A side hustle can turn a useful skill into extra income. It can also create a tax bill that never appears in your regular paycheque. Unlike an employer, a customer generally doesn’t set aside income tax for you.
The important number isn’t everything deposited into your account. It’s what remains after business expenses, income tax, and any applicable pension contributions. Understanding that difference before investing the proceeds prevents an avoidable cash shortage later.
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Getting started
Suppose a small business receives $12,000 from customers and has $3,000 of eligible business expenses. Its net business income is $9,000. At an illustrative 30% income-tax rate, the income-tax cost is $2,700, leaving $6,300 before any additional Canada Pension Plan (CPP) obligation.
The rate depends on your other income and province. The calculation simply shows why investing all $9,000 can create a problem when taxes are due. Expenses must also relate to earning business income. Personal purchases don’t become deductions because you started selling something online. For many sole proprietors, income and expenses are reported using Form T2125. Keeping invoices and receipts makes the net-income number defensible.
Sales tax is a separate issue. Most businesses must register for GST/HST when taxable supplies exceed $30,000 under the applicable single-quarter or four-consecutive-quarter rules. The threshold concerns taxable sales, not profit. Special rules apply to activities such as commercial ride-sharing, which can require registration from the start. That means $32,000 of taxable sales with only $8,000 profit can still trigger registration. Sales tax collected for remittance isn’t money available for a personal investment account.
Go SHOP-ing
Shopify (TSX: SHOP) gives investors a way to participate in merchant activity without operating a store themselves. It provides commerce software and services such as payments, helping businesses sell to customers through several channels.
Its second-quarter revenue increased 34% to US$3.6 billion. Merchant-solutions revenue was US$2.8 billion, compared with US$802 million from subscriptions. Merchant solutions therefore supplied roughly 78% of total revenue.
Shopify’s investment case therefore depends heavily on merchants selling goods and using its services, not just paying a fixed software subscription. Healthy store activity can increase payment and service revenue. A consumer slowdown can work in the opposite direction. However, using Shopify successfully as a business owner and buying its shares are different decisions.
Keep the two risks separate
At $243.83 recently, Shopify traded above 80 times the market-data provider’s forward earnings estimate. That estimate can change, but the price clearly asks for substantial growth. This is a growth holding, not a safe destination for next spring’s tax money.
A business owner already exposed to customer spending can increase household risk by putting all surplus savings in the same theme. Cash reserved for taxes should remain accessible. Long-term money can be spread across sectors and markets through a Tax-Free Savings Account (TFSA) when contribution room permits.
Self-employed CPP contributions can also differ from payroll deductions because the self-employed generally bear both portions, subject to age, existing employment contributions, and earnings limits. The income-tax example above deliberately leaves that amount separate instead of pretending one percentage covers every obligation.
It also helps to separate business cash from personal savings. A customer payment may need to cover supplier bills before it becomes profit. Keeping those obligations funded leaves a clearer amount available for long-term investing and reduces the chance of having to sell shares to pay a routine business expense.
Bottom line
A side hustle becomes useful investment fuel after its bills and tax obligations are covered. In our example, $9,000 of profit leaves $6,300 after the assumed income tax, before CPP. Shopify offers an investment in merchant growth, but its demanding valuation makes it suitable for patient growth capital, not money already owed to Ottawa.
