Understanding Tax Obligations for Self-Employed Individuals in Canada

August 18, 2023

A self Employeed business person sitting in her vehicle with her golden lab.

Be your own boss.

Work from anywhere in the world.

Flexible work in your own time.

Get paid to do what you love.

Whatever your reason, self-employment can be an empowering and enriching experience. And today, several trends support an increase in the number of self-employed individuals in Canada. From job losses to a preference for work-life balance and a desire for multiple income streams, a series of events prompts people to consider independent work, even as a side hustle.

And with great promise comes tax responsibility. Yes, even if you are self-employed. In this article, we’ll talk about how you can understand your tax obligations, what they are, and how to manage your taxes without sleepless nights.

Understanding your tax obligations as a self-employed individual

If you are self-employed, you’re responsible for a number of taxes, including:

  • Federal income tax
  • Provincial income tax
  • Canada Pension Plan contributions
  • Employment Insurance (optional)
  • GST/HST or any other provincial taxes

The different types of taxes, deadlines, rules, and processes seem like a lot, but it all makes sense once you have a system. The first step is to educate yourself, and there are several resources to help.

The Government of Canada offers clear guidelines on small businesses and income, and since that’s who you’re paying, these resources provide a great foundation. Our blog also has articles like the one you’re reading right now, designed to help small businesses and self-employed individuals understand and manage their tax obligations.

Websites like YouTube are helpful information sources, but there is no substitute for expert professional advice that you can trust. Whatever your choice of format and channel, trying to learn more about your taxes will leave you well-placed to focus on your work and your customers, all while avoiding panic during tax season. 

Stay up-to-date with changes in taxation policy

While the fundamentals of taxation, like dedication categories and rate slabs, may stay consistent year after year, the finer points are subject to change. As a self-employed individual, it is your responsibility to keep up-to-date with these changes. Again, there are several government resources available for you.   

It is reasonable to assume that policy updates are annual and unlikely to change during the year. That said, keeping up with all the changes can be difficult, especially if you, like so many others, are working on self-employed assignments alongside full-time employment. With time at a premium, you might be better off hiring an accountant specializing in self-employment.

Plan expenses and save for taxes

Working for an employer makes things more straightforward from a taxation standpoint. Your employer is responsible for all necessary deductions and the paperwork you need to file taxes. Being self-employed makes you the employer, also making it your duty to record your expenses diligently, anticipate audits, and set aside money for your taxes. The tax slab you fall under and the amount of your contribution to the Canadian Pension Plan (CPP) will also affect your tax payments. As a general rule of thumb, you’ll want to have 25-30% of your total income put aside for taxes.

Self-employed individuals can also access various deductions essential to lowering their tax payable. These include advertising and marketing expenses, vehicle costs, cell phone bills, bank fees, office supplies, and even business-use-of-home expenses if you run your business from home. While the exact list of expenses deductible may vary, one way to lower your tax liability that always works is to record all your expenses and, at the very least, have them reviewed by a professional accountant or firm.

Know your forms and deadlines

Self-employed individuals must complete form T2125, the Statement of Business or Professional Activities, alongside income reporting on their T1 General. While individuals with self-employment income have until June 15 each year to file their tax return, individuals must pay any taxes owed by April 30 to avoid a late-filing penalty.

Whether you do your taxes online, yourself, with the help of a CRA liaison officer or an accounting firm, ensure you stay ahead of the deadlines and in line with the regulations. To make things even easier, consider working with an accounting firm that understands exactly what you need, so you can focus on doing the work you love.

Contact KSSP PARTNERS LLP in Markham for your accounting and business consulting needs

KSSP Partners LLP in Markham understands the specific needs of small businesses. Our experienced advisors provide personalized guidance at every stage of your growth journey. Discover how our accounting services can assist you in Markham and throughout the GTA. Reach out to us via our contact form or call 289-554-5997.