Setting aside self-employment income for tax purposes

Just started working for myself (self-employed). How much money should I put aside for income tax?

Congratulations on your new career!

The amount of income tax and other deductions such as Canada Pension Plan (CPP) will vary a bit depending on your level of income. Assuming you’re making under $100,000 per year then I recommend putting aside about one-third (33%) of your income for income tax purposes. Generally speaking I find that self-employed people tend to end up paying around 25% of their net income (gross sales, minus work expenses) for taxes. Then another 10% of income for CPP.

As an example, if you think you’ll make about $60,000 this year, set aside about $20,000 for taxes. If you will likely make $90,000 in total (after business expenses) then save $30,000 for taxes.

One tool I find highly useful is this Tax Tips calculator. The form looks intimidating at first, but you usually just need to fill in a few fields. Tell it which province you live in, your year of birth and then scroll down to the line marked “Self-employment income”. At the bottom of the page it’ll show you how much you’re likely to owe for taxes, CPP, and EI payments.

The Tax Tips calculator is offering an estimate, it’s not going to be exact, but I’ve found it to be within a few hundred dollars each year I’ve used it to estimate how much I should put aside for end of year taxes.

Something else to keep in mind is, once you reach a level of income where you’re going to owe more than $3,000 (or $1,800 for those of you who live in Quebec) then you’ll be asked to pay income tax by quarterly instalments instead of once per year. In other words, instead of paying a lump sum in April of next year, you’ll be asked to pay a smaller amount once every three months. Details on this, how to calculate how much you owe, and how to pay instalments can be found on the Canada Revenue Agency website.

When you pay in quarterly instalments you still need to file your yearly tax return in April and may get a bill or a refund at that time as usual. Though if your quarterly instalments were calculated accurately and paid on time you probably won’t owe any additional money when you file your tax return paperwork in April.