Canadian and U.S. Income Taxes for Freelancers
Find the answers to some common questions
When people take on occasional freelance work, it constitutes starting a small business and has tax implications. It doesn't matter how much work you are doing; if you're getting paid for it, you're running a business and must comply with the applicable legal and regulatory requirements, such as paying taxes on the business income.
Even understanding that, many freelancers still have questions about how to register their businesses, filing taxes, invoicing customers, and if and when charging sales tax is necessary.
In the U.S. and Canada, you don't have to register a sole proprietorship business if you are using your legal name as the business name. If you decide to use a different name it must be registered, which means performing a name search and conforming to the business name rules.
A sole proprietorship serves only to create a name under which you do business. Whether you register one or not, you'll still include you still report your freelancing income on your individual tax return.
Creating a business name for doing business can be valuable for marketing and help make record-keeping easier.
Income from freelancing must be declared when filing your taxes. In the U.S., any business that pays you $600 or more for goods or services must provide you with Internal Revenue Service (IRS) form 1099-MISC, which will show the amount. Include this form when filing your individual tax return. In Canada, declare your freelancing income on Form T2125, which is part of your T1 (individual) tax return.
If charging sales taxes in the U.S., it's also necessary to file a sales tax return with the state where you do business.
One of the great things about running a side business is that you will be able to claim business expenses on your income tax. If you work out of your home, use your personal car, or incur other expenses in order to generate revenue for your freelancing work, these all can be calculated as part of your business expenses. For example, if your freelancing work generates $10,000 in revenue, but you have $2,000 in business-related expenses, your taxable income will be only $8,000.
Sales Taxes and Invoicing
Whether in the U.S. or in Canada, the need to charge sales taxes varies by state, province, or territory. It's important to consult with a tax professional, but freelancers in the U.S. need to charge applicable sales taxes on goods sold just as any business needs to do. Services rendered typically do not need to include sales tax.
Canada is different because it has a small supplier exemption that allows you to not register for and/or collect sales taxes if you make less than $30,000 annually in business income.
Include your legal name or a registered business name on the invoices you provide to customers, along with your relevant contact information. Any sales taxes being charged should be included as a separate line item on the invoice.