Self-Employed Taxes: Filing and Payment Basics

What are Self-Employed Taxes in Canada

Being self-employed is freedom, but it comes with a lot of tax responsibilities. If you’re self-employed in Canada, especially in Toronto, understanding self-employed taxes is key to keeping your business on track. From income tax to GST/HST there’s a lot to wrap your head around. Let’s break it down so it’s easier to understand.

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What is Self-Employment Income

Self-employment income is a broad term. Whether you’re freelancing, consulting or running a small business, this income is different from employment income. You’re not receiving a regular salary from an employer; instead you’re responsible for reporting your income and paying the taxes on it. This includes not only income tax but also Canada Pension Plan (CPP) contributions and depending on your business, Goods and Services Tax (GST) or Harmonized Sales Tax (HST).

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What does the Canada Revenue Agency (CRA) Consider Self-Employed?

The CRA considers you self-employed if you earn income from a sole proprietorship or partnership. This includes:

• Freelancers and gig workers

• Independent contractors

• Small business owners

• Artists and performers

• Trades professionals working independently

 

The CRA uses the following criteria to determine if you’re self-employed or an employee:

• Control over your work

• Ownership of tools

• Chance of profit and risk of loss

• How integrated you are into the payer’s business.

 

Your Business Income

Reporting Self-Employment Income on Form T4A

If you’re self-employed you may receive a Form T4A from your clients by the end of February following the tax year. This form is issued for amounts paid to subcontractors or for services rendered. You should track all your income even if you don’t get a T4A from every client. The CRA expects you to report all business income so keeping accurate records is key.

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Gross and Net Self-Employment Income on Form T2125

Form T2125, Statement of Business or Professional Activities, is a must have for self-employed Canadians. This form allows you to calculate your gross business income, list and deduct business expenses and determine your net business income.

 

The form is broken down into several sections:

• Part 1: Business income

• Part 2: Professional income

• Part 3: Gross business or professional income

• Part 4: Cost of goods sold and gross profit

• Part 5: Net income (loss) before adjustments

 

Fill this out accurately to calculate your self-employment income.

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Income Tax for Self-Employed

How is Income Tax Different for Self-Employed?

As a self-employed individual you have different tax obligations than traditional employees. Here’s what you need to know:

• You calculate and pay your own income tax since no one is withholding tax from your earnings.

• You pay both the employee and employer portions of CPP contributions.

• Quarterly tax instalments may be required if your net tax owing is over $3,000.

• You can claim business expenses to reduce your taxable income.

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Self-Employed Tax Rates

In 2024 the federal rates are:

• 15% on the first $55,867 of taxable income

• 20.5% on income over $55,867 up to $111,733

• 26% on income over $111,733 up to $173,205

• 29% on income over $173,205 up to $246,752

• 33% on taxable income over $246,752

 

Plus you’ll pay provincial tax. In Ontario for example the rates for 2024 are:

• 5.05% on the first $50,197 of taxable income

• 13.16% on income over $220,000

 

File Self-Employed Taxes with the CRA

How to File Self-Employed Taxes Online

The CRA has several options to file online:

• NETFILE: You can use certified tax software to file your return directly with the CRA.

• EFILE: A tax preparer can file on your behalf.

 

Many online tax products will pull tax slips from the CRA’s website. Always double check the info.

 

Besides Form T2125 you may need to fill out:

• Form T1: Income Tax and Benefit Return

• Form CPT20: Election to Pay Canada Pension Plan Contributions

• Form RC381: Inter-provincial Calculation for CPP and QPP Contributions and Overpayments
   

Self-Employed Tax Filing Due Dates

Self-employed individuals have until June 15 to submit their income tax return. But taxes owing are due April 30. Calculate your taxes owing before the filing deadline to avoid interest.

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Self-Employed Tax Deductions

What Can I Deduct for Self-Employed Taxes?

The CRA allows you to deduct reasonable expenses incurred to earn business income. Here are some common deductible expenses:

• Advertising and promotion

• Business insurance

• Interest and bank charges

• Legal and accounting fees

• Office expenses and supplies

• Rent for business premises

• Salaries, wages and benefits for employees

• Internet and telephone (business portion)

• Motor vehicle expenses (business portion)

• Home office expenses (if you work from home)

• Professional development and training costs

• Travel expenses related to business

 

Keep all records and receipts for business expenses in case of a CRA audit.

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Claiming Deductions on Form T2125

Form T2125 has a list of all the expense categories. When you fill out this form:

• Enter expenses in the correct categories

• Calculate the business use percentage for mixed-use expenses (e.g. home office, vehicle use)

• Keep all receipts and documentation to support your claims

 

Remember personal expenses aren’t deductible so keep business and personal expenses separate.

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Quarterly Tax Payments and Instalments

Quarterly Tax Payments

If your net tax owing is more than $3,000 in the current year and either of the two preceding years you may need to make quarterly instalment payments. These are due:

• March 15

• June 15

• September 15

• December 15

 

Each instalment is usually one-quarter of your current year’s estimated taxes or one-quarter of your previous year’s taxes.

 

How to Pay Instalments to the CRA

• Online banking

• CRA’s My Payment service

• Pre-authorized debit

• Credit card via a third-party service provider

• In-person at your financial institution

Set aside 25-30% of your income for taxes throughout the year to avoid penalties and interest.

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GST/HST

GST/HST for Self-Employed Individuals

If your taxable supplies exceed $30,000 in any one quarter or four consecutive quarters you must register for a GST/HST number. Once registered you will:

• Charge GST/HST on taxable goods and services

• Collect GST/HST from your clients

• Remit the GST/HST to the CRA

 

You can claim input tax credits (ITCs) for the GST/HST you pay on business related purchases and expenses to offset what you owe.

 

Even if your revenue is below $30,000 you may want to register for GST/HST if you have significant business expenses.

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Don’t Forget

• Keep all business income and expenses in detail.

• Open a separate business bank account to keep personal and business separate.

• Stay up to date with tax law changes that affect your business.

• Consider using accounting software to track income and expenses.

• Save for taxes regularly to avoid tax time stress.

 

Don’t Forget

• Report all business income including cash and bartered services.

• Overlooked expenses due to poor record keeping.

• Mixing personal and business expenses.

• Missing filing or payment deadlines which can result in penalties and interest.

• Not registering for and remitting GST/HST when required.

• Not keeping supporting documents for the required period (usually 6 years).

 

More

Expert Help for Self-Employed Tax Filers

You can do your taxes yourself but many self-employed individuals prefer to have professional help. Consider:

• Hiring a certified accountant or tax professional

• Using tax preparation software

• Consulting with a small business advisor for tax planning strategies

These experts will ensure compliance, maximize deductions and provide insight into tax-efficient business practices.

 

Bottom Line

Understanding self-employed taxes in Canada is key to anyone running their own business. Stay informed and organized and you’ll minimize your tax liability and avoid common mistakes. And when in doubt seek advice from firms like Tax Warriors in Toronto and you’ll be navigating the tax system like a pro. Stay proactive, keep records and use the resources available to you.

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