When you're a freelancer, contractor, or business owner in Canada, understanding how much to set aside for taxes is crucial. The Canada Revenue Agency (CRA) provides guidelines to help you navigate your tax obligations effectively. Here's a friendly overview of what you need to know.
Understanding Your Tax Obligations
As a self-employed individual, you are responsible for reporting all your income and paying taxes on it. This includes income from freelance work, contracts, and any other business activities. You will need to complete Form T2125, which is the Statement of Business or Professional Activities, along with your income tax return[4].
Setting Aside Money for Taxes
A good rule of thumb is to set aside 25% to 30% of your gross income for taxes. This percentage accounts for federal and provincial taxes, as well as contributions to the Canada Pension Plan (CPP).
- Federal Income Tax: The federal tax rates are progressive, meaning they increase with income. For 2023, the rates range from 15% on the first $53,359 of taxable income to 33% on income over $235,675.
- Provincial Income Tax: Each province has its own tax rates, which can vary significantly. For example, Ontario has a rate starting at 5.05% for the first $47,630 of taxable income, while British Columbia starts at 5.06% for the first $45,654.
- CPP Contributions: As a self-employed individual, you must contribute both the employer and employee portions of CPP, which is a total of 10.9% on your income up to a maximum annual limit.