income tax for self employed

Income Tax Planning for Self-Employed Business Owners and Freelancers

In 2020, approximately 3.2 million Canadians filed their income tax as self-employed workers. If you’re self-employed, you know the realities of managing a business. Staying current with the rules that apply to your business, doing the administrative work your business requires and keeping up with your income tax for self-employed business owners can be challenging.

For several reasons, income tax can be neglected or forgotten, but taxes don’t go away. Canadians who earn income from employment or self-employment are required to file a tax return and will either pay income tax or get a tax refund if they overpay.

Income tax for self-employed Canadians is more complex than for employees. Employees have their taxes, Employment Insurance (EI), and Canada Pension Plan deducted from their pay by their employers. The employer submits the monies to the Canada Revenue Agency on behalf of the employee. The money is put towards the income tax the employee owes.

When you are self-employed, you are responsible for paying your taxes to the CRA. You also pay your CPP and EI if you opt-in to the EI program. Unfortunately, owing taxes can cause serious financial problems if you’re self-employed. However, there are several strategies you can choose to make paying your taxes much easier.

Solving Tax Problems

Tax is not everyone’s area of expertise. As a result, you may need more knowledge, time, or cash to devote to keeping your tax obligations up to date.

Lack of Knowledge

Tax laws in Canada are complicated. They are even more complex when you’re self-employed. Unless you are a bookkeeper, accountant, tax lawyer, or someone who has worked with taxes, you may find managing your taxes overwhelming.

Time Crunch

Self-employment often requires long hours. Therefore, performing administrative tasks is a distraction when working on your business. In addition, you usually have more immediate administrative tasks to look after rather than income tax. That task can include payroll, billing, and ordering supplies.

Cash Shortage

When you’re self-employed, your income can be unpredictable. You could earn a lot of income in some months, while your business may generate less in other months. As a result, you might not have enough working capital to pay your ongoing expenses and cover emergencies that might come up. Working capital is defined as the difference between a business’s current assets and current liabilities.

If your business is short on working capital to meet expenses, you might use money meant for income tax to meet current financial obligations. Alternatively, you may not set aside money for income taxes because you’re short on funds. Using money meant for taxes for other purposes can leave you without the funds to pay your taxes when they are due.

Strategies for Self-Employed and Freelancers

There are several strategies you can consider to ensure you don’t fall behind with your income tax. Some common ways to manage your taxes include keeping receipts, paying in installments, setting aside a portion of your income to cover taxes, filing on time every year, and hiring a bookkeeper.

A record-keeping system

You will need receipts for any item you want to claim as a tax deduction. Having an organized filing system can help you save time when you file your taxes since you won’t need to look for paperwork to support your claims.

Pay your taxes in installments

The CRA may require you to pay your income tax in installments if you’re self-employed. CRA installment payments are due quarterly on March 15, June 15, September 15, and December 15, with some exceptions. The money you pay in installments goes towards your final tax bill. You can pay your installments monthly as well. Paying your installments monthly will avoid a nasty shock at the end of the year.

Set aside a portion of your income to cover taxes

You can set aside a certain percentage of your income into a separate account. Your accountant can tell you how much of your income you should transfer to the account to cover your income taxes. This strategy is only effective if you don’t access the funds for other purposes.

File your tax returns every year

Filing your taxes every year by the due date will help keep the amount you owe in income tax manageable. Income tax for self-employed individuals is due June 15, but you must pay any taxes by April 30. Annual tax filings will keep you current regarding the taxes you owe, any benefits you are entitled to, and your RRSP and TFSA contribution room.

Hire a bookkeeper

Bookkeepers provide many valuable services to help manage your business. Qualified bookkeeper can help with:

  • Billing clients and customers.
  • Account reconciliation.
  • Keeping track of the business’s cash flow.
  • Payroll.
  • Paying bills.
  • Administrative reporting.
  • Preparing your income tax return and tax filings.
  • Remitting self-employment taxes in installments.

Having a bookkeeper do these tasks for you will help save you the time you can devote to your business instead. Your bookkeeper will also ensure you’re aware of your income tax situation.

What happens if you don’t pay your tax bill?

The Canada Revenue Agency has several options it can exercise if you don’t pay your taxes owing. If your tax filings are late or the amount of taxes is overdue, the CRA will charge a late penalty and interest on the amount you owe. The interest is daily compound interest and can substantially increase the amount you owe.

If they don’t receive your taxes owing, they have the right to:

  • Garnish your bank account.
  • Garnish your income.
  • Start legal action against you.
  • Seize your assets and sell them.

Can’t pay your income tax bill?

Late tax filings and overdue tax balances are subject to interest and penalties. The CRA adds interest and penalties to your tax balance, increasing your debt. The higher amount owing will be even more challenging to pay. So, what can you do if you can’t pay your income tax bill?

If you prepare your tax returns, you can take your taxes to an accountant who can review them to see if you missed any deductions or tax reductions you are entitled to. Some accountants specialize in income tax for self-employed workers and can let you know if you missed any deductions you are entitled to.

Once you know how much you owe, you can contact the CRA to discuss your options. It’s very important to stay in contact with the CRA if you owe income tax and are struggling to pay it. They can help set up a payment plan for you to get your taxes up to date.

If your tax bill is too large to manage or you want other options to deal with the amount you owe, please get in touch with Derek Chase and Associates at You can book a free, confidential consultation with a Licensed Insolvency Trustee who can discuss the options available to you in order to deal with your tax debt.

Derek L. Chase, CPA, CA, LIT

Being able to offer debt help assistance to individuals and corporations on a more intimate basis was a driving force in completing a “second CPA” by becoming licensed by the Federal Government as a Licensed Insolvency Trustee (previously Trustee in Bankruptcy) in 1997. It is extremely satisfying to be able to witness lives change for the positive due to a restructuring of financial affairs.