Are you a small business owner? Are you self-employed like a freelance writer, a painter, an author, a freelance tax calculator, or do you have a different occupation? Then you should pay close attention to filing your taxes and there are certain things that you may have to take care of on your own as a self-employed individual in Canada. It can be a little tricky compared to salaried individuals but once you start filing tax for self-employed in Canada, you will realize that it is actually simple.
This article will help you to pay tax for self-employed in Canada. There are three things that you have to consider stated below.
- Income tax on your business earnings
- Canada Pension Plan (CPP)
- Contributing to employment insurance
We will come to this shortly.
Tax for Self-employed in Canada Vs. Employed
One of the major differences between being self-employed and a salaried person is that when you are self-employed, you have to calculate money for taxes and pay it to the government using your “My CRA Account”. When you are working for a company on salary, such formalities are taken care of by your employer.
In some cases, if your employer deducts the exact amount needed to pay as tax, you don’t even have to pay taxes. Being self-employed means you are your own accountant, bookkeeper, and tax professional. It is not rocket science and you can do this with ease; all you have to do is pay a little attention.
Pay Tax for Self-employed in Canada
This is one of the major things that you have to consider when you are self-employed. This will lead to you taking care of each detail that from where your money comes and from where your money goes. There are certain things that can help you reduce your tax liabilities such as expense deductions, tax credit, contributing to government plans such as RRSP, etc.
There are two income taxes. The first is Federal Tax and the second is Provincial Tax.
The Federal Income Tax table will help you to understand this better.
|Taxable Income||Income Tax Rate|
|Between $49,020 to $98,040||20.5%|
|Between $98,040 to $151,978||26%|
|Between $151,978 to $216,511||29%|
|On more than $216,511||33%|
The tax is progressive which means if your taxable income is $55,000. Your Federal income tax amount would look like this.
Taxable income = $55,000
Tax rate till $49,020 is 15% = $7,353
The remaining amount ($55,000 – $49,020) = $5,980
Tax rate on this amount is 20.5% = $1,225.9
Total Tax Amount = $8578.9
The below picture will give you information on how much income tax is levied as per your province.
Canada Pension Plan (CPP)
If you are earning more than $3,500 as your business income or your pension amount, you are liable to contribute to the Canada Pension Plan. Between 2019 to 2023, there will be a gradual increase of 2 percent for individuals to contribute to CPP. For a self-employed person, the rate to contribute to CPP is 10.9 percent of business revenue. You can deduct the basic amount of $3500 from it.
When you are employed this liability is divided between you and your employer and thus you only have to contribute 5.45 percent of the income. The maximum amount that a self-employed person can contribute to his or her CPP account is $6332.90 annually.
Employee Insurance (EI) Contribution
Now, this thing is totally volunteering, you can choose if you do not want to contribute to this but note that if you do not contribute, you will miss out on important benefits such as
- Maternity of paternity leave
- Illness Leaves
- Any benefit that you can take to take care of your sick kid.
In Canada, in 2021, the EI rate will be 1.58 percent if you are self-employed. In simple words, it means that for every $1000 earned, you have to pay $15.8 for EI. The maximum amount is kept at $88 9.54 per year. Here the earning that is taken into consideration is your gross earnings or salary after you are done deducting your expenses but before you contribute to Income Tax or CPP.
Forms to Pay Tax for Self-employed in Canada
There are mainly 3 forms that you have
This form is mandatory when you have income from a business. You are likely to get this form along with a Statement of Pension, Annuity, Retirement, or any other income by your clients in the month of February the preceding year.
This is a Statement of Business or Professional Activities. This form would aid you in calculating the gross income for the year. You can deduce the appropriate expenses in this form and lower the amount you need to pay for income tax. In this form, you may require giving the below information.
- Source of business earnings.
- Business description, along with information of your products or services, and industry you are serving in.
- Earnings from any internet business include but do not limit to ad traffic revenue, affiliate sales, referral charges, etc. You also have to give URLs for those websites to the Canada Revenue Agency.
- Goods and Services Tax (GST)/Harmonized Sales Tax (HST) paid or received.
- Any expenses incurred to generate profits.
This is the personal income tax filing form. Once you are done with the T2125 Form, you should take this form into consideration.
It is important to be meticulous in reporting your income as failure can lead to a 10 percent penalty on the missing income amount. And if you fail to pay that fine, you will be charged with a 20 percent penalty. The penalty amount would keep on doubling in case of repeated failures.
Due Dates for Filing Income Tax:
Personal Income Tax: This amount is due on April 30, given that it is not a weekend or any holiday.
Self-employed Tax: This tax filing is due on June 15 of the preceding year unless it is a weekend or any holiday. If you owe any pending tax, you have to pay it by April 30.
In case you are liable to pay the tax amount in installments, you will get communication from the CRA. These dates would be
- March 15
- June 15
- September 15
- December 15
Though farmers and fishers would only need to pay in one installment payment by the end of the year due to their seasonal nature of work and business.
As explained in this post, there is no doubt that you may find it a little difficult to calculate your taxes and file your own returns but as a responsible citizen, it is a responsibility. This will help the government to make developments and better the societal condition in the nation. I hope this article helps you to calculate and pay your tax for self-employed in Canada. Best of Luck!