Overview of Self-Employment Taxes in Canada
January 12, 2024Most of the time when you are employed, taxes are very straightforward. Most of the time it’s just a T4 and any RRSP deductions if you have them. If you earn self employment income, taxes can be much more complicated. self employed individuals responsible for keeping track of your income and expenses and then submitting them to the Canada Revenue Agency (CRA). From there you are required to pay the amount of income tax that you owe.
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When You Are Considered to be self employed
In order for the federal government to consider you to be self-employed, you have to fall under one of these categories below.- You carry on a trade or profession or even own a small business as an independent contractor or a sole proprietor.
- You are part of a partnership that carries on a business or even a trade.
- You have your own business. This includes freelancing or operating a business part-time.
- You have a side hustle online.
The Taxes that You Pay
If you are self-employed and responsible for your individual tax obligations, there are a few different taxes you need to pay besides income taxes on your self-employed income. These include federal taxes, provincial taxes, CPP (Canada Pension Plan) contributions and EI (Employment Insurance) contributions (these are optional). You are also responsible for paying GST (Goods and Services Tax), HST (Harmonized Sales Tax), and/or PST (Provincial Sales Tax) if they are required.Self-Employed Tax Rates
As a self-employed person, how much you pay in taxes is going to depend on the tax rate. How the system works is based on income. This number is difficult to determine before you file your yearly tax return but below we show you how it is calculated. Keep in mind that there are provincial tax rates as well. These rates vary from province to province. The ones shown below are the federal rates.Federal Income Tax Rates for 2023 Tax Year
Amount | Rate |
First $55,867 | 15% |
Over $55,867 up to $111,733 | 20.5% |
Over $111,733 up to $173,205 | 26% |
Over $173,205 up to $246,752 | 29% |
Over $246,752 | 33% |
Self-Employed Tax Benefits
One of the benefits of paying self employed taxes is that you can write off any expenses that directly relate to your business. What you are able to write off differs depending on what type of business you operate but here are some examples.- Advertising expenses
- Travel
- Utilities
- Phone bills
- Office Supplies
- Bank fees
- Vehicle expenses such as fuel and maintenance
- Insurance
- Legal expenses
- Property taxes
- Rent
- Salaries, Wages and Benefits
- Allowable meals and expenses
How to Report Self-Employment Income
Reporting self-employment income isn’t that much different from reporting regular income except for the fact that it does require you to input any expense or anything else you need to save money on your taxes. Reporting the income itself though, you just enter your gross and net income amounts on lines 13500 and 14300 of your income tax and benefit return. In this case, your gross income is your income before deductions and your net income is your income after deductions. You should also make sure that you are using the form T2124, Statement of Business and Professional Activities. Determining what is considered a deduction and what isn’t can be the difficult part. If you aren’t quite sure what deductions are allowed and what aren’t there is a list above, but you can also speak to a tax professional. When you are filing your income tax return, it is important to be sure that everything you enter is correct. If it is ever determined that you entered something that isn’t an expense you could end up being on the hook for that money or even end up being audited. On the other hand, you could end up paying way more income tax than necessary if you don’t make all of the allowable deductions.Other Ways to Save on Taxes
When you are self-employed, other than just your business expenses, there are other things you can claim in order to save yourself money. If you have saved 25-30% of your earnings then you should have enough to cover them, but who wants to spend all of that money if you don’t have to. Here are a few things to consider, but remember you can always speak to a tax professional. They will look at your individual tax situation and help you save as much money as you can.Home Office
If your business is operated from your home, there are expenses that you can write off instead of just your supplies. Things like:- Mortgage interest
- Utilities
- Maintenance and repairs
Lease a Vehicle
If you require a vehicle to operate your business, then leasing a vehicle is a great way to save money on taxes. The monthly lease amount that you are able to deduct is $800 plus taxes. Anything above that can’t be deducted. Along with the leasing charges, you are able to deduct:- Maintenance costs
- Insurance
- Parking Fees
- Toll fees