A Beginner’s Guide to Self-Employed Taxes Under Canadian Law

As the gig economy continues to flourish in the Canadian labour market, more people are venturing into self-employment.

In 2021, there were 2.7 million self-employed individuals in Canada. Meanwhile, gig workers, or those who operate as independent contractors and freelancers, currently stand at 8.75 million. This alternative workforce experiences greater independence. 

Despite the advantages of a flexible work schedule and the potential to earn more than a regular employee, managing income taxes poses a challenge. You would be responsible for covering federal and provincial taxes as you generate self-employed income. 

Navigating the Canadian tax legal system as a self-employed worker can be daunting without proper guidance. This article aims to guide beginners on self-employed taxes. However, it’s worth pointing out that working with Faris CPA is still the most proactive way to accurately deal with and minimize your tax obligations as a self-employed person.

What the Canadian Law Considers Self-Employed

Before delving into your tax obligation, check whether you qualify as self-employed. Remember that self-employment is more than a professional choice. The Canadian Revenue Agency (CRA) only considers you a self-employed worker if you meet the following criteria:

  • You work as an independent contractor, offering a specific service to another party on a contractual basis.
  • You operate as a sole proprietor, running an unincorporated business by yourself.
  • You’re a partner in a self-employed business run by two or more parties.
  • No other individuals are supervising your activities.
  • You have the freedom to work when and for whom and provide services to multiple clients simultaneously.
  • The employer-employee relationship is not present with your clients. That means the working relationship has no continuity, subordination, or loyalty.

Types of Self-Employed Taxes You Need To Pay in Canada

Self-employed individuals are accountable for reporting business income and paying the corresponding income taxes. Unlike traditional employees, whose taxes are directly deducted from their paychecks, you must calculate and submit your income taxes to the CRA.

It’s necessary to report your entire income on your tax return. Otherwise, you may face penalties. Note that tax filing is the only way to be eligible for government benefits. These benefits may include provincial or territorial tax credits and the GST/HST tax credit.

The following are the types of taxes you must pay on your self-employment or business income:

  • Federal and Provincial Income Tax
  • Canada Pension Plan (CPP) contributions
  • Employment Insurance (EI) Premiums
  • Goods and Services Tax

Calculating your tax liability might pose challenges initially. While there’s no one-size-fits-all method to determine the amount of money you set aside for tax purposes, allocating 25 to 30 percent of your income is highly advisable.

How You Can File Your Self-Employed Taxes Online

Preparing your first tax return may seem intimidating if this is your first year of self-employment. Thankfully, numerous online tools can make the process easier. Consider the following tips to get started:

  • Prepare the necessary information, such as personal details, business name and address, self-employment income, and expenses.
  • Register with the CRA’s My Account to pull your tax slips.
  • Check your eligibility for online filing.
  • Select CRA-approved tax software to file your annual tax return.

Hiring a tax professional can make the process less stressful. All you need to do is secure the forms, receipts, and other relevant documentation. You can also utilize the free support provided by the CRA through its Liason Officer service to understand your tax obligations better. 

One last consideration to remember

Keeping all your receipts is crucial to lowering your taxes and maximizing your deductions. Stay on top of your taxes and pay them in full and on time as scheduled, whether quarterly or annually. Doing so will help you avoid any interest charges or penalties.