This guide is for a person with employment income and a sole-proprietor side activity. It does not decide whether a particular contract is employment, nor does it cover the return of an incorporated business.
Folder 1: Your T4 employment
Keep the T4 from every employer for the tax year. Compare the employment amounts with your own pay records and flag a missing or incorrect slip for the employer. CRA says T4 employment income is generally in box 14 and is reported on line 10100.
- All T4 slips for that year, plus a note of any employer that has not sent one.
- Your final pay statements, to help identify discrepancies; the T4 is the slip to check for filing.
- A question list for unusual benefits, missing slips or a disputed employment amount.
Folder 2: Your self-employment activity
A business or professional activity has its own gross income, expenses and net result. CRA directs taxpayers to report gross and net self-employment income on the applicable business-income lines, and Form T2125 helps calculate those amounts for a sole proprietor. Employment income is not business income: do not enter the same T4 wages again as a business sale.
- Income: client invoices, contracts, platform statements and payment records. Note the date, gross amount and source, then reconcile payouts to the underlying work.
- Costs: receipts and invoices for purchases made for the activity. Add a short note about business purpose, especially when an item has personal use too.
- Follow-ups: missing receipts, unpaid invoices and amounts that do not match a payout statement. Keep uncertain tax treatment on a question list rather than guessing a deduction.
CRA says business income records should show the date, amount and source of each receipt, supported by original documents. Expense claims also need supporting documents. You can use a spreadsheet or other system; the important part is that someone can trace a figure back to the underlying record.
A simple example
Suppose you work weekdays for an employer and design a client logo on a weekend. The employer issues a T4; the logo project has a client invoice, a payment record and perhaps a fee charged by the payment service. Put the T4 with employment records. Put the invoice, the fee document and the matching payout with the business activity. A net bank deposit alone will not explain the project revenue and fee. This is an illustrative record-keeping example, not a calculation of deductible costs or tax.
Do not mistake wage withholding for a side-business tax payment
An employer withholds amounts from wages. A self-employed client generally does not withhold your income tax and CPP in the same way. Having tax deducted on your T4 does not prove that the deductions cover the tax or CPP arising from business income. Review the complete return and ask a qualified adviser about your own position rather than choosing a blanket percentage of side income to set aside.
Your next step this week
- Label two folders with the same tax year: employment and self-employment.
- List the employers whose T4 slips you expect and mark any missing slip for follow-up.
- Pick one freelance payment and link its invoice, any platform fee and the bank payout.
- Make a short list of missing evidence or classification questions for your tax preparer.
Common questions
Is a small side activity ignored because I have a T4 job?
No. A T4 job does not turn separate business income into employment income or remove the need to report it. First confirm whether the activity is actually self-employment; the label on a contract alone does not settle employment status.
Do I file a second personal return for the side business?
For a sole proprietor, T2125 is used to work out business or professional income and expenses for the personal tax return. It is not a replacement for the employment section. If you operate through a corporation, get advice on the different reporting obligations.
Can I use only bank statements as my business records?
Keep the invoices, receipts, contracts and fee statements that explain the transactions. Bank statements help reconcile a deposit, but a deposit by itself may not show the original sale, any withheld platform fee or the business purpose of a cost.