Warren Orlans is an experienced taxation and financial services writer with 10-years' experience working in the Canada Revenue Agency's collections department, learning, teaching, and helping taxpayers. Warren has an MBA from Lansbridge University and a Spec Hols Degree from York University.
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Good news: filing taxes as a self-employed person is not very complicated. All that’s required, in addition to reporting your income on your T1 General, is reporting your self-employed or business income on Form T2125 — Statement of Business or Professional Activities.
What’s more, you can reduce the amount of business income that you’ve earned, because the Canada Revenue Agency (CRA) allows the self-employed the opportunity to deduct any relevant business expenses from that income.
The other important differences for self-employed Canadians include the filing deadline for tax returns and the requirement for paying into the Canada Pension Plan (CPP). Everything you need to know about both of those differences is explained in detail below.
Business income includes money earned from a:
Employment income includes money earned from:
Every year around tax time, employers send their employees a T4 slip. This slip makes clear how much an employee earned throughout the previous year and provides them with the numbers they need to fill out their T1 return.
When you’re self-employed or earning business income, you might instead receive a Form T4A — the Statement of Pension, Retirement, Annuity, and Other Income — from your clients by the end of February the following year. T4A slips will include the total dollar amount for each job.
As a self-employed person, you must fill out Form T2125, the Statement of Business or Professional Activities. This form will help you calculate your gross income, which is the total amount of money you earned during the year. The T2125 also provides self-employed Canadians the opportunity to deduct allowable expenses from their gross income, lowering their taxable income so you pay less in income taxes. Because they reduce the amount of tax that you have to pay, these deductions can have a big impact on your bottom line when you’re self-employed.
On Form T2125, expect to provide the following details:
After completing Form T2125, you’ll then be able to use the net and gross income figures to complete your T1 return.
You must include all your income when you calculate it for tax purposes. If you fail to report all of your income, you may have to pay a penalty of 10% of the amount you failed to report after your first omission. Repeated failures to report income will likely result in a doubling of that penalty, to 20%. With repeated failures after that, that penalty can continue to double.
There is no entirely accurate way to determine the amount of money you should be setting aside during the year in order to pay your taxes in full upon filing. That said, the general rule is to set aside between 25% and 30% of income earned for taxes (even if this percentage may change as your income fluctuates and tax rates shift). That general range makes up the need to pay for the following taxes:
Federal tax rates for 2024 are:
Provincial/territorial tax rates can be found on the CRA's website here.
Canadians between the ages of 18 to 70 who have net self-employment income and pensionable employment income greater than $3,500 are required to contribute to the CPP. Regular workers contribute a particular percentage of their wages above $3,500, up to an annual maximum, while their employer contributes an equal amount. This percentage changes each year — for 2024, it remains at 5.95%.
Self-employed Canadians, however, do not have employers deducting CPP from their pay, then matching that amount and remitting it to the CRA. Instead, they are responsible both for their portion of CPP and for what would have been their employer’s contribution.
For 2024, self-employed Canadians must prepare to pay the CRA 11.9% of their income, up to a maximum of $7,735.
In order to reduce the amount of taxes you owe, it is very important to claim all of your business-related expenses on your T2125. In addition to lowering any tax payable, you’re also putting together the most accurate picture of your business’ overall health. Some of the most common expenses for self-employed Canadians include:
For the complete list of eligible business expenses, visit the CRA’s section on Business Expenses.
If this is your first year of self-employment, preparing your first tax return may seem daunting. Fortunately, there are plenty of online tax products that make the self-employed filing process simple. These products can automatically pull any tax slips that have been issued to you in your name directly from the CRA website, then walk you through completing every step of your return. That includes the T2125 reporting of business income and the fun part — those business-related expenses that reduce your taxable income.
To file online, you must be a resident of Canada, and you can’t have filed bankruptcy in the current tax year or the previous year. To be able to automatically pull your tax slips, you must also be registered with "CRA’s My Account."
While your personal income tax return would typically be due to the CRA, with full payment, by midnight on April 30 (unless that date is on a weekend or holiday, where it moves to the next business day), the CRA gives self-employed taxpayers a little longer. If you or your spouse or common-law partner are self-employed, you have until June 15 to submit your income tax return. However, any taxes owed to the CRA are still due by April 30, even for self-employed individuals. As a result, it’s important to have your return ready to file by April 30 if you suspect you will owe taxes to the CRA.
If the CRA determines that you must pay your taxes in installments, rather than in one lump sum, they will notify you. Installment payments are due on March 15, June 15, September 15, and December 15 every year. (If the due date is on a weekend or public holiday, it moves to the following business day.) There are, however, certain exemptions: because of the seasonal nature of their business, farmers and fishers only have to make one installment payment by the last day of the year.
Again, self-employed business income is reported on Form T2125, Statement of Business or Professional Activities. This form will help you calculate your gross and net income, which are both required when you complete your T1, General income and benefit return.
In order to maximize your deductions and minimize your owed taxes, it’s imperative that you keep all of your receipts.
Last Updated November 27, 2023Article contents 7 min read
