In Canada, a person who runs their own unregistered corporation-free firm is considered self-employed. A self-employed person obtains business income as their own income rather than wages from an employer as employment income.
The Canada Revenue Agency (CRA) requires you to file a variety of specialized tax return documents annually if you are a self-employed resident and worker in Canada. It might be challenging to figure out which self-employed tax forms apply to you, particularly in your first year in business.
It doesn't have to be difficult to file your taxes as a self-employed person, especially if you have kept thorough financial records throughout the year. Filing as an employee and filing as a self-employed have a few significant distinctions.
For your self-employed tax return, you should always seek advice from an accountant to make sure you are meeting all deadlines and submitting the appropriate documentation.
Which Self-Employed Business Do You Own?
To begin with, what kind of business can be classified as self-employed?
The majority of self-employed people set up their companies as:
- A sole proprietorship
- An unincorporated partnership
- An unincorporated limited liability partnership
- An unincorporated general partnership
These structures all produce revenue from self-employment. Whereas two or more owners of a partnership divide the business income among themselves, a sole proprietorship's owner keeps all of the profits for themselves.
Self-Employed Tax Return Worksheets
Tax forms that are pertinent for self-employed people are numerous. You will always need to file a personal tax return alongside other applicable returns.
- Form T2125, Statement of Business or Professional Activities
You will enter both your personal and business revenue on this form. Additionally, you will be able to track and deduct your business expenses from your total. - Form T4A, Statement of Pension, Retirement, Annuity, and Other Income
People can monitor their income by client or job throughout the year by using this self-employment income slip. For jobs completed within the allotted tax period, a contractor or freelancer will typically receive a T4 slip from each of their clients that shows the total amount paid for each job. This facilitates keeping track of, recording, and calculating your tax liability. - Form T5013, Partnership Information Return
The only people who must fill out this form are independent contractors who operate their company as a partnership. Any kind of partner is required to submit this return. Form T5013SUM, Summary of Partnership Income, must also be completed if you have a stake in the partnership. - Form T1 Return
Once the aforementioned pertinent documents are completed, you take that data and apply it to your T1 general return. Your self-employed business earnings are your personal income. - Form GST34
Your partnership or sole proprietorship must register for a GST/HST number and submit an annual GST/HST return if its annual revenue exceeds $30,000. This makes it possible for the CRA to get GST/HST from your company. When you make the $30,000 mark, it is your duty as an independent contractor to register for this number.
Managing Tax Returns for Employers and Self-Employed
If you work for your own sole proprietorship or partnership and for another firm as an employee, what should you do?
As more and more people work full-time for an employer while also managing a side business, this scenario is becoming more and more typical. In this instance, the forms outlined above will be used to report your self-employment revenue. Your employer will send you a T4 for any income you have earned from them, which you can include alongside your self-employment income on your T1 personal return.
When you have these two types of income, there may be differences in the amount of tax due on your self-employment income and the expenses you are able to write off. Always consult with a professional tax accountant to make sure you are not overcharged on your tax return and that the correct amount is deducted.
Self-Employed Tax Return Deadlines
June 15th is the deadline for taxpayers and their spouses to file self-employed tax returns. The deadline for paying any taxes owed on such returns is April 30 of the subsequent year. It is strongly advised that self-employed people finish filing their taxes by April 30th in order to avoid accruing interest on any outstanding balances.
If you need to make tax installment payments for a future year, the CRA will let you know. These have annual deadlines of March 15, June 15, September 15, and December 15.
Guide to Self-Employed Tax Returns
How should a self-employed person file their taxes? Get all the information you need from your CPA to file your taxes.
The rates and deductions for self-employed taxes in 2023
The same tax rates apply to self-employed individuals as they do to those who receive income from employment. The 2023 federal tax rates for individual income are:
- 15% of the initial $53,359 in taxable income in addition to
- 5% on the remaining $53,358 in taxable income (on the amount over $53,359 up to $106,717), in addition to
- The next $58,713 in taxable income (the amount over $106,717 up to $165,430) is subject to a 26% tax rate. Additionally
- 29% on the remaining $70,245 in taxable income (on the amount over $165,430 up to $235,675), in addition to
- Over $235,675 in taxable income, 33 percent
Visit Canada Revenue Agency to view the most recent federal tax rates on revenue from independent businesses.
Individuals who work for themselves are required to pay into the Canadian Pension Plan (CPP) in addition to their tax rates. Contributions to the CPP are required of all Canadians between the ages of 18 and 70 who have net self-employment income and pensionable job income exceeding $3,500. Regular employees contribute a certain proportion of their pay, up to a maximum annual percentage, while their company makes an equivalent contribution.
However, employers who do not employ self-employed individuals do not withhold CPP and remit it to the CRA. They have responsibility for both their share of the CPP and the portion that their employer would have contributed.
In 2020, Canadians who work for themselves should budget to pay the CRA 10.5% of their total income, up to a maximum of $5,796.00, when they file their taxes. It's important to stay informed about these rates so you can accurately set away money for self-employment, as the CPP contribution rate is expected to rise over the coming years. The new CPP contribution rate for Canadians who work for themselves will rise to 10.9% on January 1st, 2021.
You must register as a self-employed person in order to be eligible for Employment Insurance (EI), which provides benefits for taking sick, parental, maternity, and compassionate care leaves.
Expense Reporting for Independent Contractors
When filing your income tax return, you have the right to deduct expenses if you are a freelancer or a contracted individual. The amount of business income you owe the CRA is decreased when you claim business-related expenses. Additionally, it accurately depicts the financial health of your company by letting you see how your income and expenses are compared.
The following are a few of the most typical costs for a self-employed tax return:
- Advertising
- Bank charges
- Business-use-of-home expenses if you operate out of a home office (mortgage interest, utilities, property taxes, repair and maintenance, Internet)
- Cell phone fees
- Inventory
- Legal and accounting fees
- Maintenance
- Office supplies
- Rent and leases
- Traveling
- Vehicle expenses (repairs, lease, depreciation, parking, gas, oil changes, registration fees)
- Wages and benefits
Click here to view the Canada Revenue Agency's comprehensive list of allowable business expenses. Determining which expenses, and to what degree, count as business expenses can be challenging. It is always advisable to consult with a tax accountant to make sure you accurately report business expenses on your taxes.
Online Self-Employed Tax Return Submission
When self-employed people create an account, they can electronically file their tax returns. Numerous accounting programs are available to assist in streamlining the tax filing procedure. They also guide you through the process of completing pertinent tax forms and retrieving pertinent tax returns from the CRA. To select the ideal accounting software for you, always seek advice from an accountant.
If you file your self-employed tax return online, you can obtain your tax refund faster through direct deposit instead of waiting for a check in the mail. You can also immediately find out how much you owe in taxes and CPP.
How Much Is It To File A Self-Employed Tax Return?
Just like with personal tax returns, filing a self-employed tax return with the CRA is free of charge.
The cost of hiring a tax accountant to submit your return will rely on a number of factors, including your income, expenses, dependents, deductions, and other particulars. Accountants generally charge very modest rates to self-employed individuals.
Incorrectly filing your self-employed tax return can result in excessive interest, penalties, or an audit, as well as negative effects on your personal relationship with the CRA. Having a tax accountant on your team makes sure you complete all of your paperwork on time and meet all deadlines, which will help you avoid these expensive audits and fines.
Can I Receive a Tax Refund if I Am Self-Employed?
A self-employed person's income and out-of-pocket expenses may qualify them for a tax refund. However, self-employed people are frequently taken aback by the amount of tax due at the end of the year because their employers do not send tax to the CRA on each paycheque. The majority of the time, a self-employed person will not get a refund but will instead be required to pay taxes and CPP.
For self-employed people, setting aside money from each invoice or payment they receive is crucial. This way, at year's end, they won't be rushing to find the money to pay the CRA. Generally speaking, one should set aside between 25% and 30% of earned income for taxes, including CPP, federal, provincial, and, if registered, GST/HST.
Engaging with a tax professional that offers tax planning services can assist you in optimizing your return and reducing your annual tax liability.
Is an Accountant Required for Self-Employed Tax Returns?
If you have the skills and information required to finish your self-employed tax return completely, you can file it on your own. It is always advisable to speak with a qualified tax accountant if you have recently changed the way your business operates or if you have just begun a new venture (such achieving the GST/HST threshold for the first time).
A tax accountant can make sure you maximize your tax savings, fulfill all applicable dates, and accurately complete all applicable tax forms. Additionally, they may assist you in making business decisions that will allow you to keep a larger portion of your income through short- and long-term tax planning.
Accountant CPA assists self-employed people in Canada with submitting their annual self-employed income tax returns. Find out how we can maximize your tax return and support the expansion of your company.