An Introduction to Self-Employment Tax in Canada
Individuals with an entrepreneurial mindset can often find ways to generate income by running their own business and starting a company. While this goes against the traditional wealth goal of finding a job, in can prove to be very lucrative assuming the right amount of work gets put in.
With that being said, self-employed entrepreneur types are still required to file their taxes periodically just like everybody else. It’s important to understand how taxes work for self-employed persons at least at the basic level, especially since are many intricacies that can make tax filing complicated.
UNDERSTANDING TAXES FOR SELF-EMPLOYED INDIVIDUALS
Please note that all of the advice mentioned in this guide should only be treated as a stepping stone for further knowledge. None of the information provided below is a good enough substitute for professional/legal tax advice on the subject.
As always, we recommend that you supplement the content found in this post with your own research. Not only is taxation an inherently complicated matter, but tax rates and taxable income amounts are subject to change. It is vital that you make a conscious effort to stay updated on current Canadian self-employment tax rulings so that you remain ahead of the curve.
How much tax do self-employed people pay in Canada?
Although it typically varies year over year, the amount of tax an entrepreneur can expect to pay ranges depending on how much income they’ve earned from their business operations. Individuals who file tax returns and generate income in Canada fall under a tax rate that becomes steeper when higher total incomes are earned.
To give you an idea of how tax brackets work, here are Canada’s national tax rates in 2020:
||FEDERAL TAX RATE
|$ 0 – 48,535
|$ 48,535 – 97,069
|$ 97,069 – 150,473
|$ 150,473 – 214,368
|$ 214,368 +
The chart above displays the brackets under which your total taxable income is subject to a specific amount of federal dues. Note that Canadian federal taxation is a tiered system, meaning that if you earn more than the highest tax bracket (over $214,368 in 2020) you won’t lose 33% of your income outright. If you made $300,000 this year in taxable income, you would only be taxed at 33% until you hit the lower consecutive bracket ($214,367) which means the rest of your money will be taxed at 29%, so on and so forth.
Following the same format, you’ll have to pay taxes for the specific province or territory that you claim residency in. For instance, if you live in Ontario here are the tax brackets for 2020:
||PROVINCIAL FEDERAL TAX RATE
|$ 0 – 44,740
|$ 44,740 – 89,482
|$ 89,482 – 150,000
|$ 150,000 – 220,000
|$ 220,000 +
Remember to manually check and confirm the tax rates for your province if you live outside of Ontario. It’s also worth mentioning that Quebec has a slightly more complex tax situation than other provinces, so be sure to look into their policies if that’s where you legally reside.
Paying Canada’s sales tax
Assuming your business is a successful one, you’ll likely generate a modest amount of revenue to be able to sustain operations every year. Naturally, if your sales revenue passes a certain threshold you’ll be required to sign up your business for GST/HST on top of the self-employment tax you pay.
In order to be mandated into GST/HST registration, your business needs to earn at least CAD $30,000 in sales revenue every quarter given in a fiscal year. To counter balance this obligation, you should embed GST/HST into the costs of your products.
Do self-employed workers in Canada get tax deductions?
When you consider that your profit-generating entrepreneurial ventures are technically a business, you can certainly make a few tax deductions based on your operational expenses.
Depending on which type of business you’ve registered and your specific line of work you can qualify for many different tax deductions. The best advice would be to check your industry to see what kinds of operating expenses are eligible to be written off. While it’s possible to learn about these deductions easily through government websites, it’s highly recommended that you consult with a tax expert so you don’t file an improper tax return. If you are ever found to misrepresent your tax situation, you could end up paying a steep penalty from the CRA.
Just to name a few, here are some typical deductions that self-employed individuals are able to file:
- Professional licenses and fees paid by the business
- Essential start up costs
- Costs for business travel (transportation)
- Home office rent
- Cost of business supplies (paper, pencils, etc)
How are deductions claimed on tax returns for self-employed Canadians?
When it comes down to claiming your eligible tax deductions under your business, you need to double check what is permissible in your unique situation. The reality is, many tax deductions have a fine line which can be easily crossed if you’re not paying attention.
For example; business supplies and other office expenses can only be deducted if they fall within a certain category of consumable products. Supplies like paper, pencils, staples, and printer ink may be claimed while keyboards and computer monitors may not be. Longer term assets in the office are recognized as capital costs and not operational expenses, which are viewed differently under tax law.
How are Canadian self-employment taxes affected by international customers?
The nature of your tax obligations will ultimately stem from where your business enterprise is registered and what line of work you’re in. In a simple scenario, if you run a Canadian-owned business, your clients are all Canadians, and you live in the country, you answer to the CRA (Canada Revenue Agency).
However, your tax situation becomes more complex if you accept international work. In many cases working with foreign clients can lead to paying additional duties. Taking on work assignments that are based in the United States while you’re still Canadian resident will mean that you still owe money to the CRA. To get around this dual tax duty, make sure to fill out form W8-BEN which eases the tax burden for Canadian and US residents working on the other side of the border.
It’s also important to keep in mind sales tax whenever you’re selling products to customers that are located abroad. While modern day e-commerce software like Shopify will manage this sales tax for you, you should learn how to deal with it if you’re using your own proprietary sales channels.
General Tax Tips for Self-Employed Canadians
If you want to be fully prepared when it comes down to filing a tax return, here are a few things you should always consider:
SAFETY NET – Most taxpaying self-employed entrepreneurs will advise that you save roughly a quarter of your annual income in order to easily pay taxes. This amount will give you a wide enough safety net to be able to cover your CRA debts, so it might help to designate a savings account specifically for this.
TAX CALCULATOR – There are numerous free self-employment tax calculation tools online that can help you figure out your total dues. It’s recommended that you take these services with a grain of salt, since they may not be 100% accurate to your specific situation.
TRACK RECORD – It’s your responsibility as a business owner, especially if you are a one-person show, to properly store and keep track of your periodic financial records. This includes business bank statements, receipts, and proof of deductions for longer than 5 years. In the event that you get audited by the CRA, it pays to have documentation that helps prove you’ve filed your taxes honestly.