Whether a remote worker, digital nomad, freelancer, contract worker, or a work-from-home employee, there are a number of financial factors that you need to consider when not on the company payroll or if you are a remote employee when working away from the company office. If you choose to ignore these financial matters you can end up losing out on a number of tax deductions — money out of your pocket — or you could end up on the wrong end of an audit with back-taxes owed plus interest plus penalties!
To confirm what you need to know before you file your taxes — like, can you deduct those coffee filters and how to correctly file form T2200, form T2125 and other tax forms to consider — here are some essential tips to be aware of as a remote-worker or work-from-home employee, as well as considerations that freelancers and contract workers need to keep in mind.
How do you qualify for work-from-home tax deductions?
According to the Canada Revenue Agency (CRA), there are specific tax rules that apply to anyone who works from home. While these rules will differ depending on whether or not you are an employee or self-employed, the ability to claim deductions for home office expenses only applies if you meet at least one of two conditions:
- Your home is your principal place of work (meaning you spend more than half your time working from home); or
- You use a particular room or rooms exclusively for earning employment income and you meet customers or others there on a regular and continuous basis for work.
If one or both of these conditions are met, then you are eligible to deduct home-office or work-from-home expenses.
What tax-deductions should you consider as a contractor or freelancer working from home?
For self-employed workers who do most of their job from their homes, tax deductions can be significant but to maximize those deductions you’ll need to keep track of those expenses throughout the year.
At tax time, you will need to fill out form T2125, otherwise known as a Statement of Business Activities form.
To streamline tracking your business expenses, Matthew Peterson, CPA and owner of True North Accounting, suggests that all work-from-home freelancers do the following:
- Keep a separate bank account for your business to make recognizing business expenses easier;
- Invoice your clients and track expenses from this bank account;
- Consider having a credit card that is used strictly for your business expenses to make transactions easier to track;
- Always track your vehicle expenses and the kilometres you drive for work-specific tasks. This can be done easily through online apps or just using a driver’s log or notebook to track locations and kilometres driven;
- Track your cell phone and internet expenses and only deduct the percentage used for business reasons;
- Keep start-of-year and year-end mortgage statements, so that you can quickly see how much additional interest you’re paying. Remember, as a work-from-home freelancer, you can deduct a percentage of home utilities and expenses, including the interest paid on your mortgage, as a business expense;
- Whenever you buy something related to your business, keep the receipt.
As a self-employed contractor, there is a range of work-from-home expenses you can deduct (where applicable). These include the prorated portion of rent (or mortgage interest), utilities, maintenance and repairs, home insurance, property taxes and a separate business phone line.
What tax considerations should you consider as a remote-worker or work-from-home employee?
If you are an employee of a company and currently work from home, the most important form you will need to fill out at tax time is Form T2200.
A T2200 is a Declaration of Conditions of Employment. It is the CRA document that must be signed by your employer that gives you authority to write-off any work expense associated with working from home, that your company does not already reimburse. For instance, if you travel by vehicle to meet with clients regularly or use dedicated office space at home to manage your day-to-day workload, a T2200 can help you receive a tax break on these additional costs.
The main requirements for a T2200 form are:
- Any expense you claim must relate directly to your job responsibilities;
- Your employer does not pay for these expenses;
- You primarily work at a location outside of your employers’ office;
- You do not receive a non-taxable allowance for travel or motor vehicle expenses;
- You do not accept any reimbursement for the costs you claim.
This is an essential document to consider for anyone asked to work from home during COVID-19. Remember that you need to prorate any costs based on the percentage of your home dedicated to your workspace. For example, if you live in a 3,000-square-foot home and your home-office space is only 300-square-feet than you can only deduct 10% of your home’s mortgage interest and utilility bills, using form T2200.
As an employee, the work-from-home expenses you may be eligible to deduct include:
- Percentage of maintenance costs (or 100% of a maintenance cost if the expense is only for the home office);
- percentage of heating, electricity, minor repairs and cleaning.
Once you have a signed T2200 form from your employer, you will then fill out Form T777, which helps you itemize any deductible expenses that will be documented and sent to the CRA, along with the remainder of your tax documents.
Tax considerations for freelancers when billing international clients
Another consideration is whether or not your clients are based in the U.S. or Canada.
As a freelancer, it’s important to understand that where your client is based and where you are based factors in on what taxes you must charge, explains Peterson.
In these instances, Peterson says the number one thing you need to be aware of is whether you have to charge your client GST. If your client is located in Canada, you are required to charge GST (and to remit this money to the CRA by your fiscal year-end). If your client is located in the U.S. and you charge GST, you may be on the hook for paying taxes in both the U.S. and in Canada.
In some cases, your U.S.-based client may ask you to sign a W-8BEN. In this tax document, there is a section called the Claim of Tax Treaty Benefits. A tax treaty is when two countries agree to formally acknowledge taxes paid in another country, in order to prevent double-taxation. The Canada-U.S. Income Tax Treaty makes sure freelancers and contract workers with clients across the border don’t pay taxes on the same income more than once. If you sign this document, you will only pay tax to the CRA, and obtain credit for taxes withheld in the U.S. on that same income.
Peterson says it’s critical for self-employed clients and small businesses to determine their tax needs or W8-BEN requirements before filing their taxes. Quite often the filing and deduction requirements must be determined on a case-by-case basis.
Tax considerations for a digital nomad who lives, travels and works remotely
Perhaps the most complex situation, when it comes to taxes, are those who live and travel while working remotely. Known as a digital nomad, the idea of remote international living, while earning a living, was once considered an anomaly, but these days it’s an employment option that. is fast becoming very popular. The only catch — other than finding a stable, reliable internet connection — is that filing your taxes can become complicated if you aren’t adequately preparing for the season before it arrives.
The good news is that if you are self-employed, many of the same rules apply when it comes to deductions, even if you travel for work. Just be sure you find a safe spot to keep your receipts and track your expenses. A good method is to start a spreadsheet to manage your costs and include the currency you pay for these expenses.
Another consideration is that if you have income from multiple countries as you travel and work, you could end up paying tax in multiple jurisdictions. To help you keep track (and find deductions), you can purchase tax software to help you track your income or manually enter your payments onto a spreadsheet. Things to include in your spreadsheet are the type of income, who the client is and where they are located, when you receive payment, the total amount, and the currency.
One last consideration is that you may still be travelling during tax season and not in your home country. For this reason, you must be mindful of deadlines. You may also consider hiring a tax professional that lives in your home country to help file the documents on your behalf. You can sign a document stating that you assign them the authority to file and manage your tax return and/or tax payments. Now that CRA allows Canadians to make payments or receive returns online, it’s much easier for any digital nomad to ensure they make their deadlines.
No matter what type of worker you are, if you work remotely, there are plenty of considerations for tax deductions. To stay ahead and make things easier on yourself (or any hired tax professional), track any necessary income and expenses throughout the year. The last thing you need is to scramble and search for receipts you left in the car’s glovebox after every meeting and every coffee date throughout the year. The more you track as you go, the less work you’ll have to do down the line – and that, in itself, is worth every spreadsheet line you create.