March 22, 2022

Taxes: A guide for the self-employed

By Véronique Harvey

Tax time can be nerve-wracking when you’re self-employed. But there are ways to make it less painful and more predictable. Here’s how. 

When you’re self-employed, being organized and disciplined are part of the job. And you still must file taxes no matter what sector of the economy you work in. Need help?

Read this guide:

How much tax will you owe if you’re self employed?

As a self-employed worker, does thinking about your tax return give you high anxiety? Do you dread that call from your accountant telling you how much tax you owe?  There are ways to estimate how much tax you’ll have to pay. Not the exact amount. But close enough so that you can create a budget and save enough to cover your taxes.

If you multiply your income by your provincial tax rate, you’ll get an idea of how much you’ll need to pay at the end of the tax year.

But keep in mind that figure won’t include:

  • payroll contributions;
  • your expenses;
  • various tax credits you may qualify for.

Sun Life advisor Maxime Bernier uses this amount to create a savings budget for his clients. “Your budget should have enough money to cover your taxes and vacation (which independent workers pay for themselves). It’s also a good idea to have a cushion for unexpected events and lean periods. You make monthly deposits into a low-risk TFSA to earn a little interest. When the tax season arrives, you’ll have saved enough money to pay your taxes,” he explains.

It’s a good idea for a self-employed worker to set aside 40% to 50% of their annual income. This helps you prepare for any eventuality. And automating your savings can be a good way to make sure everything’s covered.

Do you need help creating a budget for your savings?

The government requires self-employed workers to pay tax instalments when they’ve had a tax balance owing the previous year.

The tax threshold is more than:

  • $3,600 ($1,800 federally and $1,800 provincially) for Quebecers, and
  • $3,000 federally for the rest of Canada.

If you’re in this situation, you’ll receive a letter in the mail, usually around September. The letter will tell you the instalments you need to pay and the frequency. You will have to pay these amounts on time. Otherwise, you run the risk having interest calculated from the first missed deadline. That’s rather than from April 30, the deadline for paying taxes.

There’s often the temptation to pay higher instalments than the government requires.

“That’s a practice to avoid,” Maxime Bernier advises. “When you do that, the government makes money on your instalment instead of you. It's best to put the difference into a ‘conservative’ TFSA, with a rate of return of 3% or 4%. That way the profit stays in your pocket. And the money is 100% liquid, so you can access it any time with no tax consequences.”

Currently, a person who has never contributed to a TFSA can deposit up to $81,500. Why not take advantage of it?

What are the payroll contributions if you’re self-employed?

In addition to federal taxes (and provincial taxes for Quebecers), there are various payroll contributions that self-employed workers must make:

  • Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
  • Quebec Parental Insurance Plan (QPIP) or Employment Insurance
  • Quebec Health Insurance Plan (RAMQ), in Quebec only.
  • Health Services Fund (HSF), for incorporated workers.

Note that, for QPP and QPIP, self-employed workers must pay both the "employee" and "employer" portions. That’s because they wear both hats.

For 2021, contributions in Quebec could be as much as:

  • $6,275 for the Quebec Pension Plan,
  • $733 for the Quebec Parental Insurance Plan, and
  • $710 for RAMQ, the Quebec Health Insurance Plan.

That’s why it’s important to set aside more than your base tax rate.

Remember: when you reach $30,000 or more in net earnings over 12 consecutive months, you must:

  • register to collect GST/HST (and QST in Quebec), and
  • start charging your clients the applicable sales taxes.

Which tax credits are available to self-employed workers?

There are various tax credits that can reduce the amount of tax you have to pay. Here are some of them:

These credits are available to everyone. The specific deduction self-employed workers can claim is the expense deduction. It’s a way to reduce your taxable income.

You can claim anything that’s a work-related expense:

  • Computer equipment (computer, cell phone, iPad, printer)
  • Office supplies (furniture, stationery)
  • Travel expenses (car payments and insurance, gas, parking, repairs)
  • Meals (travel-related or when meeting with clients)
  • Hotels (travel-related)
  • Fees for conferences, training or professional associations.

Report all your expenses, as accurately as possible, every year. And keep your receipts in a safe place for seven years. Just in case the government selects you for an audit.

When and why would a self-employed person incorporate?

Self-employed workers who make thousands of dollars in profits every year might want to consider incorporating.

The main advantage of incorporating is that it reduces your tax rate. However, there are additional expenses for setting up the corporation and administering it. Not to mention the expense of filing a corporate tax return.

When is it worthwhile to incorporate? When your business generates significantly more cash flow than what's required to cover your living expenses. If you work in a high-risk sector like construction, however, where there’s insurance to pay and liability risks, you might consider incorporating right away.

Self-employed: What are the important tax deadlines?

Date* What happens
Early March RRSP contribution deadline if you want your contribution to count toward the previous tax year. The date varies from year to year, but it’s usually the beginning of March.  
April 30  Deadline to file individual income tax returns. Payment is also due on that date, or you’ll start incurring interest on any balance owing starting May 1.
June 15  Deadline for self-employed workers to file tax returns. However, you’re still charged interest on any balance owing starting May 1.

*When these dates fall on a Saturday or Sunday, your documents or payments are on time if the government receives them on the first business day after the deadline.

Need help?

An advisor can help you build a savings plan that works for your budget.

Most advisors now offer to meet Clients virtually by video chat. Find an advisor today.


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