TAXES

How to file your taxes if you have a side hustle

If you’re ready to go it alone, here are some basics to get you started.

So you’ve got a side hustle: Smart. It’s becoming more and more challenging to afford the cost of living in Canada’s major cities, as housing costs outpace salary growth, and creating a second income stream means more money in the bank.

It also means that you’ve got more income to declare when you file your taxes. If you’re working for a business that deducts income tax from your paycheque, they are required to issue you a T4 so you can successfully file your tax return.

If you’re self-employed–whether you’re freelancing as a writer, running an Etsy shop, or driving for Uber–you often won’t get a T4, so tax time can become a bit confusing.  The key to filing your taxes is understanding your side hustle income and related expenses. I recommend hiring a tax professional to help you navigate the ins and outs of filing your side hustle income. After all, you can claim this cost as a professional expense and get a tax deduction the following year. If you’re ready to go it alone, here are some basics to get you started.

Understanding your income

You might have heard that you only need to include a certain portion of income on your tax return, but this couldn’t be further from the truth. The law states you must include all of the income you earn from any source on your tax return. That includes babysitting money, tips, and even cryptocurrency!

If you’ve received a T4, look for your employment income in box 14 and file this income on line 101 of your federal tax return. For any additional income you’ve made that isn’t in box 14, don’t forget to file your income in one of two ways:

  1. For tips or occasional earnings, file this income on line 104 of your federal tax return. If you work at a coffee shop on the weekend, this is where you would report your tips. This is also where you should report an income that didn’t incur any expenses. 
  2. However, if you have any expenses for earning your side hustle income, you should file this income on T2125, which is a form for the Statement of Business or Professional Activities.  It’s a little more work to claim your expenses, but it’s worth the extra effort because they may be eligible for a tax deduction.

Claiming your expenses

If you incur expenses from your side hustle, the most important thing you can do is track those expenses throughout the year. If you’ve got a record of your expenses, your life will be a lot easier when it comes time to fill out your tax return.

When you’re filling out your T2125, enter your expenses on part 4 of the form. Remember, you can only claim expenses that were necessary for making money. Expenses such as advertising, office expenses, and some home office expenses are examples of what you can claim. Here’s the full list.

If you plan to claim work expenses like your cell phone, internet, or travel, be sure to separate them from your personal expenses. It’s important to be honest and keep a record of everything because the Canadian Revenue Agency may check to see if the expenses you’re claiming are reasonable.  

Once you’ve completed part 4 of the T2125, complete the rest of your return and file normally. Your side hustle income and expenses will flow into your return and will be taxed like any other personal income you’ve earned.

Getting extra help

Additional income can really add up and sometimes first time freelancers are surprised with a large tax bill at the end of the year. If this happens, you can always organize to pay your bill in installments. To protect yourself in subsequent years, try to save 20-25% of your earnings so you’re not totalled come tax time.

If filing your additional income seems daunting, you can turn to online programs like Simple Tax, H&R Block, and TurboTax for help filing your return online. These programs will prompt you to answer questions that pertain to your specific situation, guide you through your return, and ensure you are filling out the correct forms.

If you’re still overwhelmed, it’s not too late to reach out to a tax professional, but returns are due April 30, so start hustling!

Janine Rogan is a CPA and personal finance writer and speaker from Calgary, Alberta. She is a passionate financial expert sharing her wealth of financial knowledge with Canadians and Americans. Janine has run numerous workshops, spoken at dozens of conferences, and written over 600 articles relating to personal finance. Janine hopes to empower Canadians to take control of their finances and live a value-based life.