While there are many benefits to being self-employed such as being your own boss and setting your own hours there are also some downsides. One, in particular, is filing your taxes as a self-employed person. While you simply get a T4 slip when you are an employee, you don’t get that same luxury as a self-employed individual. Most self-employed individuals will use a T2125, among other forms, to do their taxes. As a result, doing your taxes can be a little bit more complicated and difficult to deal with.
Self-employed Canadians have an extra month to file their taxes for the 2021 tax year compared to employees. While individuals have until May 2, 2022 to file their taxes, the deadline for self-employed Canadians is June 15, 2022.
The tax rate you pay is the same for all your business earnings and personal income as a self-employed individual. The tax rate you are charged depends on your income level, as outlined in the chart below:
| 2021 Income Tax Brackets | 2021 Income Tax Rates |
| $49,020 or less | 15% |
| $49,020 – $98,040 | 20.5% |
| $98,040 – $151,978 | 26% |
| $151,978 – $216,511 | 29% |
| Over $216,511 | 33% |
That said, you’ll need to make Canadian Pension Plan (CPP) contributions. If you so choose, you can also make Employment Insurance (EI) contributions, though this is optional.
In total, your tax obligations would include income tax and CPP (as well as optional EI, if applicable).
The tax rate for CPP contributions is 9.9%. Half of this amount is typically withheld from salaried employees’ paycheques, and employers pay the remaining half. But for self-employed individuals, you must pay the full amount, since you are essentially your own employer.
That said, this 9.9% rate applies only to a portion of your income, between $3,500 to $55,300. That means if you earn less than $3,500, you don’t need to contribute to CPP, and if you earn more than $55,300, you’d stop deducting CPP contributions when you reach that amount.
Do you live in Quebec? Find out about your QPP contributions.
As mentioned earlier, EI contributions are optional for self-employed Canadians. However, there are certain perks to EI contributions that you may want to consider before opting out, such as the following:
As a self-employed person, there are certain deductions you can make to lower your taxable income amount and pay fewer taxes overall, such as the following.
Money spent to operate your business is considered a business expense, which can be claimed as a deduction on your tax return. The following are some business expenses you can claim:
Find out if a business loan is a tax-deductible.
If you use your vehicle exclusively for business purposes, you can deduct all expenses associated with the vehicle, such as the following:
If you use the vehicle for both business and personal reasons, you can deduct a percentage of these expenses based on how frequently the vehicle is used for business purposes. For instance, if you drive your car 20,000 km a year and 10,000 km of that is used for your business, you can deduct 50% of your vehicle expenses from your income.
If you lease office space, you can deduct the cost of rent on your tax return. If you work out of your home, you can deduct your home office expenses as well.
In the case of a home office, there are two claim methods you can choose from:
To file your taxes, you can use NETFILE or a tax software to file online. You can also use a tax specialist to file your tax return through the CRA’s EFILE service. If you file online, you can expect your tax refund (if applicable) faster. If you file a paper tax return, it could take as long as 10 to 12 weeks for it to be processed.
To file your income taxes as a self-employed person, you’ll need three main forms:
As noted earlier, as a sole proprietor your business income is treated like a personal income, which means you’ll need to report it on Form T1, General Income Tax and Benefit Return. Your self-employed income is listed on Line 104. This form is also where personal deductions are reported.
In addition to reporting your income on Form T1, you’ll also need to file a business return using Form T2125, Statement of Business or Professional Activities. This lets the CRA know about your business activities throughout the tax year. This form is also used to list your deductible expenses for your business.
If you work as an independent contractor, your clients will complete and submit Form T4A (Statement of Pension, Retirement, Annuity, and Other Income) to the CRA when they file their taxes. This form allows your clients to report how much they paid you. Each client you work with will also send you a T4A, which will tell you how much you earned from each client.
Your clients have until the end of February in the following year to send you your copy. But even if they don’t, you’ll still be obligated to ensure this information is recorded so that it can be accurately reported on your Form T1.
Handling your taxes as a self-employed individual can be difficult and it is easy to sometimes miss certain deductions or other important parts of your return. Also, if done incorrectly, your return can get you in trouble as well. Instead of spending hours struggling through your taxes and still potentially missing things, it could be wise to hire the help of a professional.
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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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