Contrary to salaried employees, as an independent contractor, you do not have any taxes withheld on the payments you receive from your customers. Rather, your taxes, along with your contributions to various government programs, are determined only at the end of the year and must be paid when your tax returns are filed. However, during the year, it is possible and in some cases, mandatory to make tax instalment payments.
Who Must Make Instalments?
Under the Income Tax Act, as an independent worker, you are obligated to make instalment payments if you had a large enough amount of net tax owing when you filed your previous year’s tax return and expect to earn enough income in the current year to have tax owing above a certain threshold. Essentially, the tax authorities assume that if you had a large enough amount of taxes to pay last year, you will probably have to pay some again this year, and you must pay some of it in instalments as the year goes on. For 2017, you have to make income tax instalment payments if you expect your net tax owing to be above $1,800 (or $3,000 for Quebec residents) and your net tax owing was above the threshold for either 2015 or 2016. The figure is higher for residents of Quebec because there is a comparable provincial system, so their instalments are split between the two regimes. If you think that your revenues will be lower in the current year and you will not meet the threshold, then you don’t have to make the payments. Keep in mind that if you decide not to make the payments, you will be charged interest on the amounts you should have paid if it turns out that your calculations were wrong and you go above the net tax owing threshold. There may also be penalties applied.
Voluntarily Making Instalments
If you are starting a new businesses or you are experiencing strong growth, you may choose to make instalment payments even if you aren’t obligated to. The reason why you could choose to do this has to do with cash flow management. If you expect to have a lot of taxes to pay when you file your tax return, paying some of it in advance could make sense, even though the government won’t credit you any interest for the advance payments.
How to Make the Payments
You make instalment payments four times a year on March 15, June 15, September 15, and December 15. If you have to make mandatory payments based on your previous years, you will receive instalment reminders by mail or through the Canada Revenue Agency’s My Account portal. You can make payments online, by mail, or at most financial institutions. It is best to attach a copy of Form INNS3 to the payment, but it is not mandatory. A simple note with your Social Insurance Number and an indication that you want to make an instalment payment is enough.