If you’re self-employed in Canada — meaning you earn income from a sole proprietorship or partnership — you’re responsible for tracking your income and expenses and paying your taxes every year to the Canada Revenue Agency.
Self-employed taxes are a bit more complicated than traditional income taxes, so be sure you understand what to expect before this year’s tax filing deadline.
Who pays self-employed taxes in Canada?
The Canadian government considers you to be a self-employed individual if you fall under any of these categories:
- You carry on a trade, profession, or own a small business as a sole proprietor or individual contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including part-time and freelancing).
- You participate in the platform economy, which includes economic and societal activities, sometimes called side hustles, facilitated by the use of technology such as the internet and mobile applications.
Types of self-employed taxes
If you’re self-employed, you’re responsible for paying these taxes on your self-employment or business income:
- Federal income tax.
- Provincial income tax.
- Canada Pension Plan (CPP) contributions
- Employment insurance contributions if you opt into the program.
- Goods and services tax, harmonized sales tax and /or provincial sales tax if applicable.
Nerd tip: It’s recommended that, as a self-employed individual, you save 25%-30% of your annual income for tax purposes.
You must report your entire income on your tax return or face penalties. Remember, filing your taxes is also the only way to be considered for government benefits such as provincial or territorial tax credits, the GST/HST tax credit, and the Canada Child Benefit.
How to calculate self-employed taxes
Canada has a graduated income tax system, so your tax rate depends on how much you earn each year. You won’t know the exact amount of tax owed until you prepare your tax return, taking into account all your expenses and deductions. But you can make an estimate based on tax rates and income tax brackets that change every year.
Federal tax rates for 2022 fall under the following brackets:
- 15% on the first $50,197 of taxable income, plus
- 20.5% on the next $50,195 of taxable income (on the portion of taxable income over 50,197 up to $100,392), plus
- 26% on the next $55,233 of taxable income (on the portion of taxable income over $100,392 up to $155,625), plus
- 29% on the next $66,083 of taxable income (on the portion of taxable income over 155,625 up to $221,708), plus
- 33% of taxable income over$221,708.
Provincial tax rates vary based on the province or territory in which you live.
All working Canadians over the age of 18 must contribute to the Canada Pension Plan if their net self-employment income and/or pensionable employment income is more than $3,500.
Generally, employed individuals pay half of the CPP and their employers cover the rest. However, self-employed individuals are responsible for contributing the whole amount themselves. CPP contribution rates change every year. For 2022, you would contribute 11.4% of your total self-employed income up to a maximum of $6,999.60.
The last tax payment that you may need to worry about is GST/HST. Once you earn more than $30,000 during any three consecutive months or four consecutive calendar quarters you lose your “small supplier” status. This means you must register for a GST/HST number and begin charging, collecting and paying GST/HST.
At this point, you may also be eligible to claim an GST/HST tax credit, which reimburses you for the GST/HST you paid on goods or services related to your self-employment.
Tax deductions for self-employed workers
When you’re self-employed, you can deduct certain business expenses from your income, thereby lowering your taxable income and the amount of federal taxes you pay. Make sure to keep all the receipts for any expenses you want to claim.
These types of expenses can include, but are not limited, to the following:
- Advertising expenses such as business cards or online marketing.
- Vehicle expenses such as maintenance, insurance, and gas.
- Banking fees.
- Office supplies.
- Cell phone and utilities.
- Professional fees.
- Certain meals and entertainment costs.
The CRA website has a list of common business expenses you can write off on your taxes.
How to file self-employed taxes in Canada
As a self-employed individual, you have to file the T1 General Form, also called the Income Tax and Benefit Return, that Canadians use to file personal tax returns.
In addition, you need to file a Form T-2125, also known as the Statement of Business or Professional Activities.
If you are registered to collect GST/HST, you must also complete and file a separate GST/HST return.
You can file your annual tax return using an online tax program, but make sure to choose CRA-approved tax software. Wealthsimple Tax and TurboTax are two popular tax programs that offer options for self-employed Canadians.
Or, you can hire an accountant to do your taxes. This will cost more than filing the returns yourself with an online program, but it might be less stressful. Just make sure you have all your forms in order and ready to go for them.
You can also take advantage of free support offered by the CRA through its Liaison Officer service to help you better understand your tax obligations. This can be done virtually over the phone or via videoconference. You can learn more about this service on the CRA website.
Important tax deadlines for 2022
Self-employed Canadians have until June 15 to file their annual tax returns for the previous year, however, they must pay any taxes owed by April 30 (which is the same payment deadline for employed individuals).
If you expect to owe more than $3,000 in annual income tax, you‘ll need to pay your taxes in quarterly installments. These installments are typically due on March 15, June 15, September 15, and December 15 every year.
Make sure to keep on top of your taxes and pay them fully on time as per your schedule, whether it’s quarterly or annual to avoid any installment interest and any penalties.