How much money do I need to set aside for my taxes as a Canadian freelancer, contractor, or business owner?

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 return⁴.

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.

Additional Considerations

GST/HST Registration: If your business earns more than $30,000 in a year, you must register for Goods and Services Tax (GST) or Harmonized Sales Tax (HST) and charge it on your sales. This means you'll need to collect this tax from your clients and remit it to the CRA. Even if you earn less, you can voluntarily register to claim input tax credits on your business expenses⁴.

Business Expenses: Keep track of all your business-related expenses, as these can be deducted from your income, reducing your taxable income. Common deductible expenses include office supplies, software subscriptions, and marketing costs².

Quarterly Payments: If you expect to owe more than $3,000 in taxes for the year, you may need to make quarterly tax payments. This helps you avoid a large tax bill at the end of the year and potential penalties for underpayment¹.

Keeping Records

Maintaining accurate records of your income and expenses is vital. The CRA recommends keeping all receipts and invoices for at least six years. This will not only help you when filing your taxes but also in case of an audit³.

Conclusion

Setting aside money for taxes as a Canadian freelancer, contractor, or business owner can be straightforward if you understand your obligations. By planning ahead and keeping good records, you can ensure that you meet your tax responsibilities without any surprises. Remember, consulting with a tax professional can provide personalized advice tailored to your specific situation.