money" situation. I have a strong network of connections so while some hustle is required, this is more about how to figure out taxation, deductibles, billing -- the "meat and potatoes" business, not the "how to market your business and get clients" end.
This is a "services for money" situation. I have a strong network of connections so while some hustle is required, this is more about how to figure out taxation, deductibles, billing -- the "meat and potatoes" business, not the "how to market your business and get clients" end.
On the taxes side:
Canada Pension Plan contributions are just under 12% up to $8000 per year (if you earn more than roughly $71k).
HST registration is required if you bill more than $30k in a quarter or $30k in the last four quarters. You have to remit less than the amount you collect, so all other things being equal, it's in your interest to register for HST. You should almost certainly register for the quick method of accounting, as you pay less with this election unless you are spending a huge amount on expenses that are taxable. You may have to register for other provincial sales taxes if you sell services outside Ontario, but you can look into these details as needed.
Income taxes depend on your specific situation. You won't have to pay quarterly instalments next year (unless you for some reason owe more than $3k on your taxes this year), but you probably will the year after that. The CRA will let you know though. You can get a simple estimate of how much you'll be paying in taxes and thus how much to set aside from a calculator like this one or a more detailed estimate from the TaxTips calculator.
For your expenses, you'll want to keep track of all business expenses, and keep copies of the receipts. Include in that anything you use for both your business and personal life, including your phone and internet plans, new phones and computers, etc. There are special rules for claiming part of your home expenses (business use of home) and your vehicle expenses. There are also rules on when you can deduct capital costs (like a new computer, for instance), but that's something you can work out at tax time.
You can opt in to part of Employment Insurance, but this is generally not really worth it for self-employed people unless you may have parental leave in your relatively near future — and even then it may not be worthwhile if you are likely to be self-employed for a long time.
You'll also want to plan or spread out your contributions to your RRSP, TFSA and FHSA (First Home Savings Account), if relevant.
I think that covers the main points. I find WealthSimple tax filing is fine for a small business.
As far as your accounting, I think it really depends on your situation. If you have two clients who pay without much prompting and minimal expenses, a spreadsheet, a folder for receipts, and an invoice template might be enough. If you have ten clients and a lot of expenses, you might want to consider one of the various accounting software options.
You don't need to register your business if you are just doing business under your own legal name.
posted by ssg at 6:34 AM on November 7 [2 favorites]
Canada Pension Plan contributions are just under 12% up to $8000 per year (if you earn more than roughly $71k).
HST registration is required if you bill more than $30k in a quarter or $30k in the last four quarters. You have to remit less than the amount you collect, so all other things being equal, it's in your interest to register for HST. You should almost certainly register for the quick method of accounting, as you pay less with this election unless you are spending a huge amount on expenses that are taxable. You may have to register for other provincial sales taxes if you sell services outside Ontario, but you can look into these details as needed.
Income taxes depend on your specific situation. You won't have to pay quarterly instalments next year (unless you for some reason owe more than $3k on your taxes this year), but you probably will the year after that. The CRA will let you know though. You can get a simple estimate of how much you'll be paying in taxes and thus how much to set aside from a calculator like this one or a more detailed estimate from the TaxTips calculator.
For your expenses, you'll want to keep track of all business expenses, and keep copies of the receipts. Include in that anything you use for both your business and personal life, including your phone and internet plans, new phones and computers, etc. There are special rules for claiming part of your home expenses (business use of home) and your vehicle expenses. There are also rules on when you can deduct capital costs (like a new computer, for instance), but that's something you can work out at tax time.
You can opt in to part of Employment Insurance, but this is generally not really worth it for self-employed people unless you may have parental leave in your relatively near future — and even then it may not be worthwhile if you are likely to be self-employed for a long time.
You'll also want to plan or spread out your contributions to your RRSP, TFSA and FHSA (First Home Savings Account), if relevant.
I think that covers the main points. I find WealthSimple tax filing is fine for a small business.
As far as your accounting, I think it really depends on your situation. If you have two clients who pay without much prompting and minimal expenses, a spreadsheet, a folder for receipts, and an invoice template might be enough. If you have ten clients and a lot of expenses, you might want to consider one of the various accounting software options.
You don't need to register your business if you are just doing business under your own legal name.
posted by ssg at 6:34 AM on November 7 [2 favorites]
I got a business number when I first started my freelancing business in Ontario even though it's a sole proprietorship. I think I got the GST number only when I crossed the 30K income threshold.
I save 25% of my income for taxes. For accounting, I've used Wave (Canadian company) from the beginning, and I'm still on their free plan. It's pretty low-frills, but it's perfect for what I need--just income/invoicing, expenses, end-of-year reports, and charging Canadian customers (you can't receive payments in any other currency but Canadian, at least on the free plan). My business accounting is simple enough that I probably could file my taxes on my own, but I hire an accountant for peace of mind because they know the ways to make my return lower. Be warned: if you're used to a regular paycheque from which they automatically deduct taxes, the first CRA return where you have to pay all those deductions in one go is BRUTAL.
posted by pised at 2:14 PM on November 7
I save 25% of my income for taxes. For accounting, I've used Wave (Canadian company) from the beginning, and I'm still on their free plan. It's pretty low-frills, but it's perfect for what I need--just income/invoicing, expenses, end-of-year reports, and charging Canadian customers (you can't receive payments in any other currency but Canadian, at least on the free plan). My business accounting is simple enough that I probably could file my taxes on my own, but I hire an accountant for peace of mind because they know the ways to make my return lower. Be warned: if you're used to a regular paycheque from which they automatically deduct taxes, the first CRA return where you have to pay all those deductions in one go is BRUTAL.
posted by pised at 2:14 PM on November 7
You'll be amazed at the amount of time and effort required to keep up and do the required paperwork. It is a pain in the ass when all you want to do is your real work.
So yes look for an accountant. Take their advice let them take care of the paperwork.
Starting out:
Keep a daily journal/diary.
Record what you did, how much you spent and on what.
How much you took in and when. ie cashed cheque from whomever
Keep the receipts . In a file folder, shoe box whatever.
Travel to meet a client: record mileage ,taxi fare etc.
Later you'll be able to sort it out.
Without that diary you'll be lost.
Open a seperate bank account, deposit some working capital. Use that for your business.
Still can be in your personal name
Keeping business transactions seperate will simplify the paperwork later.
It's a lot more time and trouble than I thought it would take, coming from a small consulting firm which had bookkeepers , accountants, lawyers to handle all of it
posted by yyz at 7:29 AM on November 10
So yes look for an accountant. Take their advice let them take care of the paperwork.
Starting out:
Keep a daily journal/diary.
Record what you did, how much you spent and on what.
How much you took in and when. ie cashed cheque from whomever
Keep the receipts . In a file folder, shoe box whatever.
Travel to meet a client: record mileage ,taxi fare etc.
Later you'll be able to sort it out.
Without that diary you'll be lost.
Open a seperate bank account, deposit some working capital. Use that for your business.
Still can be in your personal name
Keeping business transactions seperate will simplify the paperwork later.
It's a lot more time and trouble than I thought it would take, coming from a small consulting firm which had bookkeepers , accountants, lawyers to handle all of it
posted by yyz at 7:29 AM on November 10
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You probably already know this but you will need to register for a GST/HST number Once you have one, it's really important that you file even if you have no income/billing. You need to pay income taxes and CPP quarterly if you anticipate paying more than $3,000 in taxes/year, and personally I think it just works best budget-wise to file GST/HST and submit tax withholdings quarterly so you don't get big surprises, even when you're small.
Basically here's what you need to think through:
You can have a freelance business without incorporating or getting a business number. If you are going to employ other people you'll want to do that.
1. Record all your income, and estimate your income so that you can pay taxes
2. Record all your expenses and keep receipts, including home office expenses, driving, software, etc. so you can deduct them - this takes that right off your net income.
3. Get a GST number
4. You do need to file taxes and pay income, CPP and Ontario taxes
5. You should decide if you want to pay into EI. If you might want to take parental/maternity leave this is probably a good idea. Recall that in the pandemic
6. Decide on insurance - liability insurance and also health insurance; there are insurance companies that offer group plans to freelancers.
For software, if you can afford it I personally think something like Freshbooks is great, both on the invoicing and on the accounting end. A cloud solution stays up to date and is easy.
posted by warriorqueen at 6:31 AM on November 7