If you don’t earn extra money outside of your normal job or business, then this message won’t be relevant for you.
But, if you have considered earning extra money on the side, or if you know someone who does, then you may want to keep reading…
Earning extra money has never been easier. The “side hustle” or “side gig” economy is booming. It has become a common way for people to supplement their income.
But there are rules and responsibilities that come with earning extra money. In fact, the CRA is prioritizing tax revenue for “side gigs”… since they have become such an enormous part of the economy.
So, here’s a few tips to help keep your “side gig” healthy and free of tax problems:
1) Know your status (independent contractor vs employee)
If you work part-time in a traditional setting, then you’re likely an employee. If that is the case, your employer will typically withhold taxes for you.
But in the new “gig economy,” many people are actually independent contractors. This is an important distinction.
Independent contractors must pay their own taxes from the money they make.
Gigs like Uber, Lyft, and Door Dash are typically classified as independent contract positions. So, verify whether you are an employee or an independent contractor — BEFORE you begin your new position.
2) You are responsible for your tax liability
No matter your status (employee or contractor), you are responsible for your tax liability.
In traditional employment, the employer will withhold some earnings to cover your tax liability.
As an independent contractor, you will receive the full amount earned. Then, you will have to pay taxes from that amount.
Independent contractors receive a special tax form (T4A) from the contracting company. It shows how much money you were paid during the year. A copy of this same form will be sent to the CRA… so, they will have a record of your earnings. If you don’t pay taxes on this money, you could set yourself up for unwelcome questions from the CRA. Nobody wants that!
Keeping track of earnings and expenses can be overwhelming. So, you will need a method to capture how much money you earn. That way, you’ll know how much you owe in taxes.
There are many ways to do this. Apps like QuickBooks, FreshBooks, or WaveApps are effective and user-friendly for tracking earnings and expenses. However, you don’t have to use an app. A spreadsheet on your computer will serve just as well — as long as you update it diligently.
You’ll also need a systematic way to pay taxes on your earnings. Ideally, estimate payments should be made every quarter. You may want to have a professional tax service help you set this up.
If you know someone who is earning extra money on the side, please share this post with them. This information can help them understand their tax responsibilities… and avoid any tax problems with their “side hustle.”