How do you declare freelance income?I covered allowable deductions for freelancers and small business owners in part 1. Here’s some help with filling in the T2125: Declaration of business or professional activities.
Do you run a business? Are you self-employed?If you are carrying on an activity that you intend to make a profit with, then you have a business. The simplest form of business is a sole proprietorship. This means you are not incorporated or in a partnership with anyone. You can run a sole proprietorship business without registering the business, registering a business name, or getting a business license.
The T2125 form: Statement of business or professional activitiesIf you’re earning money as a sole proprietorship, you simply fill in the T2125 form in addition to your basic personal income tax form. Whatever electronic income tax filing system you use can probably handle this just fine, or you can do your taxes on paper by ordering a T2125 form together with the general income tax package.
- Where to get it: the General income tax and benefit package 2014 is available now.
- The 2015 version of the T2125 is available on the CRA site now.
- How many do you need? Reasonably similar business activities (say, writing and editing) can go on the same form. Very different activities (writing and pottery) would have to go on two separate forms. I recommend phoning CRA if you’re not sure whether two activities can go on the same form.
Sections of the form
- Was 2015 your last year of business? If you closed down the business during this tax year, say “yes” here. This lets the CRA know that they shouldn’t expect any more tax reports for this business.
- Main product or service and Industry code: The industry code lets the CRA know what kinds of deductions they can expect to see on the rest of the form. Editors should use the NAICS code or industry code 561410: Document Preparation Services. This code includes “editing service,” “proofreading service,” and “desktop publishing service.”
Parts 1 and 2: Business Income or Professional Income?Freelance editors should choose “professional income.” (In general, “business income” applies to selling physical goods and “professional income” applies to selling your expertise.)
Part 4Fill this in only if you filled in Part 1 (business income).
Part 5Fill this in if you filled in Part 2 (professional income). Now plug in all the deductions that you’ve been tracking throughout the year.
- Rent: this refers to the rent on a purely commercial property. The rent for your living space should go into the “Calculation of business-use-of-home expenses” section in part 8.
- Property taxes: same thing here. Put your home property taxes under business use of home.
- Other expenses: this is where many of your deductions will go: professional development, subcontractors, etc.