How To File Self-Employed Taxes In Canada

Self-employed individuals contribute a lot to Canada. Without them — all 2.6 million of them — we wouldn’t have the boutique shops or customized services we know and love. Are you self-employed? You probably enjoy the freedom of your job and pursuing your passion. On the contrary, you might wince at the thought of tax season. Compared to an employed individual, annual returns are more taxing – pun intended! Not where to start with filing your self-employed income tax in Canada? Our guide answers your top questions.

Personal tax: types of employment in Canada

In Canada, there are various types of employment. The distinction is important because it affects how to calculate your tax payable. Before diving into personal taxation, let’s review the definition of self-employed for tax purposes versus an employee: 

• Self-employed: The individual operates a business and has a client-business relationship with entities who pay them. The business is a sole proprietorship or unincorporated partnership; not a corporation, partnership or other similar legal entity. It is the self-employed individual’s responsibility to track income and expenses. At the end of the tax year, a self-employed individual reports this information to the Canada Revenue Agency (CRA). A tax refund or obligation will arise which the individual claims or pays. 
• Employee: The individual works for another entity, referred to as the employer. The employer is responsible for remitting deductions like Canada Pension Plan (CPP), Employment Insurance (EI), and income tax from gross pay. At the end of a tax year, the employer will provide the employee with a summary of their pay, known as a T4 slip. The employee will use the T4 to complete their annual tax return. 

How it Works: Self-employed Taxes in Canada 

Self-employed individuals must track their income and expenses. The great thing about being self-employed is that expenses are deducted against income. On the other hand, employees do not have the same luxury — usually resulting in higher taxes. The difference between income and expenses will result in a profit or loss. If a profit was incurred, self-employment tax will arise. If a loss was incurred, the tax payable will be $0 or there will be a tax refund. In other words, the profit or loss that you end up with is considered your annual wage. You will report this amount on your tax return as professional or business income using a T2125 form. From this point forward, taxes for employed and self-employed individuals are calculated the same way. If you’ve filed taxes as an employee before, the process should be familiar. 

In Canada, our taxation system has a tiered structure via tax brackets. The rate of tax you pay depends on how much you earned. Below are the federal income tax rates for self-employed individuals in the 2022 tax year:

• 15% on the first $53,359 of taxable income, plus
• 20.5% on the next $53,358 of taxable income (portion between $53,359 and $106,717), plus
• 26% on the next $58,713 of taxable income (portion between $106,717 and $165,430), plus
• 29% on the next $70,245 of taxable income (portion between $165,430 and $235,675), plus
• 33% of taxable income over $235,675

How much can you make being self-employed before paying tax?

In Canada, the first $14,398 of income earned is tax-free for all individuals – employed or self-employed. This is the basic personal amount. Each year, the CRA adjusts the basic personal amount. For 2022, it is $14,398. 

Keep in mind: you are still required to file taxes if you make $14,398 or less. Even if you don’t owe tax, you should still file each year. In fact, there is an incentive to file because you might be eligible for a refund. In addition, certain government benefits require applicants to be up to date on taxes. 

What taxes do I pay if I am self-employed? 

Self-employed individuals pay personal income tax and Canada Pension Plan (CPP) premiums. If you wish, you can opt into Employment Insurance (EI), but paying premiums is not mandatory. 

Employees pay personal income tax, CPP and EI too, but these come off each paycheque. This is why they owe less tax at the end of the year. 

You may owe other taxes outside of income tax, such as sales tax or payroll tax. If you registered for a GST/HST account or a payroll account with the CRA, be sure to stay up to date on those taxes as well. 

Can I get a tax refund if I’m self-employed?

Yes! Your tax balance depends on a lot of factors. This includes how much business income you earned, what tax credits you’re eligible for, other income earned, and more. It’s always best practice to file your taxes each year because you may be eligible for a refund. 

How much self-employment income should I set aside for taxes? 

As a business owner, planning is important, especially for taxes. You might ask yourself, how much is self-employment tax? For personal taxes and CPP, a good benchmark is one-third of your income. If you pay other taxes, such as sales tax or payroll tax, you may need to set aside more. The amount depends on the volume of transactions flowing through your business. 

Is there a special self-employed tax form in Canada?

Self-employed individuals use the same T1 tax return that all other individuals use. However, you may need to fill out additional forms and schedules to be filed with your return. 

Self-employed tax software: How to account for taxes when self-employed

It is your responsibility to track income and expenses as a self-employed individual. This includes keeping invoices, receipts and other documentation to support your numbers. Some are comfortable using Microsoft Excel, Google Sheets, or other free solutions. Others may invest in accounting and tax software to streamline the process. At the end of the day, all you need is your total income and expenses for a calendar year to file taxes. How you track this information is up to you. 

Example: self-employed tax payable calculation

Tallulah is a sole proprietor who operates a bakery. Between January 2022 and December 2022, Tallulah earned $100,000 in bakery sales. Her annual expenses were as follows: 

Bakery lease payments: $18,000

Baking supplies: $15,000

Internet/phone: $1,200

Utilities: $2,500

Total expenses: $36,700

Tallulah’s taxable income is $63,300 ($100,000 – $36,700). Since her income is between $53,359 and $106,717, Tallulah is in the second tier of the tax brackets. Her tax payable is calculated as follows: 

15% x $53,359 = $8,003.85

20.5% x $9,941 ($63,300 – $53,359) = $2,037.91

Total tax payable before tax credits: $10,041.76

Tallulah’s tax payable is $10,041.76. This amount may seem high, but remember that tax credits come off this amount.

Self-employed tax calculators

Most people who complete their taxes will use some sort of software to help them out. In most cases, these tools will guide you through the process, making it as easy as filling in your numbers. If you want to do some early estimations or need a hand while filing in the actual paper return, there are a number of tax calculators out there. Sites offering free, online tax calculators include:

• H&R Block
• Wealthsimple
• TurboTax
• WOWA.ca
• TaxTips.ca

What you need to file self-employed income tax in Canada

Before you can begin your tax return, you need to gather documents and information. Below is a checklist:

Personal information

• Names, social insurance numbers, and dates of birth for you, your common law partner or spouse, and any dependents
• Tax slips, such as education slips, RRSP contributions, medical expenses or anything else you’d report outside of your self-employment income

Information about your business

• Business name and address
• The industry code, also known as the NAICS code
• Your business identification number, GST/HST number, or partnership number; if you don’t have this, you can still file your return

Financial information

• Calculation of income
• Calculation of expenses
• Profit or loss calculation
• Invoices, receipts and other support of these calculations should be readily available

Getting started on your tax return

Once you have all the items listed above, you’re ready to begin your tax return. If taxes and numbers aren’t your thing, consider purchasing software to help with the process. Otherwise, you can complete your tax return on your computer or using old-fashioned pen and paper. Learn more in the income tax and benefit guide from the CRA. 

Here is a summary of the key lines and forms for self-employed individuals:

• Lines 13499 to 14300: Report gross income and net income/loss here. If you have a loss, be sure to put brackets around the amount. 
• Form T1139, Reconciliation of 2022 Business Income for Tax Purposes: Fill out this form and file it with your taxes. It is a breakdown of how you arrived at your net income/loss amount. 
• Form T2125 Statement of Business or Professional Activities: Fill out this form and file it with your taxes. It is a breakdown of your business activities. 
• Schedule 8, CPP Contributions on Self-Employment and Other Earnings: Fill out this schedule and file it with your taxes. It is a breakdown of how much CPP premiums you owe. 

What can I claim on my taxes as a self-employed person in Canada?

When claiming self-employment income on taxes, you can deduct certain expenses against the business income earned. Below is a self-employed tax-deductible expense list:

Self-employed expenses in Canada

Generally speaking, any expense incurred to earn a business income is deductible. This is the broad definition, but expenses should be reasonable. Some common costs self-employed individuals can report: 

• Advertising 
• Utilities
• Vehicle expenses
• Rent or lease payments
• Bank charges
• Supplies
• Meals and entertainment (50% only)
• Repairs and maintenance
• Salaries and wages
• Inventory
• Education
• Office expenses (including home office expenses)
• Professional fees, such as accounting or legal fees
• Internet, cell phone and other telecommunications
• Travel expenses
• Insurance
• Software fees, such as accounting or tax software

You cannot deduct personal expenses against your business income. This can vary greatly from individual to individual. For example, you cannot deduce these from your income:

• Personal travel expenses, such as vacations
• Costs of owning a pet
• Home expenses not related to a home office

While filing your self-employment taxes, you may come across gray areas with expenses. Sometimes tax rules aren’t black and white. If you come across such a scenario, use your best judgment to determine if the expense was incurred to earn income. 

Self-employed tax deductions in Canada

Outside of business expenses, there are a few other deductions you may be able to report. The first is any contributions to your Registered Retirement Savings Plan (RRSP). Your taxable income will be reduced by the amount you contributed.

Another common self-employment tax deduction is charitable donations. These amounts also reduce your taxable income. However, you must have an official donation tax receipt to claim this deduction. That said, contributions towards a GoFundMe, Kickstarter, or similar platforms are not considered charitable contributions. 

Tax credits

Once you’ve calculated your tax payable, you can begin deducting tax credits. There are a ton of tax credits available to Canadians. Here are the most common ones:

• Basic personal (every individual is eligible for this amount)
• Age amount (65 years or older)
• Spouse or common-law partner amount
• Amount for eligible dependent
• Canada caregiver amount
• Digital news subscription expenses
• Tuition, education and textbook amounts
• Disability tax credit
• Donations and gifts

Be sure to check out our Guide To Tax Credits!

How to claim side jobs on your taxes

Some Canadians find themselves in a position where they are both employed and self-employed. For example, you may have a full-time or part-time job while you participate in a side hustle or start-up. The process is exactly the same for the self-employment portion of your income. The only thing that’s different is you must also report your employment income from your job. You should receive a T4 slip from your employer which contains all the information you need. The sum of your employment income and business income will be your taxable income. 

Canada Pension Plan (CPP) and Employment Insurance (EI) contributions

As a self-employed individual, you are required to pay towards the Canada Pension Plan (CPP). On the other hand, Employment Insurance (EI) premium payments are not required. You can opt in to the program by registering with Canada Employment Insurance Commission (CEIC) if you wish.

As an employee, your employer deducts CPP and EI premiums from your gross pay. Your net pay is what you receive as remuneration. But as a self-employed individual, you must pay these premiums on your own. Each year, you must complete Schedule 8, CPP Contributions on Self-Employment and Other Earnings. This schedule will tell you how much you owe in CPP premiums. 

For more on CPP and EI for self-employed workers, visit the CRA.

What is the self-employment taxes deadline?

Once you’ve completed your tax return, you will either have a tax owing or tax refund balance. The self-employed tax deadline in Canada is April 30, if you have a balance owing. The tax return filing deadline is June 15, for all self-employed individuals. You can either file your self-employment tax form online or mail the physical copy to the appropriate tax center. 

Takeaways

Self-employed individuals face more paperwork and administration during tax season. Even though this aspect is intimidating, it gets easier each year you complete a self-employed tax return. If you’re ever frustrated during the process, remember why you started on this journey!

Read More: Tax Credit vs Tax Deduction in Canada

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