Tips and Tricks to Help You Prepare Your Self-Employment Tax Return

Do you have self-employment income or employment income?

Before we dive into the nitty-gritty of self-employment tax, let’s see how the Canadian government defines “self-employment income” (also called “business income”).

According to the Canada Revenue Agency (CRA), you have business income if you act as an:

• Independent contractor
• Sole proprietor
• Member of a business partnership

So, if you’re a freelancer, a consultant, a home-based business owner, or a gig economy worker, you have self-employment income. A defining factor of business income is that it is earned with the intention of making a profit and you have evidence to support that intention. 

On the other hand, employment income includes money earned from wages and salary received from an employer.  

How is self-employment tax calculated?

When you’re self-employed, there’s no employer to send you a T4 slip and deduct taxes from your pay. You have to keep track of your income, calculate the estimated tax payments, and deduct business expenses related to your work.

Let’s take a look at the taxes on self-employment income and how to calculate them. 

1. Federal and provincial income tax

Canada has a progressive income tax system, so your tax rate depends on how much you earn each year. Federal tax rates are as follows:

Your provincial tax rates will vary based on the province or territory you live in. 

2. Goods and services tax/harmonized sales tax (GST/HST)

You have to register for GST/HST number as a self-employed person if your worldwide gross revenue is more than $30,000 in 3 consecutive months or in 4 consecutive calendar quarters (not in the same calendar year).

If you have a taxi business or provide ride-sharing services, you must register for GST/HST regardless of your income.

3. Canada Pension Plan (CPP) contributions

While the Canada Pension Plan (CPP) is not a tax, it is a mandatory contribution for all Canadian workers over the age of 18 who earn more than $3,500 annually. People with employment income pay half of the CPP and their employers cover the rest. However, self-employed individuals have to contribute the entire amount themselves.

The contribution is a particular percentage of wages above $3,500, and this percentage rate changes every year. For the current tax year of 2023, the self-employed CPP contribution rate is 11.90%, with the maximum annual contribution being $7,509.

For 2024 and 2025, the contribution rate will stay the same at 11.90% but the maximum annual contribution will be $7,735 and $7,878, respectively.

Which tax forms are needed for self-employed individuals?

Here are the key tax forms you need to file self-employed taxes:

Form T2125 

You need the T2125 tax form, also known as the “Statement of Business or Professional Activities,” to calculate your gross income and net income. 

Gross income is the total amount you earn before subtracting any deductions or expenses. Net income is the amount you get after deducting eligible tax credits from gross income. You pay federal and provincial taxes on net income. 

If you have more than one business activity, you have to fill out a separate Form T2125 for each activity.

T1 General Form

After completing Form T2125, you can use the net and gross income figures to complete lines 13499 to 14300 of your T1 General Form. If you have a loss, you have to show it in brackets.

You must include all of your income on the T1 Form for tax purposes. For instance, if you have both employment income and a side hustle, you must report both income sources on the respective lines of the same T1 General Form. 

GST/HST return

To report the GST/HST tax you collected from customers, you have to submit a GST/HST return. There are multiple ways to file GST/HST, but be sure to check whether you are required to file online. 

To reduce paperwork and bookkeeping costs, most small businesses use the quick method of accounting to calculate the GST/HST payment. 

Form TP-80-V

If you are a self-employed person in Quebec, you have to either enclose your financial statements or fill out Form TP-80-V, Business or Professional Income and Expenses. You also need to report your business income on the province’s income tax return, TP-1-V.

Tax deductions for self-employed workers

When you’re earning business income, you can claim certain expenses on your T2125 Form to lower your taxes. Here are some common expenses you can claim:

• Advertising expenses, such as flyers, business cards, and online marketing
• Vehicle expenses, such as gas, insurance, and maintenance 
• Travel expenses, including public transportation fees, meals, and hotel costs
• Office supplies, such as stamps, pens, and paper clips
• Startup costs, including inventory, machinery, and equipment for standard business operations
• Commercial insurance premiums for buildings, machinery, and equipment
• External professional advice, such as accounting and legal fees

The CRA website has a list of all the business expenses you can deduct from your income.

How to file self-employment taxes online

You can file your self-employment taxes using a CRA-approved online tax software, such as TurboTax. If you or your spouse or common-law partner are self-employed, you have until June 15, 2024, to file your income tax return. However, you must pay any taxes you owe to the CRA by April 30.