“The main issue for sideline income is understanding the tax implications as these kinds of arrangements are new to many people,” says Bruce Ball, vice-president of tax at CPA Canada (Shutterstock/jaturonoofer)
The appeal of gig work, when compared to a job with a long commute, working in a small cubicle from 9 to 5, comes as no surprise. For the worker, it’s freedom from the daily grind, with no tie to a specific employer. Another common development these days is earning sideline income in addition to full-time employment.
Whatever the case, it’s important, to understand what comes along with this additional income. For CPAs with these individuals as clients, it is important that their clients understand the tax issues.
“The more tax advice that you can get, the better it is,” advises Stefanie Ricchio, CPA with Balance the Five. “If you’re earning a significant regular income, and you are also doing gig work, then you are impacting the tax bracket that you are in, [and] whether or not that might impact certain credits that your family is receiving.”
According to Riccio, you need to ask yourself: “Is there a tax-planning advantage that I’m not seeing because it’s just not my area of expertise?”
UNDERSTAND YOUR POSITION
The first issue to sort out is whether you are earning the extra income as a part-time employee or from self-employment. If you are an employee, then the tax rules are more straightforward. You’ll receive a T4 for your income and will presumably have tax deducted.
However, it’s worth noting that your full-time and part-time employer will withhold based on your income from that employer only and will not take your total tax into account. So, especially where the combined income pushes you into a higher tax bracket, you may owe tax in addition to the amounts withheld. The good news is that you will have any over-deducted CPP or EI refunded.
REPORTING INCOME FROM SELF-EMPLOYMENT
If your extra income is from self-employment, the rules are more complicated as you are running a part-time business. Or rental operation in the case of short-term rentals. A common misconception, adds Bruce Ball, vice-president of tax at CPA Canada, is that income earned from side gigs—such as driving for Uber or hosting an Airbnb—is tax-free.
“Many seem to think the sideline income reduces their personal expenses and therefore isn’t taxable,” he says. “Any time you take in money in return for something, it is likely taxable unless very negligible.”
The good news? Expenses and deductions can reduce your taxes. But be careful, advises Ball, as the amount deducted must be reasonable when compared with the income that you earn. For example, if you’re moonlighting as a rideshare driver, you can claim your car expenses but you will have to pro-rate them based on your rideshare mileage compared with total mileage.
Another issue for the self-employed is whether this income exceeds $30,000. In this case, CPAs should ask their clients how they are handling GST, HST or QST. Finally, if the amount of income taxes owed exceed $3,000, then the extra self-employment income could create a requirement to pay quarterly tax instalments.
“The main issue for sideline income is understanding the tax implications as these kinds of arrangements are new to many people,” says Ball.
For additional part-time employment income, focus on whether the extra income will push you into a higher tax bracket or reduce tax credits and factor that into your decision making. For the self-employed, they need to understand that although they are running a part-time business, all the usual tax requirements for a full-time business could apply depending on the amounts involved. Not understanding the tax requirements can create unexpected costs.