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September 15, 2009

Self employment pros and Tax

The joy of being self employed is that it can all be done from home – including finding freelance work that will keep those financial fires burning.

The technical differences between being employed and self-employed basically concern tax and legal rights.
If you are "self-employed", it could mean that you had registered your own company that that you are an employee (the only employee) at your own company. This has some tax and legal advantages in some countries, but perhaps not in all countries.

For example, if I as a freelancer makes a mistake, then I'm personally liable, but if I'm self-employed (employed by a company, even if I'm also the owner of that company), then the company is liable. Also, as a freelancer I may not qualify for various tax breaks offered to companies, but if I register a company, then I might qualify. But this differs from country to country

Self-employed means you employ yourself (usually a good boss to have!) and you have to pay your taxes, social security, etc. yourself.

A freelance who has a fulltime job, also has to pay taxes on the freelance income. One way of distinguishing between self-employed and freelance is that a self-employed person 'does not have a boss' and a freelancer may be an employee who is 'freelancing' in the evenings.

To work or be an employee or certain company or looking at the legal side – if you’re an employee, you make a contract with your employer. You have a number of legal rights such as in unfair dismissal and redundancy, maternity and parental leave benefits and notice payment.

As self-employed person, you are a sole proprietor, and you are allowed various tax deductions. Since these tax deductions will help offset the money you will have to pay in self-employment taxes, it will probably be worth your while to keep track of your expenses and take advantage of these tax deduction allowances.The following tips will help you learn what qualifies as a legitimate business expense for your freelance writing or other home-based business, as well as what other deductions are available to you as a sole proprietor.

1) Supplies and Postage
You're relatively safe in deducting the cost of supplies and postage, within reason. The CRA isn't likely to question the cost of basic office supplies. They know a business owner have to buy pens, paper, and envelopes, office supplies as well as mail submissions or marketing campaigns.

2) Research Materials
If you use research software regularly for your work, you can probably get these deductions by without question from the CRA. Magazine subscriptions are probably safe, too. Unless you subscribe to thousands of dollars worth of magazines, you should be safe deducting the costs of the few writing trade magazines you subscribe to. Book and periodicals purchases and subscriptions or your online subscription to any given profesianal association can also be deducted.

3) Phone Calls and Mileage

If you do interviews that involve lengthy long-distance calls, or you have to travel for in-person interviews, you are relatively safe deducting these costs. If you dedicate a phone exclusively for business use, this deduction process should be easy, and the documented proof will be clear should you get audited. Mileage for trips to the library for research and writing work and such can also be deducted.

4) Computers, equipment and Software

If you have a computer dedicated exclusively to business use, you can deduct the full cost. The CRA allows a percentage deduction on computers used for both personal and business use. Cost of printers, scanners, copiers and the like can also be deducted under the same terms. Same with software.

5) Home Space Use
If you have an entire room set up as a home office, you can deduct a percentage of your mortgage or rent, as well as portions of your utilities and real estate taxes. This is an iffy area for people who don't have an entire home office set up. Be prepared to justify your deductions should you be audited.

6) Small Business Association, Editors and Writer's asociations or Profesional membership Dues
If you belong one of the mention above or any name professional guild or small business association, you can deduct your monthly or annual dues.

7) Personal Health Insurance Costs
Here in Ontario we have the OHIP but you can deduct the full cost of your insurance premiums you privately incurred. You cannot deduct your family's insurance costs unless your spouse or children legally work for you. However, hiring your spouse or children is often a cost-effective option with added deduction benefits.

8) RRSP Contributions
If you contributed to a self-employed or sole RRSP plan last year, you can deduct % of those contribution costs this year.

9) Earned Income of Your Minor/Teenage Children as EmployeesSolo o sole proprietors can hire their minor children without paying payroll taxes. As long as the child earns less than $5,000 per year, the child's income is generally not subject to federal income taxes either. (This means neither the sole proprietor nor the parent nor the teen will have to pay any income or employment tax on these wages.) So, if your teenagers help out with your business -- stuffing envelopes, filing, typing labels -- take advantage of this deduction. It could save you several hundred, or even a few thousand, dollars per year, as long as your business is profitable.

10) Medical reimbursement plan for employee-spouse

Spousal HRA (Healthcare Reimbursement Arrangements) Loophole
Healthcare reimbursement arrangements, known in tax-man lingo as a CRA Section plan, are NOT deductible for the sole proprietor himself. However, if the sole proprietor hires his spouse as an employee, the sole proprietor can establish an HRA that reimburses the whole family's healthcare costs. This reimbursement is a legitimate business deduction on self-employment and income taxes.

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