Self-Employment Tax Guide

Self-Employment Basics

What Is Self-Employment?

• Running your own business (sole proprietor)
• Freelancing or consulting
• Gig economy work (Uber, Airbnb, etc.)
• Professional practice
• Commission sales without employer

Employee vs Self-Employed

CPP for Self-Employed

Both Portions

• Employee portion: 5.95%
• Employer portion: 5.95%
• Total: 11.9% (2024)
• On net self-employment income

2024 Limits

• Maximum pensionable earnings: $68,500
• Basic exemption: $3,500
• Maximum CPP: ~$7,735
• Half is tax deductible

CPP2 (Second Additional)

• New in 2024: additional 4% on earnings $68,500-$73,200
• Self-employed pay both portions (8% total)
• Builds additional CPP benefit

Calculating Business Income

Revenue

• All business income received
• Cash, cheque, electronic
• Barter transactions at FMV
• Work in progress (accrual)

Net Income Formula

Gross Revenue - Business Expenses = Net Business Income

• Net income goes on Line 13500-13700
• Complete Form T2125
• Net income subject to income tax + CPP

Common Business Deductions

Advertising and Promotion

• Website, social media ads
• Business cards, brochures
• Promotional items

Office Supplies

• Paper, pens, ink
• Computer supplies
• Postage

Professional Fees

• Accounting, legal fees
• Bookkeeping
• Business consulting

Business Travel

• Transportation to client sites
• Conferences, trade shows
• Meals while traveling (50%)
• Accommodation

Vehicle Expenses

• Gas, maintenance, insurance
• Business portion only
• Track kilometers meticulously
• Keep mileage log

Home Office Deduction

Eligibility

• Work from home regularly
• It's your principal place of business, OR
• Used exclusively for business and meeting clients

Expenses to Claim

• Rent OR mortgage interest (not principal)
• Property taxes
• Utilities (heat, electricity, water)
• Home insurance
• Maintenance, repairs (reasonable portion)

Calculation

• Business-use percentage of home
• Square footage method usually
• 100 sq ft office / 1,000 sq ft home = 10%
• Apply % to eligible expenses

Capital Cost Allowance (CCA)

What Is CCA?

• Depreciation for tax purposes
• Business assets spread over years
• Different rates by asset class

Common CCA Classes

Immediate Expensing

• Up to $1.5M can be immediately expensed
• For Canadian-controlled private businesses
• Certain property types
• Available through 2024

GST/HST Obligations

Registration Threshold

• $30,000 revenue in any 4 consecutive quarters
• Must register and charge GST/HST
• Can voluntarily register earlier

Collecting GST/HST

• Add tax to invoices
• Track GST/HST collected
• File returns (annual, quarterly, or monthly)

Input Tax Credits

• Claim back GST/HST paid on business expenses
• Reduces amount you remit
• Keep receipts with GST numbers

Quick Method

• Simplified GST/HST calculation
• Keep portion of GST/HST collected
• Don't claim ITCs on most expenses
• May save money if few expenses

Tax Installments

Who Must Pay

• Net tax owing over $3,000 (current and either prior year)
• Quebec: $1,800 threshold
• No withholding = must pay quarterly

Due Dates

• March 15
• June 15
• September 15
• December 15

Calculation Methods

• Prior year: Base on last year's tax
• Current year: Estimate this year's tax
• CRA suggests: Use their installment reminders

Filing Requirements

T2125 Statement

• Complete for each business
• Attach to personal tax return
• Report income and expenses
• Calculate net income

Filing Deadline

• Self-employed: June 15
• BUT tax owing due April 30
• Interest charged from May 1
• File early to know what you owe

Records to Keep

• All receipts and invoices
• Bank statements
• Vehicle mileage log
• Home office calculation
• Keep 6 years

Common Mistakes

Avoid These Errors

• Not separating personal/business finances
• Missing deductions
• Inadequate recordkeeping
• Forgetting to pay installments
• Not tracking vehicle kilometers
• Overstating home office

Sole Proprietor vs Incorporation

Stay Sole Proprietor If

• Income under $50,000-$75,000
• Simpler administration
• No liability concerns
• Just starting out

Consider Incorporating If

• Significant liability exposure
• Income over $100,000+
• Can leave money in corporation
• Want to income split