How Much Money to Set Aside for Self-Employed Taxes in Canada

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At the beginning of the tax season, individuals and business owners are obliged to do their taxes. Being a specific group of taxpayers, self-employed need to learn more about the process of paying taxes. In case, you live in Canada you need to know how much money to set aside for taxes if self-employed.

Canada gives numerous opportunities for starting and financing a business but there are a lot of nuances to take into account when it comes to filing taxes. So, let’s get started.

Who Are Self-Employed?

In order to pay self-employed taxes Canada, you have to know if you are a self-employed or a regular worker.

There are numerous definitions for the term, so let’s clarify who can be considered self-employed. Those who are freelancers, small business owners, or those who have some side hustle are self-employed.

Many businessmen are not even aware of the fact that if they make some money by selling a product or service, they are obliged to pay an income tax on the money they earn. Either you get $1,000 selling products in your online store or $100,000 making some money on the side job, you have to pay an income tax on it.

The Canada Revenue Agency (CRA) is charging taxes. Its job is to check every single citizen’s income. If the CRA finds out that you are being paid under-the-table or haven’t paid taxes on your money for many years, you could get a huge tax bill. If you want to avoid such misunderstandings, you need to pay your taxes every single month and file them once a year.

The main tax self-employed are paying in Canada is a tax on the net income. If you are completely self-employed, CPP and EI are expected to be paid. Take into account that you always need to set aside money to contribute to the Canada Pension Plan (CPP). EI (Employment Insurance) payments are optional. In order to calculate how much you need to pay on CPP, use the CPP self-employed calculator following this link.

When to Start Charging Sales Tax?

Self-employed also need to know when to start paying taxes. Tax calculator Canada is a good instrument for those who are new in this field. As soon as your business earns $30 thous. or more in total revenue in any quarter, you are expected to start collecting sales tax from your customers and pay them to the CRA. However, if you are running a business that earns under $30 thous. per year, you don’t have to charge sales taxes. When you are an employee, all the taxes are automatically taken off your salary, so employer do all the taxes instead of you. Once, you are self-employed, tax calculator Canada can be used to find out how much taxes you have to pay.

As for the individuals, in Canada they are required to pay the taxes if they are 18 or older and make more than $3,500 a year. Also, if you are an employee, your salary includes a half of your taxes and the rest is paid by your employer. Self-employed are obliged to pay the full amount.

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Tax Periods

One of the basic but important things to remember when it comes to taxes is the timing. For most Canadians, the deadline to file their tax returns is April 30. If you or your spouse/common-law partner is self-employed, you are required to file the return before June 15. Another nuance is that if you owe money to the CRA, you need to file and pay your bill like other taxpayers, otherwise, you will be charged interest.

If you are embarking on the first year of self-employed taxes in Canada, you might be wondering what taxes exactly you need to pay. While employers file the tax returns instead of the employees, those who are self-employed, are required to do it themselves. This is quite a common question, so it is a great topic to explore.

GST/HST Registration

As mentioned above, you need to start paying your self-employed taxes when your income is more than $30 thous. a year. As soon as you reach this figure, you need to register for a GST or HST number. Taxpayers have to be aware of the fact that the CRA is not tracking your earnings and expenses. However, if you don’t keep a finger on the pulse of your finance, one day you will be penalized.

After you get an HST or GST number, you need to start saving money on your taxes. It depends on the province you are located in. For instance, if you pay self-employed taxes, Ontario is your province but your customers are from Quebec, you will need to charge them GST of 5%.

If you make money on selling products or services, you need to pay sales tax. It can either be GST, GST + PST or HST depending on the province you live in. To make it easier for you, in the table below there are sales taxes varied by province/territory in Canada.

Provinces HST Rate
New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island HST 15%
Quebec GST + PST 14.975%
Ontario HST 13%
Manitoba GST + PST 13%
British Columbia GST + PST 12%
Saskatchewan GST + PST 11%
Alberta, Northwest Territories, Nunavut and Yukon GST 5%

You might notice that in some provinces two sales taxes, namely, GST and PST are paid. To know which sales tax to pay, you also need to know where your customers live. If you live in Manitoba, then you should be paying 13% GST + PST and charging a specific sales tax to all of your customers depending on where they live. By the way, in case, you need some quick cash in Manitoba which sits in the middle of Canada, you can take payday loans in Manitoba just in a couple of hours. If your customers live in Manitoba, you would charge them 13% GST + PST. However, if they live outside of your province, you would charge them the sales tax of their province. Using Saskatchewan income tax calculator, calculate the sales taxes for your customers at 11% GST & PST rate.

Also, when selling goods and services to customers from outside of Canada, you don’t need to charge them any sales taxes. If you had a physical shop outside of Canada, you would have to pay any sales to Canada.

How to Calculate Your Taxes?

You probably think that if you are self-employed, you have to pay tax on every single dollar you earn, however, that is not the truth. You have to pay your taxes not on your gross but net income. The general number to set aside of your net income for taxes is 25%. If you worry that you will need to pay more, it is always better to save a little more money. The most important tip on how to save on taxes in Canada is by tracking deductions. You need to pay taxes on the amount you earned except for business expenses and RRSP contributions.

Let’s imagine that you earned $100,000 as self-employed, so your tax comes to $25,000. That means that your net income would be $75,000 under the condition that there are no deductions. Deductions are business expenses that help to earn your business income. Anything you use to make a profit is potentially deductible.

Ronald Watson, chartered accountant in Fort Erie, Ontario, explains, “The CRA allows a multitude of business expenses to be deducted from salaries and benefits”. There are numerous deductions variety of which depends on the particular area of business. Here are the most common business expenses allowed for deduction:

  • traveling expenses
  • food
  • advertisement
  • goods for retail sale
  • attorney services
  • accounting fees
  • bank charges
  • car expenses like lease payments, maintenance, parking and depreciation of the vehicle
  • rent including mortgage payments, utilities, repairs, upgrades and property tax.

All of the above deductions help to reduce a taxable amount and rate. Interesting that income tax rates for the self-employed individuals and employees are the same. However, those who own a business have deductions that are more than the average wage earner. So, you need to have a clear idea of your business expenses and know your deductions. Then, you can use an income tax calculator Ontario 2018 to get an estimate of how much tax you will have to pay.

How to Calculate Your CPP Contributions?

In case, you need more information about CPP contributions, check out the post on this resource. Each person’s CPP contributions vary because they are determined by your income. Given the fact that the minimum income required is $3,500 and a rate is 9.90%, you can calculate your taxes using an income after tax calculator Canada.

How to Calculate Your EI Contributions?

When talking about EI contributions, one needs to remember that they are absolutely voluntary if you are self-employed. The advantage of contributing to EI can be extremely beneficial. For someone who is a caregiver to an ill person or is on maternity/parental leave it can be a good chance to save some money. What is important to understand is that contributing to EI is often risky and may not be worth it. It’s better sometimes to grow a cushy emergency fund instead of spending money on employment insurance in vain.

However, if you still are interested in EI, here is how much you would need to set aside.

According to Canada.ca, in 2018 the EI rate for individuals was 1.66%. With the maximum of $51,700/year earnings, you would need to pay $858.22. For employers, this amount would be $1,201.51.

 

One more thing to note is that you will not be able to get out of the EI program if you have entered into it. However, you will have 60 days to cancel. If you face any difficulties with calculating your CPP or EI contributions, use the free income tax calculator Canada.

2018 Tax Rates

As mentioned above, business owners file their personal income tax returns and pay the same amount of tax as employees. After deductions, their business income is considered an annual salary. Canadian federal tax rate on personal income for 2018 tax year is the following:

Income, $ Tax rate, %
Under 45,282 15
From 45,282 to 90,563 20.5
From 90,563 to 140,388 26
From 140,388 to 200,000 29
Over 200,000 33

All the provinces and territories, except for Quebec, calculate their income tax the same way.

How to File Your Taxes?

To do your taxes, you can always use an online tax software like TurboTax,  QuickBooks, Mint and other. Developed by Intuit, they include helpful step-by-step instructions for self-employed. If deductions make your head spin, you can use either Canada self-employed tax calculator or any other online or offline software. For example, TurboTax solutions for Self-Employed can walk you through the tax filing process. It will help you get every business deduction you are entitled to and save money in your pocket.

In  order to file their taxes, self-employed need to use the T2125 form from the CRA. For this purpose, not only online resources but apps available on AppStore or Google Play Market. With this form and app, self-employed can track their expenses which becomes much easier. If you are filing your tax return for the first time, you may face a lot of difficulties. Similarly, handling your taxes can become complicated if you don’t pay them regularly. Since every taxpayer has to calculate his taxes himself, he might need some help. To get your taxes filed quickly and with no mistake, you may ask for help from a good accountant. The fee you are charged  will be covered by the money an accountant will save you on taxes.

A Few Helpful Tips

There are many great things about being self-employed. However, taxes are not the most favorite part. Whether you are an entrepreneur, a freelancer or an on-demand worker, filing your tax return can be quite complicated. To make the process easier, use the following tips.

  1. Keep track of your money. Tax preparation begins the moment you start earning over $30,000 a year. Step one is knowing how much you made and what you can claim as business expenses. If you are a business owner, you need to keep track of all the revenues and expenses, namely, you need to remember who has paid you and who still owes you money. Besides, you will have to keep personal and business affairs separate and manage your cash flow. If your income varies widely from month to month, you will need to set aside enough money to pay for taxes.
  2. Deduct expenses reasonably. A list of deductions can be long for every profession, self-employed can deduct many reasonable current expenses. In case, there are too many deductions in the tax return, it may lead to an audit. In order to check which expenses fit CRA, read the CRA guidelines. When it comes to business meetings, the CRA can allow ever for a 50 per cent deduction of food and beverage costs.
  3. Collect all receipts. It is recommended to keep records and copies of all invoices for at least six years, otherwise, CRA will deny the deduction. Besides, by  keeping a record of all the transactions you will make the bookkeeping much easier.
  4. Pay taxes as often as possible and file once a year. If you pay taxes every single month or at least every quarter, it will save you from a headache at the end of the tax year.

Conclusion

Hope this post was helpful and now you are much more informed than most self-employed people. However, if you need some help in doing your self-employed taxes in Canada, feel free to leave your questions in the comments below.

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