This is a hard question to answer! It entirely depends on the individual, but putting aside 25% to 30% of your self-employed income is a safe bet. If your income varies from month to month, we suggest setting aside 25% to 30% of each pay cheque to ensure you have enough to pay your taxes come tax season. If you work as a contractor, you might want to confirm that deductions aren’t already being made.
Setting aside this amount of money will allow you to pay off the following taxes:
- Federal Income Tax
- Provincial Income Tax
When tax season roles around, you will make payments on a T4A slip, whereas your employed friends will make payments on their T4 slip. Additionally, as a self-employed person, you will also have to fill out a Form T2125 to calculate your gross income, which is the total amount of money you earned for the year. This form also allows you to make allowable deductions to lower your taxable income for the year.
On a Form T2125, you will have to state:
- your sources of income
- description of your business
- income that comes from internet sales and revenue
- GST and HST you paid and received
- all expenses incurred while attempting to make a profit