The Most Important Self-Employed Tax Deductions

the most important self-employed tax deductions

As a self-employed individual and small business owner, you are likely looking for the most important expenses to keep track of that can be deducted from your taxes. If you’re self-employed, read this blog to learn what the most important tax deductions are and how Gallo LLP can help you win in business!

What Does It Mean to Be Self Employed?

Being self-employed means a lot more than simply ‘working for yourself’. A self employed person is someone who does not work for a specific employer who pays them a consistent salary. Self employed individuals earn income by contracting with a trade or business directly. In most cases, payment to self employed individuals does not have taxes withheld, so this becomes the responsibility of the self employed individual. 

For entrepreneurs, the main advantage of hiring self-employed workers is that, unlike for regular employees, they are not responsible for deducting Canada Pension Plan contributions (Quebec Pension Plan in Quebec), Employment Insurance premiums, or income tax from the remuneration. The legal responsibilities of the employer are also different when hiring self-employed workers. For example, employers do not have to provide vacation, sick leave, or overtime pay to self-employed workers.

There are a number of other factors that distinguish self-employed workers from typical employees.

  • They have the right to work for other companies.
  • They are responsible for paying provincial and/or federal sales taxes, but also have the right to claim certain deductions as business expenses.
  • They typically use their own tools, space, and equipment.
  • They are not subject to detailed instructions, supervision, and discipline.
  • Their employment is not subject to the same employment legislations.

You can also be partially self-employed. All the income a self-employed worker makes from working for themselves would be listed in your taxes as self-employed income. 

Who is Considered a Self-Employed Worker?

If you are working for yourself, regardless of the size of your company, you are considered a self -employed worker. The most common title for a self-employed worker would be a contractor. This is because contractors control their abilities, independence, and working hours, and typically they own their own tools and work space. Almost all farmers can be self-employed if they fit the description above. Other examples may include photographers, graphic designers, writers, make-up artists, event planners, web developers, etc. Another determining factor for whether or not you are considered a self-employed worker is the risk of profit or loss. 

For more information on this, please review CRA Guide RC4110, Employee or Self-employed.

Types of Expenses for Tax Deductions:

As a self-employed worker, you are able to deduct many different expenses from your taxes. This is because as a self-employed individual you are responsible for making your own income and paying all your taxes and business expenses. Here are some of the main deductions you can use for your taxes.

  1. Business Operating Expenses
  2. Office Expenses
  3. Vehicle Costs
  4. Entertainment and Travel

Business Operating Expenses

Any expenses related to your business operations can be a deductible. Here are a few examples:

  • Accounting fees
  • Marketing expenses
  • Office supplies
  • Internet and telephone
  • Business insurance
  • Professional fees and dues
  • Utilities and leasing costs
  • Cleaning supplies/cleaning services
  • Medical and health benefits plans

Office and Home Office Expenses

If your work requires an office space, you can use this as a deductible. If you lease an office space, you can deduct the cost of the space. If you work from home, you can calculate the cost of your home office. In order to do this, you must figure out the percentage of your home that your home office takes up, based on square footage and deduct that percentage of your mortgage interest or home’s rent, utilities, home insurance, repairs and services (such as related to heating and cooling, hot water, etc.). 

Vehicle Costs

If you need a vehicle for work, there are many expenses you can deduct from your taxes related to your vehicle.

  • Gas and mileage related to traveling for business
  • Vehicle insurance
  • Repair costs
  • Vehicle payments if the vehicle is work-related
  • Parking fees for client visits

Entertainment and Travel

Entertainment and travel expenses related to your business can be deducted from your taxes. Examples could include taking a prospective client out to dinner, buying thank you gifts for clients, traveling to conferences and business related events, visiting vendors, and more. Deducting entertainment and travel expenses can be difficult, so make sure you talk to an accountant.

How do small business owners benefit from tax deductions?

Generally speaking, small business owners can report their income as personal income, not a business income. As a result, every business expense you deduct means you are paying less in personal taxes. For self-employed individuals, your income minus your tax deductions becomes the net income you are paying tax on. The more deductions you have, the lower your taxes will be. 

Why does every small business owner need a CPA?

Self-employed individuals and small businesses owners can greatly benefit from the help of a Chartered Professional Accountant. Here at Gallo LLP, our CPAs can help you with your financial planning and business all year round, not just during tax season. By working with one of the professionals at Gallo LLP, you’ll have a deeper understanding of your financial situation, gain knowledge on how to move forward with your business, as well as make sure you’re compliant and get the best results when you file your taxes. Here are a few examples of ways a CPA can help with financial planning and setting up your business:

  • calculating your home office expenses and other deductions
  • assisting with organization/structure
  • streamlining your tax approach
  • getting a GST/HST account if you need a business number
  • helping you track expenses
  • provide financial advice on how to save for retirement and set aside money for taxes

help determine how much installments to make for the year if the person is required to make an estimated quarterly tax installment. 

Here at Gallo LLP, our team of professional accountants are sure to help your small business. We know our clients’ businesses and understand the best way to approach their taxes. We can answer any questions you may have, and will always be available to represent you if you are faced with a CRA audit. With Gallo LLP, you’ll find peace of mind and your taxes will become a piece of cake!

Jonathan Gallo is the Managing Partner of Gallo LLP Chartered Professional Accountants. He started his accounting career at a large international firm, which provided valuable technical lessons, but his passion is business and winning in business. As an in-depth tax practitioner his recommendations and solutions, are simply, not taxing.