If you’re like many Canadians, you have a side hustle to supplement your income. While this is a great way to earn extra cash, it’s important to understand the tax implications of this side hustle to avoid any surprises come tax season. In this post, we’ll discuss the basics of side hustle taxes in Canada, including how additional income may affect your tax bracket and eligibility for certain deductions.
If you only remember one key fact, it is this – any income from your side hustle is considered taxable income by the Canada Revenue Agency (CRA) and must be reported on your tax return, even if you only earned a small amount. Failure to report can result in penalties and fines.
Tax Implications of Your Side Hustle – What To Focus On
- Additional income: Any income you earn from your side hustle is taxable, just like your regular income. This means that you will need to report your side hustle income (selling products or services, social media earnings, affiliate marketing, or being an Airbnb host) on your tax return and pay taxes on it. Keep in mind that your side hustle income may push you into a higher tax bracket, which means you’ll owe more in taxes.
- Understand your tax bracket: Additional income from your side hustle may push you into a higher tax bracket, resulting in a higher tax rate on your overall income. Make sure to factor in the tax implications of your side hustle when budgeting and planning for taxes.
- Check eligibility for GST/HST: Should your secondary business produce revenues of $30,000 or more (prior to deducting expenses) within a single calendar quarter or across four consecutive quarters (not necessarily within a calendar year), it becomes necessary to register for a GST/HST account and commence GST/HST collection. When engaged in an employer-employee relationship with individuals you employ, you must fulfill the obligation to withhold income taxes, Canada Pension Plan (CPP), and Employment Insurance (EI) deductions at the source.
- Determine your business structure: Depending on the nature and scope of your side hustle, you may need to register your business with the government and obtain a business number. You may also need to decide whether to operate as a sole proprietorship or incorporate your business. Each option has its own tax implications and reporting requirements, so it’s important to consult with a tax professional to determine the best option for you.
- Self-Employment Taxes: If your side hustle is a business or freelance venture, you may need to pay self-employment taxes in addition to income taxes if your earnings are above a certain level. Self-employment taxes cover your Canada Pension Plan (CPP) and Employment Insurance (EI) contributions.
- Keep track of expenses: One of the benefits of having a side hustle is the ability to deduct business expenses from your taxable income. However, you can only deduct expenses that are directly related to your side hustle and are reasonable in amount. Keep detailed records of all expenses related to your side hustle, such as supplies, equipment, and marketing costs, and consult with a tax professional to ensure you are claiming all eligible deductions.
- Know which deductions you may lose: Depending on the nature of your side hustle, additional income may make you ineligible for certain tax deductions and credits, such as the Working Income Tax Benefit or the Canada Child Benefit. Make sure to understand the eligibility requirements for these benefits and adjust your budget accordingly.
- Know which deductions are applicable: When it comes to taxes, there are several deductions that you may be eligible for. These include deductions for expenses related to your business, such as office supplies, equipment, and advertising costs. If you use your personal vehicle for your side hustle, you may also be able to deduct car expenses such as gas, maintenance, and repairs. If you work from home, you may be able to deduct a portion of your home expenses such as rent, utilities, and property taxes, based on the percentage of your home used for official work.
It’s important to note that deductions can only be claimed for expenses that are directly related to your side hustle. For example, if you use your personal laptop for both your full-time job and your side hustle, you may only be able to deduct a portion of the cost of the laptop based on the percentage of time you use it for your side gig.
- Consider advance quarterly tax payments: If your side hustle income is (expected to be) substantial enough (over $3,000), you may be required to (or should) make quarterly tax payments to the CRA. Estimated tax payments ease the burden of a large tax bill at the end of the year and can help you avoid penalties for underpayment of taxes.
- Stay up to date on tax laws: It’s important to stay up-to-date on changes to tax laws and regulations that may impact your side hustle. It’s important to consult with a tax professional or accountant who can help you navigate these changes and ensure you are compliant.
In summary, having a side hustle in Canada can be a great way to earn extra income, but it’s important to understand the tax implications and reporting requirements. Make sure to keep accurate records of all income and expenses, and factor in the tax implications of your side hustle when budgeting and planning for taxes. By doing so, you can ensure that your side hustle remains a valuable source of income without any unwanted tax surprises.
If you are new to the side hustle game, and need help navigating your tax return for this year, contact us today to schedule a consultation. Let the expert team at Taxvisors manage your financial obligations so you are free to pursue your side hustle dreams.