Personal Tax: Types Of Employment In Canada
In Canada, there are various types of employment. The distinction is important because it affects how to calculate your tax payable. Before diving into personal taxation, lets review the definition of self-employed for tax purposes versus an employee:
- Self-employed: The individual operates a business and has a client-business relationship with entities who pay them. The business is a sole proprietorship or unincorporated partnership not a corporation, partnership or other similar legal entity. It is the self-employed individuals responsibility to track income and expenses. At the end of the tax year, a self-employed individual reports this information to the Canada Revenue Agency . A tax refund or obligation will arise which the individual claims or pays.
- Employee: The individual works for another entity, referred to as the employer. The employer is responsible for remitting deductions like Canada Pension Plan , Employment Insurance , and income tax from gross pay. At the end of a tax year, the employer will provide the employee with a summary of their pay, known as a T4 slip. The employee will use the T4 to complete their annual tax return.
The Future Of Tax In Canada
The government is always looking for ways to increase revenue, and one way to do this is by raising taxes. The other way to have a budget surplus is to decrease expenses. As the Baby Boomer generation begins to retire, the government will have to find ways to reduce costs, as there will be fewer people working and paying taxes. One way the government may do this is by raising the retirement age.
Another method could be changing the eligibility requirements for specific programs, such as Old Age Security or Employment Insurance. The government may also choose to reduce the amount of money in tax credits or deductions.
No matter what changes the government makes to taxes in the future, it is essential to remember that taxes are necessary to fund the many services that the government provides, such as education, health care, and infrastructure.
What Is The Cpp
The CPP, short for the Canada Pension Plan, is a mandatory public retirement pension plan run by the Government of Canada. All Canadians over the age of 18 with employment income are required to contribute towards the CPP, with the exception of those employed in Quebec. Instead of the Canada Pension Plan, the Province of Quebec administers a similar pension plan, called the Quebec Pension Plan.
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Payroll Deductions Online Calculator
Use the Payroll Deductions Online Calculator to calculate federal, provincial , and territorial payroll deductions. It will confirm the deductions you include on your official statement of earnings.
You assume the risks associated with using this calculator. The reliability of the calculations produced depends on the accuracy of the information you provide.
The Quebec provincial government administers its provincial income tax, Quebec Pension Plan , and Quebec Parental Insurance Plan . To calculate provincial payroll deductions for Quebec, use the WebRAS program from Revenu Quebec.
Here Are The Steps To Calculating The Self
Step 1: Calculate net earnings.
Gross earnings – business expenses = net earnings
Step 2: Calculate the amount that equals 92.35% of your net earnings, which is the amount subject to self-employment tax.
Net earnings X 92.35% = the amount subject to self-employment tax
Step 3: Calculate the Social Security portion of self-employment tax.
Only part of your earnings is subject to Social Security, which for 2020 is the first $137,700 of earnings.
Amount subject to self-employment tax X 12.4% = Social Security tax
Step 4: Calculate the Medicare portion of self-employment tax.
Amount subject to self-employment tax X 2.9% = Medicare tax
Step 5: Calculate the entire amount of self-employment tax owed
Social Security tax + Medicare tax = self-employment tax owed
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How Often Should You Calculate And Re
If youâve just started your business, you will need to estimate your net earnings in order to determine the self-employment tax and to make quarterly payments. If youâve been in business, you will have a good sense of annual income to determine the quarterly payments.
However, itâs important to keep meticulous records of your expenses all through the year. You donât want to wait until tax season and then scramble to find expense records. After all, deducting legitimate expenses from your gross earnings will lower your net earnings and ensure your tax bill is lower.
How Much Tax Do You Pay When You Sell A House In Alberta
If the house is your main residence, you do not have to pay taxes, because a so-called main residence exemption applies. This is the case if the property was exclusively your principal residence in each year you owned it.
If the house is not your principal residence, you must report the portion of the capital gain attributable to the years in which you did not designate the property as your principal residence.
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Expanded Penalty Waiver Available If 2018 Tax Withholding And Estimated Tax Payments Fell Short Refund Available For Those Who Already Paid 2018 Underpayment Penalty
The IRS lowered to 80 percent the threshold required for certain taxpayers to qualify for estimated tax penalty relief if their federal income tax withholding and estimated tax payments fell short of their total tax liability in 2018. In general, taxpayers must pay at least 90 percent of their tax bill during the year to avoid an underpayment penalty when they file. On January 16, 2019, the IRS lowered the underpayment threshold to 85 percent and on March 22, 2019, the IRS lowered it to 80 percent for tax year 2018.
This additional expanded penalty relief for tax year 2018 means that the IRS is waiving the estimated tax penalty for any taxpayer who paid at least 80 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two.
Taxpayers who have not filed yet should file electronically. The tax software was updated and uses the new underpayment threshold and will determine the amount of taxes owed and any penalties or waivers that apply. This penalty relief is also included in the revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
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How To Calculate Your Cpp Contributions
Personally, I just use this tax calculator to ensure Im saving enough for income taxes and my Canada Pension Plan contributions, but if youre curious how the math works, here goes!
For your CPP premiums, you are required to pay these if you are 18 or older and earn more than $3,500/year. Its also interesting to note that if you are an employee, you only pay half of your CPP premiums and your employer pays the other half. When youre self-employed, you arent so lucky and have to pay the full 10.9%. You are required to pay 10.9% on your gross income , minus the $3,500 basic exemption amount. Heres an example:
You earned $100,000 in business revenue
You spent $30,000 on business expenses and operating costs
Youre left with $70,000 in business earnings after expenses
Subtract the $3,500 basic exemption amount to equal $66,500
Multiply $66,500 by 10.9% to equal $7,248.50
$100,000 $30,000 = $70,000 $3,500 = $66,500 x 10.9% = $7,248.50
But thats not all! There is actually a ceiling for CPP premiums. The maximum amount a self-employed individual can contribute to CPP is $6,332.90/year as of 2021. Which means instead of paying $7,248.50 in CPP, you would actually only owe the maximum contribution amount which is $6,332.90.
Since CPP contribution amounts change every year, to keep up to date check out this CPP contribution rates, maximums and exemptions page on the governments website.
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If Youre A Freelancer Read This
As a freelancer, you depend on your clients to file Form 1099-NEC for you. When you total that 1099 income up, youâll get most of the income that you need to report on your tax return
When you hire subcontractors to take care of freelance work, the script is flipped. Itâs up to you to fill out and file Form 1099-NEC for every subcontractor you pay more than $600 during the course of the year.
The deadline for getting a Form 1099-NEC to a subcontractor is January 31st . All Form 1099-NECs must also be filed with the IRS by January 31st.
Further reading:Independent Contractors
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Who Has To Pay Self
The IRS indicates that sole proprietors or independent contractors must pay self-employment tax and file Schedule SE if either of these apply2:
- Your net earnings from self-employment were $400 or more
- You had church employee income of $108.28 or more
These rules apply regardless of taxpayer age even if you’re already receiving Social Security or Medicare. IRS Schedule C is used to calculate your net earnings while IRS Schedule SE is used to calculate how much self-employment tax you owe. Not sure if you’re self-employed? According to the IRS, if you received a 1099 form instead of a W2, you are considered self-employed.
Business Use Of Home Or Dwelling
Accountant and consultant Jéneen R. Perkins, principal of Éclat Enterprises LLC, in Milwaukee, Wisconsin, said most self-employed taxpayers’ businesses start as home-based businesses. Those people need to know portions of business costs are deductible, Perkins said, adding, It is very important that you keep track of expenses relating to your housing costs.”
If your gross income from your business exceeds your total expenses, then you can deduct all of your expenses related to the business use of your home, Perkins said. If your gross income is less than your total expenses, your deduction will be limited to the difference between your gross income and the sum of all business expenses you would pay if the business was not in your home. Those expenses could include telephone lines, the Internet, and other costs to do business.
You must also have a home office that is truly used for work. Hillis said the Internal Revenue Service may require you to document this.
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Tip #: Consider Deferring Your Business Income
This isnât a feasible option for everyone. But for those of you who invoice clients, consider delaying your December invoicing until the New Year.
Hereâs why: A payment you receive on December 31st has to be reported on your tax return by the following April. However, a payment you get on January 1st doesnât have to be reported until April of the following year. Thatâs 11 extra months!
Delaying your income by just a couple of days can give you lots of extra breathing room to plan for taxes.
Whats The Social Security Tax
Similar to the Medicare Tax, this is a portion of your self-employed tax that supports another government program â specifically, the Social Security program. Social Security is known for the cash benefits it provides to seniors, but it also plays a role in supporting the disabled and surviving spouses and children. One important thing to note is that Social Security Retirement Benefits are based on your highest 35 years of earnings in a lifetime. Your freelance income is counted into this formula the more you make and report as a self-employed freelancer, the closer youâll be to max out Social Security retirement benefits later in life!
Step 1 – calculated net earnings of $10000
Step 2 – Net earnings $10000 X 92.35% = the amount subject to self-employment tax
Step 3 – Amount subject to self-employment tax X 12.4% = Social Security tax
Step 4 – Amount subject to self-employment tax X 2.9% = Medicare tax
Step 5 – Social Security tax + Medicare tax = self-employment tax â
Step 1 – calculated net earnings of $25000
Step 2 – Net earnings $25000 X 92.35% = the amount subject to self-employment tax
Step 3 – Amount subject to self-employment tax X 12.4% = Social Security tax
Step 4 – Amount subject to self-employment tax X 2.9% = Medicare tax
Step 5 – Social Security tax + Medicare tax = self-employment tax â
Step 1 – calculated net earnings of $50000
Step 2 – Net earnings $50000 X 92.35% = the amount subject to self-employment tax
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Larger Budget Deficits Historically End With Increased Income Taxes
Like you, the Government of Canada must earn income to fund expenses. The government earns income through taxes, such as on income, corporations, capital gains and sales tax. The government invests in social projects, infrastructure, education and more with this income. The balance between income and expenses is known as the federal budget. When the costs are higher than income in a given year, there is a budget deficit. If income exceeds expenses, there is a surplus.
If there is a deficit, the government must borrow money to make up for the difference in expenses. To borrow money, the government issues T-Bills which you can think of as IOU notes that the government promises to repay in the future. To pay off debt, the government generally needs to increase income, which means higher taxes. Personal income taxes are a crucial part of the government’s revenue. At its peak, they made up 40.8% of federal revenue in 1990. The following section will explore the history of personal income tax changes in Canada related to the federal budget.
What Is A Tax On Split Payment
A tax on split income applies to children born in 2003 or later, as well as to amounts received by adult individuals from an affiliate. In cases where TOSI applies, the disability tax credit, the dividend tax credit, and the nonresident tax credit may be used to reduce the tax payable for the year. Form T1206 can be used to obtain more information.
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How Does The Cpp Work
You will contribute towards the CPP from your employment earnings from age 18 to 70. The CPP Investment Board then invests CPP funds. Once you retire, you will then receive a monthly retirement pension that is equal to a certain percentage of your lifetime average earnings.
The base CPP benefit provides a monthly pension of up to 25% of your contributory earnings for the best 40 years of earnings. With changes enhancing CPP contributions, the monthly pension amount can rise to up to 33.33% of your contributory earnings. This pension amount counts as income, and so you must pay income tax on your CPP benefit.
The earliest that you can receive your retirement pension is when you turn 60 years of age. If you have a disability, you may receive the CPP disability benefit if you are under the age of 65, or the CPP post-retirement disability benefit if you have already started to receive your CPP retirement pension.
If you start receiving your pension between 60 and before you turn 65, your pension amount will be permanently reduced at a rate of 0.6% for every month before age 65, for a maximum reduction of 36%.
Every month after age 65 permanently increases your pension amount by 0.7%, up to a maximum of 42% when you turn 70.
How To Calculate How Much Youll Owe If Youre Self
Lets talk specifics here. You may think that you have to pay tax on every dollar your business earns, but thats actually not the case. Youre only required to pay income tax on your business earnings after business expenses. Moreover, you can lower your average tax rate and thus your tax bill even more by taking advantage of other personal tax deductions and tax credits, such as claiming some of your RRSP contributions as deductions.
For example:
Lets say youre a self-employed web designer in Ontario and you earned $100,000 in business revenue. Business revenue is the total amount of income your business generated by selling goods and/or services. Business revenue does not include any sales tax collected .
You spent $30,000 on business expenses and operating costs.
That leaves you with $70,000 in business earnings after expenses. Using this free tax calculator, youll find that your average tax rate would be 26.66%, and you should set aside $18,662 to pay your federal and provincial taxes and your CPP premiums.
Now, lets say you also contributed $10,000 to your RRSP which you claim as a tax deduction.
As you can see, your RRSP deduction lowered your average tax rate to 22.42%, thus decreasing your tax bill to only $15,697.
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Tip #: Dont Miss Your Business Write
Most write-offs are missed because people donât keep track of what they buy for work. In the frenzy to pull everything together before taxes are due, eligible write-offs tend to fall through the cracks.
Do yourself a favor and start keeping up with your expenses now. More of your purchases count as business expenses than you might realize, and they could significantly lower your taxable income. Here are a few examples of business tax deductions you can take:
- ð³ Bank and credit card fees on accounts you use for work
- ð Computers and electronic accessories
- ð» Platform fees, from Shopify to Patreon
If youâre wondering where to start with this, youâve come to the right place. The Keeper app is specifically designed for gig and freelance workers.
The app will find and sort all of your business write-offs automatically. When youâre ready to file, all you have to do is upload your 1099s, and weâll handle the rest.