Self-Employed Taxes in Canada: How Much to Set Aside for CPP, EI & Income Tax

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It’s that time! I’m talking about tax season, and my first time doing self-employed taxes in Canada. What joy, what luck, oh gosh…what am I in for?

If you've got to your self-employed taxes in Canada this year and have no idea where to start...then start here., I go in-depth on collecting sales tax, CPP/EI contributions and calculating your income tax owed (saving you the headache of researching yourself).And as a quick reminder, if you’re thinking “Wait, when are my taxes due?” these are the deadlines to file your 2017 taxes:

    • April 30, 2018 – the deadline for most Canadians
    • June 15, 2018 – the deadline if you or your spouse/common-law partner are self-employed (but if you owe money on your taxes, you should file & pay your bill by April 30, or you’ll be charged interest)

I’ve mentioned¬†throughout the years how I’m probably the only person in the world that doesn’t dread tax time. But,¬†to be fair, up until 2017, I’ve always been a salaried employee with a side hustle. My taxes were fairly straightforward, I would always do them myself using an online tax software like TurboTax, and I would usually get a tax refund instead of a hefty tax bill. With no headache and a nice cheque to look forward to, why wouldn’t I look forward to tax season?

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My First Year Dealing with Self-Employed Taxes in Canada

But, that time has now come to an end. Since I am now completely self-employed, that means that I am fully responsible for setting aside money to contribute to the Canada Pension Plan (CPP) and my income taxes. Long gone are the days when my employer would just put that money aside for me, making filing my taxes a total breeze. That being said, since I did end my last job on Jan. 9, 2017, that means I will still get a T4 from my old employer (and possibly my last T4 ever).

To prepare myself for filing my self-employed taxes for the first time, throughout the year I’ve been putting aside money in a special savings account for just this purpose. But recently, a question popped up in my private Facebook group asking:

“How much should I set aside for CPP, EI and taxes if I’m self-employed in Canada?”

It’s a very simple question, and one that reminds me that there are a ton of other people out there embarking on their first year of self-employed taxes in Canada just like me.

Since this is actually a very common question, I thought this would be a great topic to explore in-depth on the blog. So, let’s start with some key information you’ll want to know before getting started with your own self-employed taxes as a Canadian.

How to Know If You’re Self-Employed

There are a ton of different terms for being self-employed, so I want to start with clearing some things up. If you’re a freelancer, if you’re a small business owner, and even if you have a side hustle, all of those would fall under the umbrella of self-employed.

Speaking a bit more about side hustles, because the gig economy is strong and I think a lot of people aren’t even aware of this, if you make money by selling a product or service, you need to pay income tax on that money. I doesn’t matter if you only earned $500 from your Etsy store or $10,000 from doing some consulting on the side. No matter how much you earned, you need to pay income tax on it.

The same goes for if you earn cash tips at your job or do jobs for cash. Many people believe that you are exempt from paying taxes if you do cash gigs, but that’s not the case at all. Yes, if there isn’t a paper trail it is less likely that the Canada Revenue Agency (CRA) will discover that you are being paid under-the-table. But, if they do catch you and you haven’t paid taxes on those cash gigs for a number of years, you could be slapped with a big and unexpected tax bill. And you really don’t want that, so it’s best to always err on the side of caution and just pay taxes on any money you earn.

For more info, check out this article on the government’s website about tax obligations for self-employed individuals.

Make Sure You’re Collecting Sales Tax

Not to be confused with income tax, there is also sales tax to be considered. Sales tax can either be GST, GST + PST, or HST depending on what province you live in and what province your customers lives in. To make things easy for you, here’s a sales tax chart¬†that will show you the sales taxes per province/territory in Canada.

Provinces HST Rate
New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island HST 15%
Quebec GST + PST 14.975%
Ontario HST 13%
Manitoba GST + PST 13%
British Columbia GST + PST 12%
Saskatchewan GST + PST 11%
Alberta, Northwest Territories, Nunavut and Yukon GST 5%

A few important things to reiterate here because they’re very important.

How to Know Which Sales Tax to Charge

You may assume that if you live in Ontario, then you should be charging 13% HST to all of your customers no matter where they live. Well, you’d be wrong.

If your customers live in Ontario, then yes you would charge them 13% HST. However, if they live outside of your province or territory, you would charge them the sales tax applicable to their province or territory. In other words, if you had an Etsy store selling scarves and your business operated in Ontario, if a customer bought a scarf and lived in Alberta, you would charge them the 5% GST that Alberta requires.

For provinces that have both GST and PST, it can be a bit confusing. If you run a business or will be offering goods and services in one of these provinces, it’s best to seek the advice of a tax accountant.

Now, something that is less confusing is dealing with customers from outside of Canada¬†(like the United States). When selling goods and services to customers internationally, you don’t need to charge them any sales tax.

This is of course assuming that they are getting your product shipped to or are using your service from their residence that’s outside of Canada.¬†If you had a physical shop in Canada and a U.S. customer was visiting and bought something from you, then you would have to charge them the sales tax applicable to where your shop is located.

Hopefully I’ve explained all that as simply as possible, but for more information check out this article on the government’s website or ask a tax accountant like my pal Lisa Zamparo, CPA.

When to Start Charging Sales Tax

On top of knowing how much to charge, it’s equally important to know when you should start charging sales tax. Here’s the answer to that:

“A small supplier does not have to register for a¬†GST/HST¬†account. To be considered as such, your business must be a sole proprietorship, partnership or corporation with $30,000 or less in total revenue in the last four consecutive calendar quarters or in any single calendar quarter.” – CanadaBusiness.ca

So, if you have an Etsy shop that earns just under $30,000/year, you don’t need to charge sales tax quite yet. If you do earn $30,000/year or more, then you need to register for a GST/HST account, collect sales tax from your customers and then pay that sales to the CRA.

For more information on that, here’s a great resource on the government’s website.

What You’re Required to Pay as a Self-Employed Person

Okay, with all of that knowledge in your head now, let’s talk what you’re on the hook to pay to the government come tax time.

  • Tax on your net income
  • Contributions to the Canada Pension Plan (CPP)
  • Contributions to Employment Insurance (EI) voluntary

When you’re a salaried employee, tax and CPP and EI contributions are automatically taken off your paycheque, so all the heavy lifting is done for you. That’s not the case when you’re self-employed, so you really need to make sure you’re saving enough to pay up when filing your taxes.

So, how much should you be saving exactly?

How to Calculate Your Income Tax When Self-Employed

Let’s talk specifics here. You may think that you have to pay tax on every dollar your business earns, but that’s actually not the case. You’re required to pay tax on your net income, not your gross income. What that means is you need to pay tax on the amount you earned after deductions, which could include business expenses and RRSP contributions.

So let’s say you earned $100,000 as a self-employed masseuse, and your total business expenses and RRSP contributions come to $20,000. That would mean that your net income would be $80,000, which would be the amount you would be taxed on.

For myself personally, I track all of my income and deductions in my budget spreadsheet¬†and in Freshbooks. Because I do this, I always have a clear idea of what my business expenses are throughout the year, and I suggest that anyone who is self-employed do the same (and don’t forget to save your receipts for those expenses, or they’re ineligible!).

Once you know your deductions, then you can use one of these calculators to get an estimate of how much tax you’ll have to pay:

But, if you’re just looking for a general number to save for taxes, set aside 25% of your net income to be safe. Even if you end up paying less, it’s always better to have some money left over than not enough.

How to Calculate Your CPP Contributions

For your CPP premiums, you are required to pay these if you are 18 or older and earn more than $3,500/year. It’s also interesting to note that if you are an employee, you pay half of your CPP premiums and your employer pays the other half. When you’re self-employed, you aren’t so lucky and have to pay the full amount. For more specific info about CPP contributions, check out this great resource on Canada.ca.

Each person’s CPP contributions vary because they are determined by your income. The minimum income required (as mentioned above) is $3,500 and the maximum amount $55,900. The rate to calculate how much you’ll owe is 9.90% of your net income, with a cap of $5,187.60. For more details on these numbers, here’s a great article on Bookkeeping Essentials‘ blog.

As an example, let’s say your net income is $80,000. At a rate of 9.90%, it would look like you’d have to fork over $7,920 for CPP. Luckily, there’s that wonderful cap on contributions, so you’d just have to pay the maximum amount which is $5,187.60.

How to Calculate Your EI Contributions

I want to make it clear that contributing to the EI program is not mandatory when you’re self-employed. It is absolutely voluntary. However, by not contributing to EI, that means you are ineligible to take advantage of all the benefits EI has to offer, such as maternity/parental leave or being a caregiver to a family member who is ill or injured. Then again, it may not be worth it to you and instead you may prefer to have a very cushy emergency fund.

But if you are interested in it, here’s how much it costs. For self-employed individuals, in 2017 the EI rate was 1.63% on your net income (on a maximum of $51,300/year earnings). For 2018, it’s 1.66% on a maximum of $51,700 in annual earnings.

Breaking this down, if you wanted to contribute to EI for 2018 and earned $80,000 net, you would owe $858.22.

An important thing to note, once you’re entered into the EI program, you can never get out. I know that sounds a bit ominous, but it’s true. With a few exceptions of course.

If you register and change your mind, you have 60-days to cancel. Once it’s passed the 60-days, you can only cancel if you’ve never used your EI benefits. Unfortunately, if you have used your EI benefits, you’re locked into the program for the entire length of your self-employed career.

So…make sure this is something you really want to do before signing up!

Final Thoughts

This has been a major post, so if you actually read it all, word for word, you are a rock star! Not only that, now you’re way more informed than most self-employed people. High-fives all around for that!

But again, if you’ve got to do your self-employed taxes in Canada and are still confused about things, feel free to email me or leave your question in the comments and I’ll try my best to help you find a answer or solution.

Is it your first time filing self-employed taxes in Canada? What are you concerns or questions? Let me know if you can’t find the answers here and I can write a follow-up blog post!

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