The Canada Revenue Agency (CRA) helps smooth out retirement planning by requiring workers outside of Quebec to contribute a portion of their wages to the Canada Pension Plan (CPP). Those who live in Quebec don’t pay into the CPP, but instead pay into the Quebec Pension Plan (QPP).
This applies to both employees and self-employed people, though the contribution rules differ since employers pay a portion of employee CPP contributions. Knowing the rules concerning contributions can help your small business better prepare for the future.
CPP Rules for the Self-Employed
Whether you’re self-employed or an employee makes a big difference when it comes to the way CRA treats your CPP contributions. If you’re unsure as to whether the CRA sees you as a business owner or a worker, you can reference its Employee or Self-Employed? guide.
As the CPP rules state, self-employed individuals between ages 18 and 69 must contribute a portion of their net earnings over $3,500 towards their retirement fund. If you fall into this age group and are self employed, you should file your self-employed CPP contributions with CRA form Schedule 8, Canada Pension Plan Contributions and Overpayment.
Required CPP Contributions
Under 2019 rules, there is a $3,500 basic exemption rate.The percentage of required contributions are 5.10% for workers and 10.2% for self-employed business owners. For both, maximum annual pensionable earnings are $57,500 and maximum contributory earnings are $53,900. This means workers and employers each have a maximum contributor earnings responsibility of $2,748.90 and self-employed individuals have a maximum annual contribution of $5,497.80.
For 2020, the basic exemption amount stays the same at $3,500, while the general contribution rate raises to 5.25% for employees and employers, and raises to 10.5% for self-employed. Maximum annual pensionable earnings for 2020 are now $58,700. While the maximum contribution for employees and employers is now $2898 and the contribution for self-employed is capped at $5796.
Self-Employed in Quebec
Self-employed people in Quebec pay into the QPP instead of the CPP. The plans have similar requirements, but the QPP rate for contributions sits at 10.80% in 2020 with maximum pensionable earnings of $58,700.
FAQs About CPP & QPP
Is CPP & QPP mandatory?
Yes, paying into CPP and QPP is mandatory for Canadian citizens aged 18 to 69 making more than $3500 a year. Employers and employees each pay half the total contribution, while self-employed workers pay the entire amount.
How do I calculate CPP & QPP contributions
To calculate CPP and QPP contributions the same steps need to be followed:
- Step 1: Calculate the basic pay-period exemption by dividing the basic yearly exemption ($3500) by the number of pay periods in the year. Do not round off to the nearest cent.
- Step 2: Calculate the total pensionable income by adding the sum of your gross pay (include any taxable benefits and allowances) in the pay period that required CPP deductions.
- Step 3: Deduct the basic pay period exemption from the total pensionable income.
- Step 4: Calculate the amount for CPP contributions by multiplying the result of step three, by the current year’s CPP contribution rate.
How do I voluntary pay into CPP & QPP?
When it comes to paying into CPP or QPP, you can do this by filling out the proper forms. For more information go to the CRA website.
While Canada helps with a portion of your retirement planning, the CPP and QPP only go so far into ensuring you have enough money for your retirement. QuickBooks Self-Employed accounting app helps freelancers, contractors, and sole proprietors track manage their business on the go. Download the app.