Self-employment has some exciting benefits, including a flexible schedule and the freedom to select your projects. It also comes with big responsibilities, especially at tax time.

When you’re self-employed, the burden of reporting, filing, and paying taxes falls entirely to you. If you want to streamline the process, it’s a good idea to get familiar with the Canada Revenue Agency's (CRA) required self-employment tax forms. With that understanding, you can organize your finances, keep great records, and make tax filing a breeze.

These topics will help you understand more about self-employed taxes and it’s role in small business management: 

• Business Income vs. Employment Income
• Important Tax Forms for Self-Employed Taxes
• How to File Self-Employed Taxes
• Common Self-Employed Tax Deductions
• Canada Pension Plan Contributions for Self-Employed Entrepreneurs
• When are Self-Employed Taxes Due?

Self-Employed Taxes Defined

Self-employed taxes are for those who are registered as sole proprietors, in a partnership, and self-employed individuals, including those who earn income from commissions. Depending on how much profit is earned, there are various types of taxes self-employed individuals must pay to the Canadian government. These include:

• Personal income tax
• Sales tax (HST/GST/PST)
• Federal tax

Who Needs to File Self-Employment Taxes?

When you’re self-employed, your business income is part of your personal tax return. That means that you pay the personal income tax rate rather than a corporate tax rate. The CRA considers you to be self-employed if your business is:

• A sole proprietorship
• An unincorporated partnership
• An unincorporated limited liability partnership
• An unincorporated general partnership

If you’ve incorporated your business, you’re no longer self-employed. Instead, you work for the corporation.

Important Tax Deductions

When you are self-employed there are many expenses that you can put towards your tax deductions. These items will help you save money on your tax returns. You can write off operating expenses that have contributed to your business including:

• Office supplies
• Mileage
• Internet and phone bills
• Rent
• Meals
• Publications and subscriptions
• Education

Learn more about common tax deductions here.

What You Need to File Your Self-Employed Taxes

There are many papers and forms you need before you file your self-employed taxes. When filing your self-employment taxes, the CRA needs supporting documents that will help support your claims. These include:

• Financial statements
• Expenses summaries or receipts, this includes phone bills
• Vehicle information
• Last years notice of assessment or tax return
• Proper tax forms

Self-Employed Tax Forms

When filing your taxes, there are specific tax forms that those who fall under the self-employed category must fill in. These forms include:

• Form T2125 – Statement of Business or Professional Activities
• Form T5013 – Partnership Information Return
• T1 Return – Personal Income Return
• GST/HST/PST Forms

How Much to Set Aside for Taxes

With so many numbers, it can be hard to estimate how much you should set aside for taxes. Typically, it’s easier to estimate your taxes after you’ve been in business a year. When you file your first self-employment tax return, add up all your federal and provincial income taxes. Then, divide that amount by your income. For this calculation, just use your regular business income. Don’t use your taxable income.

To illustrate, imagine your income was $80,000 and your total federal and provincial income tax was $16,000. When you divide your income tax bill by your income, the result is 0.2. In other words, your effective tax rate is 20% of your income. If you anticipate making about the same amount during your second year of business, you should set aside 20% of your profits for taxes.

Remember, this amount only covers your income tax. You have to set aside money separately for EI premiums and CPP/QPP contributions. Of course, this number will change as your income fluctuates and as tax rates change. Some self-employed people may only need to set aside 2 or 3% of their profits, while others may need to set aside a third or more.

Learn more about income tax rates here.

Canada and Québec Pension Plan Contributions for the Self-Employed

The CPP is a retirement-pension program. All workers over the age of 18 are required to make CPP contributions, and then, receive a pension based on their contributions if they retire or become disabled. If you die, your dependants may also receive payments from the CPP.

As of 2023, you have to pay CPP premiums on all income over $3,500 and up to $63,100. When you have an employer, you contribute 5.95% of your wages, and your employer matches that amount. But when you’re self-employed, you’re your own boss, so you cover both portions. In other words, you contribute 10.20% of your income. Because the contributions only apply to a certain range of your income, your maximum annual contribution can only be up to $7,508.90.

Residents of Québec have their own program. If you reside in Québec, you pay Québec Pension Plan contributions. As of 2023, QPP also applies to all earnings between $3,500 and $66,600. Although these amounts are the same, the rate is a bit higher. In Québec, you must pay 12.80% of your income.

Employment Insurance for Self-Employed People

CPP and QPP premiums are compulsory, but when you’re self-employed, you get to decide whether you want to pay Employment Insurance (EI) premiums. EI offers maternity, parental, and sickness benefits, and you can also apply for benefits if you need to provide care to a terminally ill patient or a critically injured child or adult.

As a self-employed individual, you can forgo these benefits, or you can opt to register with the Canada Employment Insurance Commission. To qualify, you must be self-employed and a citizen or permanent resident of Canada. As of 2023, EI premiums are $1.63 for every $100 you earn, up to an annual maximum of $1002.45. If you register as a self-employed person, you can’t claim any benefits until you’ve paid in for at least 12 months.

Again, the situation is different in Québec. If you live in Québec, you’re automatically entitled to maternity, paternity, and parental benefits through the Québec Parental Insurance Plan. If you want to get additional benefits in case you become ill or need to take care of another person, you can choose to enrol in the EI program. As of 2023, your premiums are $1.27 for every $100 of earnings, up to $781.05 per year.

Installment Payments

Sometimes, the CRA requires self-employed people to pay their income tax in installments (quarterly payments) throughout the year. You only need to make installment payments if you anticipate owing over $3,000 and you owed over $3,000 in one of the previous two years. In Québec, you have to make installment payments if your income tax due exceeds $1,800. Usually, during your first year of business, you can do your income-tax filing and pay all your taxes for the year at once. But typically, after that point, you need to pay your income tax in installments throughout the year.

For example, say it’s your first year of business and you owe $5,000 in income taxes. You can pay that amount when you file your annual tax return. Now, imagine that during your second year of business, you also anticipate owing $5,000 in income taxes. You have to pay that amount in installments during your second year of business. If you don’t make the installment payments, you may face penalties and interest.

Government Tax Resources for Self-Employed People

The government offers a variety of resources to help you file your self-employment taxes. For basic information about filing your Canadian taxes, look to the “Doing Your Taxes” government guide. This guide provides step-by-step assistance for filing income tax and benefit returns. It can also tell you if you’re eligible for a free tax clinic that provides help with filing.

Guide T4002 helps you work through Form T2125. This is especially useful in determining the difference between business and professional income. It also helps you understand special tax circumstances that apply if your business is fishing or farming. Need to figure out how to pay your taxes? The Make a Payment tool helps you determine the best method for your business. 

Filing your taxes might seem intimidating as a self-employed person, but there’s no need to worry. As long as you track your expenses and fill out all your self-employed tax forms carefully, you can maximize your deductions and stay compliant with CRA rules. The QuickBooks Self-Employed app helps freelancers, contractors, and sole proprietors track and manage your business on the go. Download the app today.