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We specialize in incorporated contractors and freelancers across Canada and the USA.
Our services for contractors:
Who is a contractor?
A contractor is a self-employed professional who provides services to clients or businesses under a contract.
Unlike traditional employees, contractors manage their own taxes, expenses, and business activities. They are responsible for securing their own contracts, setting their rates, and handling taxes independently.
Who is an Incorporated Contractor?
You are an incorporated contractor, if you are doing contracting business under a corporation. In this case the corporation is referred to as contractor. It is a separate entity (from the contractor/ you) providing services.
The corporation will be responsible for the business, contracts, handling taxes and other obligations like payroll.
1. Incorrect Classification (Employee vs. Contractor)
Many contractors may unintentionally fall under the CRA’s “employee” classification due to factors like working primarily for one client, having set hours, or using the client’s tools. Misclassification can lead to issues with deducting expenses and paying correct taxes.
Consequence: Reclassification as an employee can result in back taxes owed, ineligible expense deductions, and penalties.
Solution: Review CRA guidelines on contractor status, ensuring contracts clarify independence. If uncertain, consult a tax professional.
2. Overlooking GST/HST Registration and Filing
Contractors earning over $30,000 annually must register for a GST/HST number. Many overlook this requirement, especially when just starting out or working with multiple clients.
Consequence: Failing to register or file GST/HST on time can result in interest, late fees, and CRA audits.
Solution: Track income closely, register for GST/HST when the threshold is reached, and set reminders for quarterly or annual filing deadlines. A bookkeeping app like Zoombooks can help manage these tasks effortlessly.
3. Improper Expense Deductions
Not all expenses are deductible. Common mistakes include claiming personal expenses or misunderstanding eligible business deductions, leading to inaccuracies in tax returns.
Consequence: Incorrect deductions can trigger audits, re-assessments, and penalties from the CRA.
Solution: Familiarize yourself with eligible deductions for contractors, such as home office expenses, equipment, and vehicle costs. Keep meticulous records and consider using expense tracking software to streamline this process.
4. Inadequate Tax Planning and Payment
Contractors often fail to set aside enough income for tax payments, leading to unexpected tax bills. With no automatic payroll deductions, it’s crucial to plan for tax payments ahead of time.
Consequence: Inadequate funds for tax payments can lead to interest on overdue amounts and potential penalties.
Solution: Aim to save at least 25-30% of income for taxes, including both income tax and GST/HST. Making quarterly installments can also help avoid a large tax bill at year-end.
5. Not Keeping Detailed Records
Many contractors overlook the importance of detailed bookkeeping, especially when juggling multiple clients. Poor record-keeping makes it hard to prove income and expenses in case of an audit.
Consequence: Disorganized records can lead to denied deductions, missed claims, and potential CRA scrutiny.
Solution: Use a dedicated bookkeeping tool, like Zoombooks, to track all income and expenses. This habit will ensure accurate tax filing and provide peace of mind if audited.
As tax experts for independent contractors, incorporated professionals, and freelancers in Canada, we deliver specialized tax and accounting services tailored for self-employed individuals and small business owners. Based in Toronto, we offer both online and in-office support to clients across Canada and the USA.
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