How to file self-employed taxes in Canada

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.

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.

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

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 2022 are as follows:

• 15% on the first $50,197 of taxable income
•  20.5% on the portion of taxable income over $50,197 up to $100,392
•  26% on the portion of taxable income over $100,392 up to $155,625
•  29% on the portion of taxable income over 155,625 up to $221,708
•  33% of taxable income over $221,708

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 $14,398, then you do not pay income tax. The second step is when taxes start. If you make anything between $14,398 and $50,197 per year, your income is taxed at 15%. The third step is where things can get confusing. If you make more than $50,197, then every dollar you make ABOVE that “step” is taxed at a slightly higher rate, 20.5% Let’s say you made $60,197 last year. The first $50,197 is taxed at 15%. Then, the next $10,000 is taxed at 20.5%. The math looks like this:

$50,197 X 15% = $7,529.55

$10,000 X 20.5% = $2,050

$7,529.55 + 2,050 = $9579.55

So, in this example, you would have to pay $9579.55 in income taxes in 2022.

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:

• H&R Block Calculator
• Wealthsimple Calculator
• TaxTips Calculator 

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.

Charitable Donations

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.

You can find a comprehensive list here, but 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.

For most people working for an employer, the deadline to file your tax returns and pay any money you owe the government is May 2, 2022. 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.

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, ect.

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.

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.

Good luck!