You’re ready to chase your dream and be your own boss. Before you quit your day job, make sure you understand the financial and tax ramifications of being self-employed. There are countless aspects to consider, but here’s a look at five of the top issues to keep in mind.
Canada Pension Plan Premiums
If you are employed, your employer withholds Canada Pension Plan contributions from your paycheque, matches your payment and remits the funds to the Canada Revenue Agency. Your contribution is 4.45 percent of your earnings, and your employer’s contribution rate is the same. However, if you are self-employed, you have to cover both portions. This means you have to pay 9.9 percent of your income in CPP contributions.
As of 2016, the CRA requires you to make CPP contributions all all income over $3,500 and up to $54,900. That makes your maximum annual contribution $5,088.60. Keep this difference in mind when comparing an employment salary with projected self-employment earnings.
Employment Insurance Premiums
If you are self-employed, you are not obligated to pay Employment Insurance premiums. However, if you don’t, you won’t be eligible for any benefits. If you like, you can sign up for self-employment EI special coverage. As of 2017, you pay 1.63 percent of earnings up to an annual maximum of $836.19. For example, if you earn $40,000, you pay $652 per year.
You may claim special EI benefits for maternity or parental leave, extended illness, or to care for a sick family member. The benefits may be worth up to $537 per week, but the amount varies. Before deciding to work for yourself, determine whether you can afford these premiums, or consider the risk of working without EI coverage.
As an employee in Canada, you are eligible for at least two weeks of paid vacation per year. In many cases, you may receive more than that. Once you are your own boss, however, you don’t have access to that perk. The only way you can take vacation time as a self-employed individual is if you set aside money during the weeks you work.
When budgeting for vacation pay, plan to set aside a certain amount of earnings per week. For example, if you want to take two weeks of vacation per year, set aside 4 percent of your income each week. If you anticipate earning $1,000 per week and you set aside $40 per week, you’ll have $2,000 after 50 weeks of working, when you can afford to take two weeks off without pay.
Although you may incur some more expenses as a self-employed individual, you may also claim a lot of business deductions. The CRA allows you to write off business expenses that you incur in the pursuit of profit. This may include rent, utilities, computers, office supplies, inventory and a range of other costs. You may subtract these expenses from your business income to lower your tax burden; in most cases, you wouldn’t receive this financial benefit as an employee.