Self-employed workers can get tax surprise if they're not prepared
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MONTREAL — The growth of the gig economy is making it easier for Canadians to earn extra cash driving for Uber, renting out their homes on Airbnb or making crafts to sell on Etsy, but people new to the side-hustle game may be in for an eye opener when it comes to tax season, say experts.
That's because new self-employed workers are often ignorant about their obligation to report all income and pay the appropriate taxes and Canada Pension Plan contributions.
"Certainly when there's a surprise tax bill at the end of the year, people are shocked," says Bessy Triantafyllos, a tax partner with Deloitte.
While employers remit deducted taxes to the government, self-employed workers are responsible for these expenses.
The number of people working on the side has more than doubled in the last 40 years, rising to nearly one million Canadians as of 2015, says Statistics Canada.
Emilie Coulombe says the high cost of housing in urban centres has prompted young entrepreneurs like herself to work tens of hours each week on top of their regular work schedule.
The 28-year-old accountant started a business last year making baskets from recycled fibres and winter clothing from knitting or crochet.
Coulombe expects to lose money for several years, which will allow her to reduce the taxable income from her main job and receive a large refund.
But she says many people who make crafts are woefully unprepared for the business side of their exploits.
"A lot of people start into business because they like the creative side...but they don't think about the corporate side of things," she said in an interview.
They incorrectly believe that no taxes have to be paid because their sales are less than $30,000. In fact, all income has to be reported, but no GST has to be collected until sales reach that threshold.
She urges newbies to consult with a tax professional to fully understand the rules, including deductions that can be claimed to offset income.
Valorie Elgar, senior tax professional at H&R Block says the most common mistake self-employed workers make is not keeping proper records of income and expenses.
She said workers often fail to fully tabulate their employment expenses, including car payments, gas, insurance, fuel, repairs, utilities and property taxes based on the percentage of the car or home that is used for the business.
Elgar said the most successful moonlighters don't realize that their second jobs could put them in a higher tax bracket.
"I think people probably don't think about it a lot until they get to do their taxes and then they realize," she said from Calgary.
Uber driver Mathieu Visser says he turned to an accountant when he started driving in 2014 and now keeps detailed records of his mileage and expenses.
"I have a strange book with a lot of numbers and at the end of the year I count the number of kilometres I did for Uber," he said during a break in his schedule.
"So it needs a little organization but it's not too hard."
Uber has a partnership with tax advisers including H&R Block and Turbo Tax, to assist drivers. In Quebec, the ride-sharing program agreed to collect all relevant sales tax on behalf of drivers and remit it directly to the provincial government.
Triantafyllos says the biggest surprise people face come April's tax deadline is being forced to come up with money to pay taxes after failing to set aside funds.
For those in the service industry, estimating that tips amount to 10 to 15 per cent of a server's salary no longer cuts it. The government assumes that most servers earn one to four times their salary in tips, unless records show otherwise, she said.
Many restaurants already report tips remitted from credit card receipts, and could be required to do so under a Canada Revenue Agency audit.
"With a cashless economy, every transaction is traceable," she said.
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