Financial pressure is driving more Canadians to find additional sources of income, according to a study of over 1,500 Canadians by H&R Block, with 58 per cent of respondents saying they have started a side hustle due to an increased cost of living.
Though the extra income is beneficial, starting a side hustle comes with its own responsibilities that are vastly different from traditional employment, said Aurèle Courcelles, assistant vice-president of tax and estate planning at IG Wealth Management.
“You have to educate yourself first, in terms of what your responsibilities are from both an income and expense perspective,” Courcelles told Yahoo Finance Canada in an interview.
Here are key pieces of tax and financial advice experts think side hustlers need to know to make the most of their new income.
“It’s really important to understand where you sit when it comes to what your filing requirements are,” Travis Alexander, manager at McNabb Lucuk LLP Chartered Professional Accountants said in an interview with Yahoo Finance Canada.
One critical area according to Alexander is GST requirements. If freelancers hit $30,000 in revenue over four consecutive quarters, they’ll need to start charging the appropriate sales tax.
“If (business owners) go over (the threshold) or they’re required to register, that can be a big surprise when they have to pay a GST bill or register for GST,” Alexander said.
For new side hustlers used to traditional employment – where they don’t necessarily need to set aside money for tax purposes – it may be an adjustment.
“If you’re earning self-employment income, there’s no withholding tax on that income (in) the same way there may be on salary earned through payroll. And the result of that is you tend to owe tax when you file your tax return,” Jason Heath, managing director at Objective Financial Partner, told Yahoo Finance Canada.
To make sure you have enough set aside for tax time, Heath recommends drafting a “tax estimate” to see your potential side hustle income and then setting aside funds based on that. Heath generally advises business owners to set aside 30 per cent of their income for paying tax in their first business year.
Alexander recommends side hustlers meet with a financial professional to understand what business expenses they can deduct on their taxes against their business income. He said he’s seen business owners make assumptions about what kinds of expenses they can deduct, resulting in them paying an “unplanned tax amount.”