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The Self-Employment Tax Guide: What You Should Know

Rebecca Rustin
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Updated March 8, 2019  Filing your taxes as a self-employed individual does come with its own set of differences. Keep reading to find out what you need to know as a self-employed individual in Canada in terms of filing your taxes.

Are you an employee or self-employed?

This topic has been discussed before, but it's important to be clear on which category you belong to. Primarily because your employment status has a direct impact on your right to collect Employment Insurance (EI) and what you will contribute to the Canada Pension Plan (CPP). Quebec residents pay into the Quebec Pension Plan (QPP).  Most Canadians over the age of 18 who earn more than $3,500 per year are required to contribute to the Canada Pension Plan.

How much will you contribute to the Canada Pension Plan?

One of the biggest differences between being self-employed and being an employee is the amount that you will pay into the CPP. This is because as an employee, your employer covers half of your CPP contributions.  If you are self-employed, you must cover the full amount. For 2019, this amount is equal to 10.2% of income up to $57,400. Self-employed Canadians who earn more than $57,400 will contribute¬†$5,497.80 into the CPP. This is in addition to¬†federal and provincial taxes owed. For a breakdown of CPP contributions by year, consult the CRA.  The maximum contribution you will make to the CPP as an employee is $2,748.90, and your employer will contribute the same amount.

What if you live in Quebec?

The Quebec Pension Plan provides similar benefits to the CPP, though QPP rates are slightly higher.  The QPP contribution rate for 2019 is 10.80% and the first additional QPP contribution rate is 0.30%. The maximum pensionable earnings for the were increased from $55,900 to $57,400. Like the CPP, the first $3,500 of income earned is exempt from QPP contributions.

Quebec will enhance the QPP in the same manner to which the CPP is being enhanced. The resulting rates will be:

     2019     0.15%    +5.40% = 5.55% total rate

     2020     0.30%    +5.40% = 5.70%

     2021     0.50%    +5.40% = 5.90%

     2022     0.75%    +5.40% = 6.15%

     2023     1.00%    +5.40% = 6.40%

Federal and provincial income tax

If you are an employee, your taxes will usually come off your paycheque in the form of source deductions. As long as an employee doesn't opt out, federal and provincial taxes are deducted from an employee's pay throughout the year. This is in addition to the Employment Insurance and Pension Plan amounts mentioned above.  If you are self-employed, you probably understand how difficult it can be to set aside federal and provincial taxes on all funds you receive from clients. That being said, it is best to start setting this money aside at the beginning of the year.  To avoid having to scramble to come up with large sums of money at the end of the year, make a point of saving a certain percentage of each payment you receive. If you make less than $50,000 per year, plan to save at least 25% of your income for tax purposes. If your income is higher, you will need to save even more.  Of course, if you have a lot of source deductions, you could very well owe less at the end of the year. In this case, you can think of the additional savings as a windfall.  To make it harder to spend, deposit this money in a separate bank account you can't access easily, such as a tax-free savings account (TFSA) that are not linked to your ATM card. Making sure this account is a TFSA will allow you to save the taxes on any interest earned on your tax dollars before you remit them to the CRA or Revenu Quebec.

What are instalment payments?

You can also make income tax payments by instalments. In fact, this is mandatory if you owe $3,000 or more in net taxes at the end of the year. Quebec residents are required to pay tax by instalments if they owe $1,800 or more.

When are instalment payments due?

In 2018, instalment payments will need to be made by the following dates:

  • March 15
  • June 15
  • September 15
  • December 15

Instalment payments can be made in a variety of ways, including Visa Debit, online banking, debit card, pre-authorized debit, credit card, or in person at your bank.  You can verify whether or not your payment has been received by signing into CRA's My Account service.

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How much tax will you have to pay?

The federal tax rates for 2019 are as follows:

  • 15% on the first $47,630 of taxable income
  • 20.5% on amounts earned between $47,630 and $95,259
  • 26% on amounts earned between $95,260 and $147,667
  • 29% on amounts earned between $147,668 and $210,371
  • 33% of taxable income over $210,371

You will also need to add provincial tax to these amounts. Provincial tax rates vary by province, with the lowest provincial income tax brackets for 2019 ranging between 4% (Nunavut) to 10.8% (Manitoba) to 15% (Quebec).  Because of the discrepancies between federal and provincial taxes, it can be difficult to figure out exactly how much tax you will need to pay at the end of the year. This is especially true if you are self-employed. For this reason, we recommend using a personal income tax calculator.

What if you have a low income?

All Canadians are entitled to a tax-free personal amount. The personal amount for 2019 is $11,809. This means that a person who made less than $11,809 will not owe federal or provincial income tax. However, they will still need to pay into the CPP or QPP on amounts earned above $3,500.  Similarly, if you only made $30,000, you will only be taxed on $18,365 ($30,000 - $11,809 = $18,191).  Even if you have a low income, you should always file your income tax return.

Tips to help reduce your income tax

If all of these figures make it seem like we Canadians have a lot of tax to pay … that's because we do! However, there are a few things you can do to reduce your income tax owing at the end of the year.

1. Keep track business expenses

If you are self-employed or a small business owner, remember that your taxable income is based on your net income, or what you made after expenses. Eligible business expenses include things like a portion of your rent if you have a home office, office supplies, inventory, vehicle and other travel expenses, advertising, etc. In order to claim business expenses, you will need to hold on to your receipts. Because receipts tend to fade over time, it can be a good idea to digitize these with a camera or scanner. Please note that you are required to keep all receipts for expenses claimed for a period of six years.

2. Contribute to your RRSP

If you are under the age of 65, contributing to a Registered Retirement Savings Plan (RRSP) is a great way to save for retirement and reduce your income tax owing. Any amounts you contribute to your RRSP are tax-exempt as long as the funds remain in the plan. However, you will be taxed on these amounts whenever you take them out.  RRSPs have an annual contribution limit based on your income. This is also known as your "contribution room." For 2018, the contribution limit is set at 18% of your net income, up to $26,230.  If you don't have the money to max out your RRSP, don't worry! You can carry the unused portion of your RRSP room indefinitely.

3. Claim your medical expenses

According to CBC news, "missed medical expenses are one of the most overlooked tax breaks." This is because the non-refundable tax credit based on medical expenses only applies to expenses that exceed either $2,171 or three percent of your net income, whichever is lower. Most people figure they haven't spent that much on medical expenses, and don't bother to check the numbers.  What people don't realize is that if you have medical expenses, it's not difficult to surpass this threshold. To know which expenses are eligible for the Medical Expenses tax credit, read our previous blog post on the topic or consult the CRA.

4. Use transfer credit where applicable

If you are married or in a common-law relationship you may be able to use transfer credits to reduce your income tax even further. The following credits can be transferred between spouses:

  • The age amount (line 301). This credit applies if your spouse was 65 years of age or older during the tax year
  • The pension income amount (line 314)
  • The disability amount for self (line 316)
  • The tuition amount (line 323). The maximum amount that your spouse can transfer to you is $5,000 minus the portion they will use, even if there is an unused portion remaining. Your spouse or common-law partner cannot transfer any amounts paid for tuition or textbooks carried forward from a previous year
  • The Canada caregiver amount for infirm children under the age of 18 (line 367).

Tuition credits can also be transferred between children and their parents.

When in doubt, get professional assistance

There's no doubt that as self-employed individuals, our taxes are much more complicated than they are for the average worker. If you have rental income, multiple streams of income, or even if you're just not good with numbers, it's never a bad idea to consult a professional to prepare your taxes for you.  Just don't wait until the last minute - as accountants and CPAs tend to get very busy around tax time!

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