Whether you’re doing consulting on the weekend, cutting lawns for your neighbours for extra cash, teaching yoga classes outside of your 9-5, or selling your arts and crafts on Etsy, you’re not alone. In the last decade we’ve seen a steady increase of the “side-hustle” or “gig” economy. People are looking for ways to increase their income, and also pursue passions and side-projects that they always wanted to pursue. And it’s not just a few people, In a study done last year by Bankrate it’s estimated that more than 44 million Americans have a side-hustle.
While part-time work isn’t anything new to the employment circuit, the side-hustle has become popular most notably for the millennial generation. Whether they’re chasing their passion, or just trying to gain some extra money to pay off student debt, or the increasing cost of living, “side-hustle” has become a buzzword across North America.
So why is this new way of work so popular amongst young professionals in particularly? It’s no surprise that millennials have been known as the generation to shake up the workplace. They aren’t the traditional 9-5’ers that stick to the same job for 40 years and retire. They don’t believe sitting in cubicles will make them creative or get the job done better or faster, and they definitely are asking and wanting more out of their jobs. Older generations can frown at them as much as they want, but this generation is the one who is leading the change in what was once seen as the traditional (and now dated) workplace.
Side-hustles can have all sorts of benefits for professionals, but we hear stories all the time about people starting a side business or taking on work outside of their regular 9-5, who don’t really know how they should be managing this extra income. Unfortunately for them, it often takes getting hit during tax season with a hefty bill they need to pay back to the Canadian Revenue Agency (CRA).
Here’s the thing, a lot of the time the income that is coming in from side work is not being taxed, and just like any income from a regular job, you need to claim it when you do your taxes every year. Since you likely haven’t been paying a percentage of taxes for your additional earnings, this is when you’re going to have to pay them. Often times people get caught off guard with this, and we don’t blame them, this is something that you don’t learn in school and given the gig economy has just recently exploded, many people don’t know how to properly be prepared for tax season when it comes to their side-hustle. That’s where we come in with our advice to make sure you’re on the right track and don’t get hit by a hefty bill to pay next tax season.
1) Save your receipts and invoices
Keep track of all your receipts and invoices in an organized fashion. Save every single transaction that’s made throughout the year in regards to your business or side-hustle. We mean everything. So for example, if you are a yoga instructor and had to buy yoga props in order to do your job, save those recipes. If you’re a freelancer and had to take a new client out for coffee and you paid, save those receipts.
The CRA requires you to provide receipts and invoices for anything you are claiming on your taxes and from what you’ll see below, there’s actually quite a few things you can claim that you may have never thought about previously. But if you don’t have receipts and invoices to prove those purchases and get audited, you will need to provide documentation to back up what you claimed.
TIP! Keep them organized! Receipts and invoices can build up quick when you’re keeping them for an entire year, and if you start doing your taxes with a box of receipts just thrown in, you’ll be frustrated, overwhelmed and may even miss some important details. Using services like PayPal for any invoicing, and apps like Expensify, can help you keep on top of things throughout the year.
2) Budget for tax season
This is one of the most important things you can do for yourself so you aren’t caught off guard when you receive your tax return. Budgeting for tax season can help you build a cushion that’ll make biting the bullet and having to pay back the CRA a lot less painful. Financial experts suggest that you set aside around 25-30% of every freelance paycheque you earn.
The easiest way to do this is to set up a separate account that you don’t have easy access to and automatically deposit the 25-30% each time you are paid. It sucks at the time, but it’s no different than the taxes that are coming off your regular paycheques.
TIP! If you are making over $30,000 in your side-hustle in a year, you’ll need to register for GST/HST.
3) Start and contribute to your RRSP
It’s not only great to contribute to a Registered Retirement Savings Plan (RRSP) as soon as you can to start saving for your retirement or future investments like a house, but contributing to an RRSP can also save you from having to pay a ton for your side-hustle when it’s time to do your taxes. The benefit of contributing to your RRSP is that it’ll feel a lot better putting money into an account that is all yours, versus giving away your money to the CRA!
It can be challenging to determine what to contribute to your RRSP because if you’re nowhere near retiring it’s hard to envision what your salary will be pre-retirement and how much you’d want to have in that account when you retire. However, contributing the max you are capable of is a great start, and you can continue to increase that number as you go through your career and make more money. Keep in mind that the maximum amount of money you can put into your RRSP each year is 18% of your pre-tax earned income.
Your contributions to your RRSP will be claimed on your income tax and in turn, this will help lower what you owe on your taxes. Even if you don’t have a side-hustle, this is a tip that can be valuable for everyone, especially who are at risk at having to owe the CRA money during tax season.
4) Look at deductions
As a freelancer or someone who is self-employed even just in a side-hustle capacity, there are several things that you can deduct and claim on your taxes. Some things that you can consider deducting are:
- Home office: If you use an area of your home as your workspace, you can claim this on your income tax. The same goes with your maintenance costs in your home. A certain percentage of your heat, home insurance, electricity, internet, phone, etc. can all be deducted.
- Supplies: If you need certain supplies to do your job, you may be able to deduct them on your income taxes. For example, if you need to buy a new laptop for your consulting business, or even just basic supplies like notebooks, pens, etc.
- Entertainment: This may depend on what your side-hustle is, but if your “job” requires you to entertain clients then you can potentially claim a portion of that on your taxes.
- Vehicle expenses: If using your vehicle is a big part of your side-hustle, for example if you clean houses and need it to drive to each place, then you can claim part of your fuel, maintenance, insurance, etc.
- Advertising: Are you spending money to advertise your services? Claim them!
When you go to file your taxes, ensure you fill out the T2125 form which is a statement of your business activities which covers your income from your side-hustle and expenses such as the ones mentioned above. One thing to note is that personal use of the listed expenses can’t be claimed, so if you use your home internet for say only 30% of the time for your side-hustle, you can only claim 30% of your bill.
TIP! Here is a full list of the expenses you can claim.
5) Build a cushion
Side-hustles are fantastic for making extra money and gaining valuable experience. They also allow you to pursue your passion on top of your career, however the one downfall of side-hustles is the often inconsistent earnings you’ll make from it. Your revenue can very likely vary from month-to-month so ensure you always build yourself a cushion and plan for slower months, because they’re inevitable.
How do you figure this out? Figure out what you earn in a year (or more if you have that info available) and divide it by the total number of months, that’s your average monthly earnings. This will help you make a budget that’s realistic. Some ways to help you create this budget are:
- Estimating your monthly taxes/saving for your taxes (see point two)
- Figure out your fixed expenses (rent, prescriptions, phone bills, etc.)
- Open a few different bank accounts that will help you save and separate your money. Some ideas for this:
– Tax account for your savings for tax season.
– Living account for most of your daily needs.
– Emergency account incase something in your life happens that you need some extra money.
– Retirement account (or RRSP) to save for your retirement, even if you’re young and this doesn’t seem important right now.
Building a cushion and taking charge of your budget will help ensure that you are building yourself up for success with your side-hustle, especially if it’s something you want to eventually turn into a full-time gig.
A side-hustle, gig, part-time work, or whatever you want to call it, are only going to become increasingly more popular. Of the 28% of millennials working on a side project as we speak, 61% are doing that more than once a week and 25% are claiming to earning around $500 a month or more. We only can expect these numbers will continue to climb, so it’s important that all the side-hustlers out there are taking the necessary steps to ensure their finances are in check to avoid the dreaded penalties at tax season.
