Deductions for freelancers (people who are not employed)

When we refer to a freelancer, we mean someone who works for themselves / carries on a business in their personal names. If you are an employee, your work is subject to the control or supervision of your employer. A freelancer works for themselves so their work is not subject to the control or supervision of a particular person.

A freelancer makes their own income and does not earn a salary. Therefore a freelancer is responsible to pay their own tax because they do not have an employer you pays PAYE on their behalf. A freelancer is required to be registered for income tax as a provisional taxpayer.

Remember from our discussion of the income tax equation, that the “general deductions formula” sets out the general requirements for claiming deductions:

  • expenditure and losses
  • incurred
  • when carrying on a trade
  • in the production of income
  • that is not of a capital nature

So, generally, if an expense falls within the above definition, it may be deducted from your gross income when calculating your taxable income. However, even though when you are employed you are technically “carrying on a trade”, the Income Tax Act specifically provides that you cannot claim most expenses related to your employment if the meet the above requirements. We have discussed certain expenses that may be claimed, such as wear-and-tear allowances, travel expenses and certain home office expenses.

This course is not focused on tax for businesses, but in this topic we are giving a very broad explanation of the general rules applicable to freelancers (and businesses) for the deduction of expenses to calculate taxable income.

The basic idea is that –

  • an employee is limited to deducting only certain expenses from their income
  • as a freelancer / independent contractor / small business owner
  • you are able to deduct all expenses that fall under the general deductions formula
  • as a freelancer, any expenses that are directly related to you earning an income are deductible