Despite inflation continuing in Canada, many employers are failing to pay higher salaries in line with increasing costs to their employees. Perhaps you’re considering self employment to earn a higher income using your existing skills. Or maybe you have a passion to pursue or you desire the flexibility that comes with self employment. However, there is a lot of work that goes into self employment and the burden of responsibility is undoubtedly larger. By the end of this article, you’ll gain insight into life as a self employed Canadian before you embark on the journey yourself.
Table of contents
- What is self employment?
- What are the risks of being self employed?
- Self employed taxes in Canada
- How to report self employment income without business name
- Is rental income considered self employment in Canada?
- What is the self employed home office tax deduction in Canada?
- EI and CPP for self employed Canadians
- Self employed tax deductions in Canada
- When are self employment taxes due?
- Self employed tax calculator
- Self employment ideas
What is self employment?
Self employment occurs when a person works for themselves as a freelancer, independent contractor or business owner, as opposed to working for an employer. A person in this state generates their own income and also covers business expenses. Because of this, self employed individuals have different taxation and face unique circumstances in their careers.
Freelance vs self employed
Often, freelance and self employed are interchangeable terms for the same thing. But what exactly is the difference? A freelancer is someone who earns money on a per-job or per-task basis. You may hear the term independent contractor as well. An independent contractor usually works alongside an entity as an external party under a work performance agreement. Self employed is a broader term which encompasses a freelancer, an independent contractor and anyone else who generates income from self-driven activities.
What are the risks of being self employed?
Self employment comes with a lot of benefits, but there are some drawbacks too. Delving into a self employment role requires a lot more responsibility which comes with greater risk. You have to find your own work, manage your workflows, track your finances and pay taxes accordingly. Even though this may seem like a lot of work, there are plenty of benefits too, such as the ability to set your own hours and follow your passion. Let’s explore a summary of the pros and cons below.
| Pros | Cons |
| Flexibility with your schedule and working hours | No one holds you accountable or manages you, like a boss would |
| Higher earning potential | No stable income or benefits |
| More fulfilling and rewarding career path | Can be lonely and isolating |
| Utilize more tax breaks and deductions | Bigger responsibility to track and manage finances, plus higher tax liability |
| Greater control over your income and expenses | More challenging to access the benefits of EI and CPP |
| Can choose what kind of work you want to do and how you do it | Can be difficult to find work and keep clients long term |
| Able to work from anywhere | Longer and more demanding work hours |
Overall, a lot of work goes into self employment that people just starting may overlook. As an employee, you’re usually operating within a corporate system designed and perfected over many years. In addition, you have a team of people managing the workload. But as a self employed individual, it’s up to you to create an effective system and manage a team of people. You may quickly find out it’s a lot harder than it looks! On top of all that, you have to create a brand, develop a client base, maintain client relationships, remain compliant with local laws, manage your cash flow — and the list goes on and on. Don’t underestimate how much work goes into being self employed!
Self employed taxes in Canada
One of the biggest differences between employed and self employed individuals is the taxation. Employers tend to handle most of the taxation process on behalf of their employees. This includes taking and remitting taxes throughout the year so employees pay less tax in April. In addition, employers track information about pay and benefits for their employees which makes completing a tax return that much easier.
On the other hand, self employed individuals must figure all of this out on their own. In addition, they tend to face higher taxes in April because they’re not paying tax throughout the year. They also may have to manage payroll and sales tax on top of their personal or corporate taxes. Let’s explore some of the common questions related to self employed taxes in Canada below.
Related Reading: Tax Season In Canada: What You Need To Know For 2022
How to report self employment income without business name
When you’re starting out, you may not have an established business name yet – and that’s okay! In the long run, some people choose to operate under their name as opposed to a formal business name.
Either way, the process of reporting self employment income without a business name is simple. In this case, you would be considered a sole proprietor. You would report your self employment income on your personal tax return on lines 13499 to 14300.
Is rental income considered self employment in Canada?
If you earn rental income by offering a space to a tenant, you may wonder if it’s self employment income. The Canada Revenue Agency categorizes the process of earning money from renting property to a third party as either rental income or business income. From there, the tax implications are slightly different.
The difference between rental income and business income depends on the services you provide tenants. If you only provide basic services, including heat, lighting, parking and laundry, then you have rental income. If you provide additional services, such as cleaning, meals and security, then you have business income.
Rental income is reported on line 8141 of your tax return. You are allowed to deduct eligible expenses against your rental income but there are more restrictions. If your rental situation is deemed to be earning business income, it would be considered a self employment business. In this case, you would report income and expenses related to your rental activities on lines 13499 to 14300.
Keep in mind the overall tax burden is relatively the same between rental income and business income. The only thing that’s different is where you report it on your tax return.
What is the self employed home office tax deduction in Canada?
Many self employed individuals have a home office space they regularly use for work. Fortunately, you can deduct expenses related to this space which is referred to as the home office tax deduction. Determine eligibility by meeting one of the following criteria:
- The home office is your principal place of business
- The home office is solely used to generate business income
In most cases, a home office is a portion of your home where the other space is used for personal purposes only. Only the expenses related to your home office are deductible. To calculate the eligible amount, determine how many hours a day you use your home office on average. Then divide this number by 24 hours to achieve a multiplier. You would use the multiplier on your total home office expenses to determine the portion that’s related to your home office. For example, if your total home office expenses are $20,000 per year and you use your home office for 8 hours a day on average, your home office tax deduction would be $6,667 ($20,000 x 8/24).
One important thing to note is home office expenses cannot exceed your income thereby creating a loss. Also, if you rent your home, you can deduct the portion of rent and other expenses of living there as your home office deduction.
Related Reading: Best Free Tax Software In Canada
EI and CPP for self employed Canadians
Employees pay into EI and CPP every time they receive a pay cheque. Employers are legally responsible for managing payments into EI and CPP on behalf of their employees. However, self employed individuals do not automatically pay into these programs. Rather, they must either pay themselves a salary or manually pay into CPP and EI while doing their personal taxes.
Employment Insurance (EI) is a program designed to protect your employment. If you lose your job, EI provides financial benefits until you find your next source of income. But why pay into EI when self employed? In a way, you’re your own insurance. Although, the EI program actually offers special benefits for the self employed. After 12 months of registration, you can claim benefits if you need to take time away from your self employed activities to care for yourself or your family. For instance, if you’re having a child, you can claim EI benefits while taking a maternity leave from your self employment. The benefit is 55% of your regular income, up to a maximum of $638 per week in 2022.
The Canada Pension Plan (CPP) provides income to retired individuals. On average, Canadians begin claiming CPP when they’re 65 years of age. CPP is helpful because it provides partial income for retirees. If you earn more than $3,500 through your self employment activities in a year, you’re required to pay into CPP on your personal tax return. This amount can be shocking when you file your taxes. Be sure to set aside about a third of everything you earn to account for this payment into CPP. If incorporated or you did not exceed the $3,500 amount, it’s possible to elect to pay into CPP. This may be desirable if you want to ensure you receive as much CPP as possible in retirement. The amount you receive is mainly based on how much you contributed throughout your life.
Self employed tax deductions in Canada
Possibly the greatest benefit to being self employed in Canada is the tax deductions available to you. Employed people have tons of limitations when it comes to tax deductions whereas self employed individuals have a lot more liberty. In general, self employed individuals can deduct any expense they incur to generate income. Common expense categories include:
- Capital cost allowance
- Other capital expenses
- Advertising
- 50% of meals and entertainment
- Bad debts
- Insurance
- Interest and bank charges
- Internet and phone
- Taxes, licenses and memberships
- Office expenses
- Professional fees, such as accounting and legal
- Rent
- Repairs and maintenance
- Salaries and wages
- Supplies
- Travel expenses
- Utilities
Related Reading: Guide To Tax Credits: How To Get A Bigger Tax Refund
When are self employment taxes due?
The tax filing deadline for self employed individuals is June 15. However, your tax payment is due on April 30.
Self employed tax calculator
Since the tax payable is often higher for self employed individuals, it can be helpful to use a tax calculator to estimate how much you owe in advance of the deadline. Here are two self employed tax calculators you can use:
Turbo Tax Self Employed Tax Calculator
Wealthsimple Personal Tax Calculator
Still have more questions about self employed taxes? Check out How to File Self-Employed Taxes in Canada.
Self employment ideas
Ready to take the plunge into self employment? If you’re not intimidated by the additional work involved with working for yourself, you may be looking for ideas on what to do. Below are some common self employment professions in Canada:
- Writer/editor/proofreader
- Repair technician
- Driver
- Tutor
- Cosmetologist
- Photographer/videographer
- Social media manager
- Landscaper
- Business consultant
- Event planner
- Graphic designer/illustrator
- Nanny
- Career coach
- Landlord
Related Reading: How To Make Extra Money Online In Canada
Many of the jobs listed above can be done alone. Sometimes these people are referred to as solopreneurs. These kinds of positions can be ideal for someone who wants to dip their toe in self employment. But there is also the opportunity to start a business by hiring a team and offering a product or service. If you’ve ever had a problem at work or in your life and know a way to fix it, maybe this is the time to create a startup and put the issue to rest! After all, the best business ideas solve a problem.
As a self employed person, you will face many challenges and take on a lot of risks. However, the process is rewarding and can lead to a more fulfilling life. As with all things, it gets easier the more you do it. If you choose to take the plunge and journey into the world of self employment, we wish you all the best!