For many young workers today, entrepreneurship has become a lifestyle. Whether you’re a sole proprietor, business partner, freelancer, independent contractor, or dabbling in direct sales on the side, you are most likely classified as self-employed as defined by the Canada Revenue Agency (CRA).

When you’re self-employed and filling out your personal Income Tax and Benefit Return, navigating your tax situation can become more complex compared to an employee on salary. Self-employed individuals differ from regular employees in two main areas: contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI).

Let’s dive deeper into EI and CPP so you’re well informed before it’s time to file your taxes.

Key Takeaways
  1. Self-employed individuals contribute both the employee and employer portions of the CPP, calculated based on net business income.
  2. While people who work for themselves aren’t required to pay EI premiums, opting into the EI benefits program provides coverage for maternity, parental, sickness, and other special benefits.
  3. Those opting into the EI benefits program must pay premiums for a full 12 months before accessing benefits.

Do you have to pay CPP if you’re self-employed?

With a few exceptions, everyone between the ages of 18 and 70 whose income is greater than $3,500 must contribute to the CPP. Salaried employees contribute a particular percentage of their wages above $3,500, up to an annual maximum, while their employer contributes an equal amount. Someone who is self-employed must contribute both the employer half and the employee half.

And, yes, CPP is mandatory for self-employed. You are required to contribute both the employee and employer amounts. The formula used to determine these contributions is:

  • 2 x the annual percentage rate, up to the annual maximum for self-employed persons

For example, in 2024 the employer and employee contribution rate is 5.95% each. When you’re self-employed, you pay both portions, which is 11.9% of your business’s net earnings for 2024 (.0595 x 2 = 0.119). But you will not pay more than the combined maximum of $7,735.00.

While it may seem hard to take a cut in pay, your CPP contribution provides benefits for you as a self-employed person. For instance:

  • The Canada Pension Plan (CPP) is one of the major pillars of Canada’s retirement benefits system. So, paying your CPP contributions creates retirement income for you in the future.
  • You’ll receive a tax deduction for the “employer half” of the contribution when completing your tax return.
  • You’ll receive a 15% federal tax credit for the “employee half” of the contribution when completing your tax return.

How do I contribute to the CPP if I’m self-employed?

You’ll make contributions to the CPP in full when you file your T1 Income Tax and Benefit Return. Since CPP contributions from self-employment are based on the net income of your business, they’ll vary each year. You’ll calculate and report the current year’s contributions using Schedule 8.

As of 2024, you’ll report and pay these contributions in two parts: the base CPP amount alongside the first additional CPP contributions, and a second contribution known as CPP2.

To understand CPP2, let’s take a brief look at history. Until 2018, separate employee and employer contributions were 4.95% of net wages, thus the combined amount for self-employed people was 9.9% (.o495 x 2 = .099).

The contribution rate increased gradually by 1% through 2023, bringing the total to 11.9%. This increase was considered the first additional contribution. As of the 2024 tax year, there is a second contribution (CPP2) which is calculated at the rate of 8%, based on a new, higher income ceiling. The enhanced portion of your contributions and your CPP2 contributions are both tax deductible.

After calculating your CPP on Schedule 8, you’ll enter the amount on line 42100 of your Income Tax and Benefit Return.

Are there self-employed CPP exceptions?

Self-employed individuals have some flexibility on their CPP contributions depending on how their business is structured. For example, a sole proprietor might consider incorporating, which gives them the option to pay themselves a salary or dividends.

Incorporating allows you to pay yourself a lower salary and then take the rest of your income as dividends to reduce CPP premiums. It also lets you participate in a pension plan, which isn’t an option as a sole proprietor. Remember though, if you choose to incorporate and reduce your CPP contributions, this will impact your pension amount at retirement.

Can the self-employed get EI?

Self-employed people can choose to opt into the EI benefits for self-employed program and receive EI benefits, but it’s not a requirement.

EI benefits fall into 3 categories and depend on your circumstances:

  • Maternity and parental benefits—for people who are away from work due to pregnancy, recently giving birth or adopting a child.
  • Sickness benefits—for people who cannot work for medical reasons.
  • Family caregiver benefits—for people who provide care or support to a critically ill or injured child or adult, and those taking care of someone who requires end-of-life care.

Each type of special benefit has its own maximum weekly rates of pay, as well as a maximum number of weeks you can collect the benefit. It’s important to know these maximums and you can find an easy-to-read chart outlining them here.

Opting in means you’ll need to register for the self-employed EI benefit program, and you’ll need to do that before taking payroll deductions. If you’re not approved, then you’ll need to process payroll as EI exempt.

You can use your My Service Canada Account to register. When self-employed people opt into the EI program to access EI special benefits, they pay the same EI premium rate as employees pay.

EI premiums are paid when the self-employed worker files their annual Income Tax and Benefit Return using Schedule 13 (Employment Insurance Premiums on Self-Employment and Other Eligible Earnings). Unlike with the regular EI program, self-employed workers do not have to pay the employer’s portion of the EI premiums.

Things to consider about EI benefits for self-employed

There are some important factors to take into consideration before you decide as a self-employed worker to opt-in to the program:

  • You must pay premiums for a full 12 months before you can collect any benefits and you need to have earned a minimum amount of self-employed earnings between January 1 and December 31 of the year before you apply.
  • You can opt out of the self-employed EI benefit program at the end of any tax year—but only if you have never claimed benefits.
    • For example: you cannot collect maternity benefits for the maximum number of weeks available, then decide you want to opt out of the program when you file your tax return for that year. You must contribute on self-employed earnings for as long as you are self-employed if you have claimed benefits.
  • Even after paying into the system for 12 months, if your business fails you will be ineligible for any benefits.
  • An extended leave might not be suitable for a business that relies on your time and effort to keep running.

Rather than opting into the EI program, you might consider investing the equivalent of the premiums instead. For example, if the maximum premium you can pay into the EI program is around $900.00, set that amount aside in a Tax-Free Savings Account (TFSA) each year and watch your savings grow. This, of course, is not equivalent to the dollar amount of any special benefits you may receive. So, you may want to add a little extra to that account if you’re budgeting for a life event or large purchase.

If you’re opting into the EI program because you are planning for an event, such as pregnancy or adoption, you should plan on taking at least two—if not three—full parental leaves for the program to pay off in your favour.

What are the maximum EI and CPP contributions?

The CPP maximum contribution for 2024 is $7,735 for a self-employed person—$3,867.50 of that is the employee portion, and $3,867.50 is the employer portion. Since there is also a CPP2 as of January 1, 2024, that is a maximum contribution of up to an additional $376.

The EI allows you to insure up to a specific amount of income each year. In 2024, the maximum amount of income you can insure is $63,200. The EI contribution rate is 1.66%. Since you only pay the maximum employee contributions, the most you would pay for 2024 is $1,049.12 ($63,200 x .0166 = $1,049.12).

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