A Guide to Navigating Taxes in the Gig Economy

In a recent study by H&R Block, nearly 28% of Canadians reported taking on a side hustle in the “gig economy” to boost their income. This is a significant increase from 2022 in which the analogous percentage was 13%. This is likely a result of inflationary pressures and the expansion of opportunities available for flexible work.

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What is the Gig Economy?

The gig economy, popularized by Uber, refers to work that is flexible and usually incorporates digital apps or platforms.  Examples of the gig economy include:

• Ridesharing platforms e.g. Uber or Lyft

• Freelance work platforms e.g. Upwork or Fiverr

• Short term accommodations e.g. Airbnb

• Task based platforms e.g. taskrabbit or pet sitting services

• E-commere selling e.g. ebay, Amazon and affiliate programs

• Writing/Blogging which generates revenue either by selling articles to publications or via ads on their website

• Virtual assistants, online surveys, tutoring etc. are other examples

• Other content creation such as YouTube, original artwork, music etc. that generates revenues either via sales, ads or affiliate marketing.

• Internet “content” subscription services which might include selling photos, videos and often includes erotic content.  Onlyfans would be an example of this. 

Gig workers tend to be independent contractors who usually decide when they are going to work, often bring their own “tools” (such as a car or a computer) and are required to report their earnings to tax authorities.

Tax Consequences of Being a Gig Worker

From a tax perspective, being a worker in the gig economy is functionally identical to being self employed and is subject to the same tax requirements.  If you are a participant and earn income in any capacity that is not classified as employment income (i.e. you don’t get a paycheque with deductions taken off from by an employer) it is crucial that you understand your tax obligations.  Keep in mind that Revenue Canada already has access to much of the data – in a recent court case CRA requested that the Federal Court of Canada issue an order requiring the Canadian e-commerce platform Shopify to (1) identify all Canadian merchants using the platform and (2) release each Canadian merchant’s Shopify sales records for the last six years. 

Additionally,  CRA has become much more sophisticated in identifying those who are earning more income that they are reporting via lifestyle audits, site visits and review of social media accounts.  Once you are identified and audited, you can be subject to significant penalties and ongoing scrutiny which can be deeply stressful.   

Accounting and Tax Considerations for Gig Workers

As discussed, there is an administrative burden to being a self employed gig worker.  Often the digital platforms that provide the opportunities for the gig work try to simplify this process as much as possible by informing workers of their obligations and providing them with tax reports to streamline the process as much as possible.  For example, Uber in Canada helps to simplify the GST/HST and QST registration process and provides the information required to report to Revenue Canada (and Revenue  Quebec) on its year end tax forms along with other tax information.

Accounting:

As a gig worker, it is essential that you maintain details records of all your income and expenses relating to your work.  This includes

• Invoices that you submit to your customers.  If you do not submit invoices, you should make sure that you keep a copy of the revenue report from the digital platform that you are using. 

• Receipts, bills etc for expenses.  Note that a credit card or bank statement showing the charge is often not sufficient.  I usually recommend scanning the original receipts and maintaining them in an accounting folder on your computer.

• Agreements, contracts, government notices etc should all be kept either in hard copy of via a clear scan that can be printed if necessary.

You can use a spreadsheet or accounting software to do your accounting depending on the complexity and needs of your business.  If it is simply a small side hustle,  and you intend to keep it that way, a spreadsheet (excel or google docs) is probably sufficient.  It is important to reflect the relevant details on your spreadsheet for your own information, in case you are audited and for tax purposes.  This might include:

• Name of customer/supplier

• Description of service/purchase

• Category such as office supplies, rent, gas etc.

• Amount before GST/HST (and QST)

• Separate columns for GST/HST and QST

• Total Amount

• How payment was received

• Exchange rate and Canadian equivalent if you receive or make payments in USD (or other foreign) currency.

• receipts, and other relevant documents. Good record-keeping is essential for accurate reporting and potential deductions.

Separate Bank Account:

I always emphatically recommend a separate bank account and credit card for any gig related income and expenses.  This helps you in case of audit, greatly simplifies your accounting and helps you to see your earnings at a glance.  Also see my blog post on why you should have a separate bank account which applies equally to gig workers.

Income Tax Obligations

Any income earned through gig work is generally considered business income and is reported on the T2125 form as part of your personal income tax return (assuming you are not incorporated).  The form is relatively straightforward to complete, but it might be worth hiring an accountant depending on your comfort with numbers.  Regardless, your record keeping should be as accurate and detailed as possible as this will help your tax prepare to properly reflect your data. 

Tax Expenses and Deductions For Gig Workers:

Since gig workers are effectively running a business and are considered to be self employed, you are entitled to claim any expense deductions that relate to the maintenance and operation of your business.  Essentially, any purchase that is used to generate business income can be considered an expense and deducted from your revenues.  Note that there are specific certain exceptions.

Types of expenses for gig workers include:

• Direct costs such as the materials that you might purchase for crafts that you sell on Etsy

• Supplies such as dog treats for your pet sitting business

• Equipment such as a computer for provide freelance services or camera equipment for creating content

• Vehicle expenses that an Uber driver might incur including gas, repairs, insurance, registration etc.  Note that these should be prorated based on the percentage of time that you use your vehicle for business vs personal 

• Home office expenses for anyone who needs an office to do their work.  Note that, typically, you can only claim one office.  Ideally, you have a separate room in your home that is specifically used as an office or a delineated space.  You can then claim the percentage that this space represents relative to your home on rent or mortgage interest, utilities, insurance, property taxes etc.

• Costs of cleaning your home prior to short term rental of your space

• Subscriptions to various services such as Canva, Dropbox, Google Drive, ChatGPT,  accounting software, Adobe, editing services  etc. that you require to provide your services

One of the exceptions specifically highlighted by CRA is that you are not permitted to deduct clothing expenses unless they are a uniform.  You can read more about this in my blog post about whether clothing expenses are deductible.  

Calculating and Saving For Taxes

As a gig worker, who earns income on which no taxes are deducted at source (as would happen with an employer), you are required to pay tax on your profits from the business.  This is total income (revenues) that you generated less your expenses that you may deduct.

It is good practice, (that can save you a great deal of stress) to estimate the amount of taxes that you owe  and put that aside in a separate savings account to avoid any potential shocks at the end of the year.  To estimate, I highly recommend using this tool from WealthSimple. You can also see my short video on how this works:

It is important to keep in mind that if you also have employment income, you would want to reflect this on the tax calculator since your tax rate rises (only on the additional amounts earned) on higher amounts of income. You would then deduct any taxes paid.

Once you have shown business (gig) income for a year two, there is a good chance that you will be required to pay instalments towards your current year taxes (sort of like a down payment).  In this case, CRA will inform you and let you know the amounts that are due which are usually based on previous years income.

Sales Taxes (GST/HST) Requirements for Gig Workers:

All businesses, self employed and gig workers are required to register for and collect GST/HST on their services if their total revenue (sales, not profits) exceeds $30,000 over a four quarter period.  As such, you need to be vigilant in monitoring your salesover time to determine if you have reached this threshold and then register right away.  A couple of things to note:

• You do not have to wait to reach $30,000 in sales to register.  You can register as soon as you launch your gig which can be especially beneficial if you have large start up expenses as you can claim back the GST/HST (and QST) paid on these expenses only if you are registered.  If you do register, you will have to start charging your customers right away. See my post on reasons why you should register for GST/HST even if you have less than $30k in sales.

• Many digital platforms automatically charge sales taxes on your behalf including Uber and Ebay.  This is irrespective of whether you are registered for sales tax.  In this case it makes sense to register so that you can also claim back sales taxes being paid on expenses as your customers are being charged anyway.

• Most digital platforms with a Canadian presence will have documentation on how they deal with Canadian sales taxes that you should familiarize yourself with. 

Employment Insurance (EI) and Canada Pension Plan (CPP):

Self employed gig workers are generally not eligible for EI benefits the logic being that you cannot fire yourself.  Consequently, unlike salaried employees, they are also not required to pay EI contributions.   

CPP (or Quebec Pension Plan) contributions are automatically calculated on your tax return based on information entered in the T2125.  This is mandatory for all gig workers.  Unlike when you are an employee where your employer pays half of the contribution, gig workers (independent contractors) are required to pay both parts of the contribution since you are considered to be, in a sense, both employer and employee. 

Final Comments:

The opportunity to engage in a side hustle doing something you enjoy or simply to make some extra income for the holidays has never been easier.  The number of digital platforms that allow you to do this has proliferated and there is work to suit almost everyone’s expertise or passion.  It is important, when you do engage in the gig economy, to be aware of your obligations.   If you are unsure, it can be useful to consult with an accountant to help you better understand the process to avoid unpleasant and unnecessary surprises. 

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.