Taxes are unavoidable, but you can prepare for it and help yourself in many ways so you don’t have to dread filing and paying them.
This guide is for all you side-hustlers, business owners, freelancers, and anyone else who has the drive to work for themselves either part-time or full-time.
You’re hungry for increased financial dependence and that means educating yourself on what to do at tax time. But, preparing and filing your taxes doesn’t need to devour all your time (or money).
We’ve put in the work and rsearched how to complete self-employed taxes in Canada, so you can focus on your business.
What is self-employment tax in Canada?
Self-employment tax in Canada is what you pay the government based on how much money you make in your business. If you work a 9-5 job and earn money in your off-hours from a different source than the company where you’re employed, then you are required to pay a portion of that extra money back.
Self-employment is a broad category. Any money you make from a side-hustle is considered business income. Your side-hustle is technically a business in the eyes of the Canada Revenue Agency (CRA), which makes you responsible to pay taxes on that extra cash you’re bringing in. Consultants and independent contractors also fall under the category of self-employment.
If you own a business and are not incorporated, remember that side-hustles count, you are considered self-employed, and any profit you make (profit = income minus expenses) is subject to taxes.
How do I file taxes as a self-employed person?
You have at least three options to file your taxes as a self-employed person.
1. File them yourself. The government of Canada website has everything you need to properly file your taxes. But I would strongly recommend researching which forms you’ll need because while their site is comprehensive and truly helpful, it can feel like a bit of a labyrinth.
2. File with an accountant. Speak to an accountant in your area about filing taxes as a self-employed person. Ask lots of questions. A good accountant will be happy to help you figure out what needs to happen so you can minimize a payment or potentially maximize a refund.
3. File online with tax software. There are many free and not-so-free options available. Wealthsimple Tax and H&R Block both have great reviews and are set up for the Canadian tax system.
Self-employment tax rates in Canada
Now, just because you own a business doesn’t mean you will pay a huge chunk of your hard-earned cheddar. Not all businesses are the same, and tax rates change based on how much money you’ve earned in the past year. How much tax you have to pay is usually calculated based on the last calendar year.
Income Tax is determined by your profits. If you make $60,000 annually in your business, but your business expenses are $10,000, then you are only taxed on your gross income (profit after expenses) which in this example would be $50,000.
The federal income tax rates for 2023 are as follows:
- 15% on the first $53,359 of taxable income
- 20.5% on the portion of taxable income over $53,359 up to $106,717
- 26% on the portion of taxable income over $106,717 up to $165,430
- 29% on the portion of taxable income over 165,430 up to $235,675
- 33% of taxable income over $235,675
On top of federal taxes, you also have to pay provincial income tax rates, which are different in each province.
Income taxes are applied on a portioned system, like a set of stairs. The first step isn’t actually on the staircase. If you make less than $15,000, then you do not pay income tax. The second step is when taxes start. If you make anything between $15,000 and $53,359 per year, your income is taxed at 15%. The third step is where things can get confusing. If you make more than $53,359, then every dollar you make ABOVE that “step” is taxed at a slightly higher rate, 20.5%. Let’s say you made $63,359 last year. The first $53,359 is taxed at 15%. Then, the next $10,000 is taxed at 20.5%. The math looks like this:
$53,359 X 15% = $8,003.85
$10,000 X 20.5% = $2,050
$8,003.85 + 2,050 = $10,053.85
So, in this example, you would have to pay $10,053.85 in income taxes in 2023.
Looking for an estimate on how much you’ll have to pay in self-employment taxes? Here are a few free calculators you can use:
- Netfile Approved Yes
- Pricing $0 - $69.99
- Mobile App iOS & Android
Canada Pension Plan contributions
Canada Pension Plan (CPP) contributions are going up in 2023. As an employee, only half of the total amount is removed from your paycheck and your employer pays the other half. However, when you’re self-employed, you have to pay the whole thing, 11.9%. But, there is a cap on contributions. The government has determined the maximum amount at $7,508 for 2023.
Similar to Income Tax, however, there is something called a Basic Exemption Amount. That means that the first $3,500 you earn is NOT subject to CPP contributions, which is good. You pay a little less than you might otherwise have to.
So, factoring in the $3,500 limit, you will max out your CPP contributions if you make $63,100 or more. If you make $65,000, $70,000, or $90,000 per year, you will still only have to pay $7,508.
Let’s look at some math again using the numbers from the previous example:
$63,359 X 11.9% = $7,539.72
Your CPP contributions for 2023 would be $7,539.72. Now, if we add this to your Income Tax from the previous section, this is the rundown:
Income Tax = $10,053.85
CPP = $7,539.72
Total self-employment tax for the year = $17,593.57
You’d need to budget around 28% of your annual income to cover your tax bill. Experts recommend setting aside between 25% and 28% of your income for taxes each year. It’s an easier pill to swallow if you place the money in a savings account each month. It’s always better to save too much than too little. Any extra money you have after paying your taxes could be reinvested in your business, or the stock market, or simply kept for next year’s tax bill. You know it’s coming.
The last self-employment tax you need to know about is Employment Insurance. And this one, unlike the last two, is voluntary!
Employment Insurance (EI)
Employment Insurance (EI) is NOT required for self-employed people. If you don’t want to invest money in EI, you 100% don’t have to. That said, you will miss out on the benefits of EI including maternity/ paternity leave, caregiver benefits, etc.
In 2023, the EI premium rate is 1.63%, which has changed since 2022. There is a maximum premium for the year as well, $1,002.45, and you won’t be required or allowed to contribute more than that each year. So, if you make $63,000, you will pay the maximum amount for EI. If, instead, you make $105,000, you will only pay $1,002.45.
Returning to our ongoing example, let’s do the math:
$63,359 X 1.63% = $1,032.75 (over $1,002.45 maximum)
Income Tax = $10,053.85
CPP = $7,539.72
EI = $1,002.45
Total self-employment tax for the year = $18,596.02
Now, the total tax rate for 2023 is just over 29% when EI premiums are added into the mix. Almost one third of the money you make will go to the government, which might make you want to rip your hair out and forget all about this self-employment thing.
Don’t lose heart just yet. There are ways to reduce your tax amount through charitable giving, Registered Retirement Savings Plan (RRSP) contributions, and determining which business expenses you can deduct. We’ll discuss these next.
Self-employed deductible expenses
Don’t be intimidated by a large number when you’ve finished calculating your self-employment taxes. There may be untapped deductions that you didn’t know were available to you. There are a few simple ways you can defer some of your self-employment taxes.
Registered Retirement Savings Plan (RRSP) contributions
RRSPs are designed to help Canadians save money for retirement. They are excellent savings options for self-employed people because they offer a tax deduction. When you put money into an RRSP, the amount of taxes you owe at the end of the year are decreased.
Every year, the government determines the contribution limit for RRSP’s, it’s usually around 18% of your annual income. However, if you haven’t contributed to an RRSP in a year or more, that limit could be higher.
It’s important to know that once money has been placed into an RRSP, it is usually best to leave it alone. There are certain circumstances where you can withdraw it with little or no penalty, like to buy your first home, but aside from that, any money withdrawn from an RRSP is considered income, and you will have to pay income tax and CPP on it come tax time. So, don’t take it out until you’ve retired and are being taxed far lower than you are now.
Another way to reduce the amount of tax you can defer while self-employed is by making donations to charities.
Each province calculates the deduction differently, but Manitoba, as a totally unbiased example, gives you a tax credit of 10.8% on the first $200 you donate, and 17.4% on any donations on any amount over the initial $200. So, a donation of $5,000 would give you a tax credit of $2,278.80.
Not only can you save yourself money on your taxes, but you can support an organization or cause that you love.
Deductible business expenses
There are a surprising number of business expenses you can deduct from your taxes, like certain meals, or even part of your mortgage and utilities if you work from home.
To actually claim these expenses as tax deductions, you need to be organized. If you want to deduct the desk and office supplies you purchased for your home office, you need to keep receipts, either digital or paper copies. If you want to deduct part of your internet bill, hydro, fuel, mortgage, etc. you need to itemize each separate expense and list the monthly price. I love spreadsheets, so that’s what I use. It’s easy to make and easy to update if something changes.
The best thing you can do, after making a spreadsheet, is talk to a real-life accountant. Many will be happy to offer some advice, and even happier if you use their services. While it’s certainly possible, and easier than ever, to file your own taxes online, you can never underestimate the value of a good accountant. They might save you a lot of money.
Self-employed tax deadlines in Canada
For most people working for an employer, the deadline to file your tax returns and pay any money you owe the government is May 1, 2023. For most self-employed people, the deadline is June 15.
Be sure to give yourself some extra time to file your taxes, because there may be unexpected delays, and the CRA will charge late fees of 5% interest on any balance owing and an additional 1% for each full month the money isn’t paid.
What's the proper tax form for a self-employed person?
For someone self-employed earning a business professional income, the proper tax for you is Form T2125. On this form, you’ll be able to submit all relevant information like your personal and business income, business expenses, and capital cost allowance. In other words, you’ll be able to deduct your office rent, cell phone and WiFi bills, cost of goods, etc.
Self-employed tax preparation software
The process of calculating and filing taxes is trending away from brick-and-mortar establishments. These days, tax-filing software is the hot new thing.
Here are some brief descriptions of three big names so you know what to expect if you decide to give any of them a try.
100% free and incredibly intuitive, Wealthsimple Tax offers a simple and lightning fast online tax-filing service that allows you to upload information from previous tax years for free.
You don’t even need to make an account, just verify your email address, enter some personal information, and blaze through the rest of the process with real humans within reach if you need any help.
Once you’re done, your refund or balance owing appears instantly on the screen. At this stage you’re asked if you’d like to pay for the service, but there is no penalty for declining.
Their version of online tax-filing offers a free service to file basic taxes, but there are two other levels which you can pay for if you want a more personal experience and added security.
The Assistance plan and the Protection plan add integration of previous years’ tax returns, and more customized customer service among other perks.
One big plus for H&R Block is they guarantee your return is perfectly accurate. If there is an issue which draws penalties or fees from the CRA, they will reimburse you.
How do I know if I should pay self-employment tax?
Start by asking yourself a few basic questions:
- Do I earn money that doesn’t come from an employer?
- Is the money I earn based on piece work like freelancing or consulting?
- Do I own my own small business such as hairdressing, contracting, etc.?
If you answered yes to any or all of these, then you are certainly self-employed and must pay taxes accordingly. But don’t worry, there are a lot of great resources available to you online. Or, if you prefer talking to an actual human, call up an accountant in your area and ask to chat with them. They will be able to help you.
Getting started with self-employed taxes
Self-employment is a tough gig already, figuring out your taxes shouldn’t be a reason to keep you from pursuing that goal.
If you’ve already taken the leap into self-employment, then you can absolutely figure out your self-employed taxes. No one starts out knowing everything. It just takes courage to admit that you don’t know enough and commit to learning. Put in the hours it will take to stop being a dummy about taxes. Since you’re reading this now, you are already a champion.