Freelancers working across borders face unique tax challenges, especially for Americans freelancing in Canada and vice versa. Whether you’re a US citizen living in Canada or a Canadian working with US clients, it’s essential to understand your tax obligations in both countries. Dealing with the intricacies of tax law in two jurisdictions can be complicated, but understanding key requirements can help minimize tax liability and avoid penalties.
This article will provide an overview of tax considerations for cross-border freelancers, including the forms you need to file in both the US and Canada.
US Tax Obligations for Freelancers Living in Canada
As a US citizen, you are required to file taxes with the US, even if you live and freelancing in Canada. This is due to the US’s worldwide taxation system, which taxes its citizens on their global income. However, certain provisions and tax treaties can help alleviate the burden of double taxation.
US forms you need to file
- Form 1040: This is the standard US individual income tax return form. As a US freelancer working abroad, you must file Form 1040 to report your global income. Your freelance income from Canadian clients must be reported as part of your total income.
- Form 2555 – Foreign Earned Income Exclusion (FEIE): If you meet the requirements, you can exclude up to $126,500 (for 2024 tax year) of your foreign earned income from US taxation. This is especially useful for freelancers who live and work in Canada for a significant portion of the year. To qualify, you must pass either the Physical Presence Test or the Bona Fide Residence Test.
- Form 1116 – Foreign Tax Credit: If you pay Canadian taxes on your freelance income, you may be eligible for a Foreign Tax Credit (FTC). This allows you to reduce your U.S. tax liability by the amount of tax you paid to Canada. This helps avoid double taxation by allowing you to claim credit for taxes paid to a foreign country.
- Schedule C – Profit or Loss from Business: Freelancers must report their income and expenses on Schedule C as part of the Form 1040 filing. This form helps you calculate your net income from freelancing, taking into account business-related expenses like supplies, equipment, or travel.
- Schedule SE – Self-Employment Tax: Since freelancers are considered self-employed, you are subject to self-employment taxes. This includes Social Security and Medicare taxes, which are reported on Schedule SE. However, if you are eligible for the FEIE, these taxes may not apply to the income you exclude.
Social Security and Medicare Taxes for US Citizens in Canada
US citizens working in Canada are generally required to pay self-employment taxes (Social Security and Medicare) on their freelance income. However, the US-Canada Totalization Agreement helps prevent double contributions to both US and Canadian social security systems. Under this agreement, you generally only need to pay into one country’s system.
If you work in Canada, you may be exempt from paying US Social Security taxes, but you will still be subject to Canadian social security contributions (known as the Canada Pension Plan or CPP). Make sure to review the terms of the Totalization Agreement to determine your exact obligations.
Canadian Tax Obligations for Freelancers Working with US Clients
Freelancers living in Canada and working for US clients have their own set of tax obligations. In Canada, all income, including freelance earnings, is subject to Canadian income tax. Canadian freelancers are required to report their worldwide income to the Canada Revenue Agency (CRA).
Canadian forms you need to file
- T1 General Tax Return: This is the standard form for Canadian taxpayers. As a freelancer, you’ll report your freelance income on the T1, which includes all your income sources. Freelance income, including income earned from US clients, should be included in this return.
- Form T2125 – Statement of Business or Professional Activities: This form is used to report self-employed income in Canada. If you are freelancing, you will need to complete T2125 to report your freelance income and related expenses, such as office supplies, travel, or marketing.
- Form T776 – Statement of Real Estate Rentals (if applicable): If you also generate income from rental properties (in either the US or Canada), you’ll need to report this income using Form T776.
- Form T1135 – Foreign Income Verification Statement: If you have foreign assets worth more than CAD 100,000 (including bank accounts, investments, or real estate outside of Canada), you must file Form T1135 to report these assets to the CRA. This includes US-based assets, such as investments or bank accounts, which you might have as a freelancer working across the border.
Tax Considerations for Both US and Canadian Freelancers
Income from US Clients
Freelancers who are US citizens living in Canada and Canadian citizens freelancing for US clients need to understand how their income will be taxed in both countries. Typically, US citizens must report their freelance income to the IRS, while Canadian citizens report it to the CRA. However, both countries allow for tax credits and exclusions to mitigate double taxation, which is a key consideration.
Self-employment and Business Expenses
Both US and Canadian tax laws permit freelancers to deduct business-related expenses. This can include office equipment, internet bills, home office deductions, and other expenses directly related to freelancing.
Filing Deadlines
- US Filing Deadline: For US freelancers living abroad, the filing deadline is typically April 15. However, there is an automatic extension until June 15 for expats. If you need more time, you can apply for a further extension until October 15.
- Canadian Filing Deadline: The filing deadline for Canadian freelancers is usually April 30. However, if you or your spouse are self-employed, the deadline extends to June 15. Payments owed are still due by April 30.
Important Considerations for Cross-Border Freelancers
- Tracking Income and Expenses: When working as a freelancer across borders, keeping accurate records of income and expenses is crucial. This includes tracking payments received from clients in both the US and Canada, as well as any business-related expenses incurred in either country. Using accounting software can simplify the process and help you stay organized.
- Goods and Services Tax (GST)/Harmonized Sales Tax (HST): If your annual income from freelancing exceeds $30,000 (CAD), you may be required to register for the Goods and Services Tax (GST) or Harmonized Sales Tax (HST) in Canada. These taxes apply to the sale of goods and services in Canada. Freelancers who are registered for GST/HST must file a GST/HST return and remit the collected taxes to the Canada Revenue Agency (CRA). The threshold for mandatory registration is based on your taxable sales, including those made to Canadian clients.
- Exchange Rates: When filing taxes in both countries, you’ll need to account for currency exchange rates. The IRS and the CRA both require that foreign income and expenses be reported in the local currency (USD for the US and CAD for Canada), so you will need to convert your income and expenses into the appropriate currency.
Being a freelancer across the US-Canada borders can be complex, but with careful planning and adherence to tax laws in both countries, you can minimize your tax liability and ensure full compliance. It’s essential to understand the tax rules in both countries and be aware of the forms you need to file to stay compliant. By filing the right forms, such as Form 1040, Schedule C, and Form 2555 in the US, and T1 General and T2125 in Canada, freelancers can properly report their income and claim deductions. Additionally, taking advantage of tax credits and exclusions, such as the Foreign Tax Credit and Foreign Earned Income Exclusion, can help minimize the risk of double taxation.
