Going self-employed — whether as a freelancer, contractor, consultant, or small business — comes with real tax obligations that most people are not prepared for. This guide explains what you owe, when you owe it, and how to minimize your bill legally.
How Self-Employment Income Is Taxed
Unlike an employee, no one withholds tax for you. You are responsible for paying:
| Tax | Rate | Notes |
|---|---|---|
| Federal income tax | 15%–33% | Progressive on net income |
| Provincial income tax | 5%–25% | Varies by province |
| CPP contributions | 11.9% (self-employed both shares) | On net self-employment income over $3,500 |
| EI | Optional | If you opt in: 1.66% × 1.4 premium |
Total effective tax rate for most self-employed: 30–45% depending on province and income level.
Self-Employed CPP: The Big Surprise
As an employee, your employer pays half of CPP. Self-employed, you pay both shares:
| Income | CPP (employed, employee share) | CPP (self-employed, both shares) |
|---|---|---|
| $40,000 | ~$2,200 | ~$4,400 |
| $60,000 | ~$3,500 | ~$7,000 (up to the ceiling) |
| $73,200+ | ~$3,867 | ~$7,735 (max) |
This is often the biggest shock for first-year self-employed people.
How Much to Set Aside
The safest approach: put 25–35% of every payment into a dedicated tax savings account.
| Annual Net Income | Approximate Tax Rate | Set Aside |
|---|---|---|
| $30,000 | ~22% | $7,000–$8,000 |
| $50,000 | ~30% | $15,000 |
| $75,000 | ~35% | $26,000 |
| $100,000 | ~40% | $40,000 |
Includes federal + provincial income tax + CPP combined. Rates shown are for Ontario. Varies by province.
Open a separate tax savings account — HISA at EQ Bank or Wealthsimple. Transfer your set-aside % immediately when invoices are paid.
Your Self-Employment Tax Return: T2125
Self-employed income is reported via the T2125 (Statement of Business or Professional Activities) form, filed with your T1 personal return.
| Section | What You Report |
|---|---|
| Gross income | All revenue before expenses |
| Business expenses | Deductible expenses |
| Net income | Gross minus expenses — what is taxed |
| Business use of home | Home office deduction |
| Vehicle expenses | Business portion of vehicle costs |
Most tax software (Wealthsimple Tax, TurboTax) guides you through T2125 step by step. Use the self-employed tax calculator to estimate your total bill before filing.
Business Deductions: What You Can Claim
This is where self-employment pays off — you can deduct legitimate business expenses.
Common Self-Employment Deductions
| Expense | Deductible | Notes |
|---|---|---|
| Home office | Portion of rent/utilities | Based on % of home used for work |
| Cell phone | Business % | Split personal vs business use |
| Internet | Business % | Split personal vs business use |
| Computer/equipment | 100% or CCA | Immediately or amortized |
| Software subscriptions | 100% | Must be for business |
| Professional fees (CPA, lawyer) | 100% | Business-related only |
| Professional membership dues | 100% | Industry associations |
| Business insurance | 100% | Separate from personal |
| Marketing and advertising | 100% | Website, ads, printing |
| Vehicle expenses | Business % | Keep a mileage log |
| Meals and entertainment | 50% | With client, business purpose |
| Training and education | 100% | If related to current work |
| Tools and supplies | 100% | For the business |
| Bank and transaction fees | 100% | Business account fees |
| Health insurance premiums | Deductible | Via extended health plan |
Home Office Deduction
Calculate the percentage of your home used exclusively for work:
| Method | Formula | Example (1 room in 10-room home) |
|---|---|---|
| Room method | Work rooms ÷ total rooms | 1/10 = 10% |
| Square footage | Work area ÷ total area | 150 sqft / 1,500 sqft = 10% |
Apply that percentage to: rent, mortgage interest, utilities, property taxes, maintenance.
Example: 10% × $1,800/month rent × 12 = $2,160 home office deduction
🔴 Important: Home office must be used primarily for work. Shared living spaces (dining room, kitchen) generally do not qualify.
Vehicle Expense Deduction
If you use a vehicle for business, track your mileage:
| Record | What to Track |
|---|---|
| Mileage log | Date, destination, purpose, km driven |
| Total annual km | Odometer at start + end of year |
| Business km | From mileage log |
| Business use % | Business km ÷ total km |
Apply the business use % to: gas, insurance, parking, maintenance, lease/loan interest, depreciation (CCA).
GST/HST: Registration and Collection
When to Register
| Threshold | Action |
|---|---|
| Revenue over $30,000 in 12 months | Must register for GST/HST |
| Revenue under $30,000 | May register voluntarily (to claim ITCs) |
Once registered, you collect GST/HST from clients and remit it to the CRA — it is not your money.
GST/HST Rates
| Province | Rate |
|---|---|
| Ontario, BC, NS, NL, NB, PEI | 13–15% HST |
| Alberta, QC (QST separate), SK, MB | 5% GST + provincial |
How to Register
Register online at My Business Account or call CRA Business Registration at 1-800-959-5525.
Input Tax Credits (ITCs)
Once registered, you recover GST/HST paid on business expenses:
Example:
- You collect $5,000 GST from clients
- You paid $800 GST on business expenses
- Net remittance to CRA: $4,200
Filing Frequency
| Annual Revenue | Filing Frequency |
|---|---|
| Under $1.5M | Annual |
| $1.5M–$6M | Quarterly |
| Over $6M | Monthly |
Tax Instalments
If you expect to owe more than $3,000 in federal tax ($1,800 in QC), the CRA will require quarterly tax instalments:
| Due Date | Payment |
|---|---|
| March 15 | Q1 instalment |
| June 15 | Q2 instalment |
| September 15 | Q3 instalment |
| December 15 | Q4 instalment |
Failing to pay instalments results in interest charges. In your first year of self-employment, instalments are not required — but they may be required in your second year based on year one income.
Record Keeping Requirements
The CRA requires you to keep business records for 6 years from the end of the tax year.
| Records to Keep | How Long |
|---|---|
| All receipts and invoices | 6 years |
| Mileage logs | 6 years |
| Bank statements | 6 years |
| T2125 and supporting worksheets | 6 years |
| Contracts with clients | 6+ years |
Tools for record-keeping:
- Wave Accounting (free)
- QuickBooks Self-Employed ($20/month)
- FreshBooks ($20+/month)
- Google Sheets (manual)
Should I Incorporate?
Incorporation is worth considering when:
| Signal | When to Think About It |
|---|---|
| Net income over $100,000+ consistently | Tax deferral savings become significant |
| Multiple clients / growing | Liability protection matters |
| Plan to hire employees | Corporate structure needed |
| Want to invest inside corporation | Deferral on investment income |
Incorporation has costs: ~$1,500–$3,000 to set up, $1,500–$4,000/year for corporate tax return. Worth it once income exceeds ~$100K.
See our guide: Should I Incorporate My Side Hustle?
Filing Deadline for Self-Employed
| Filing Type | Deadline |
|---|---|
| T1 return (self-employed) | June 15 |
| Taxes owing | April 30 (even though filing deadline is June 15) |
If you owe money and wait until June 15 to pay, interest accrues from May 1.