What is the difference between self-employed and regular CPP?
Self-employed CPP is no different from CPP if you were employed by someone, the only difference is who is responsible for making and remitting the payroll deductions. If you are paid by an employer, the employer will usually make all necessary payroll tax deductions such as CPP, EI, worker’s compensation and any others mandated by their province of business. If you are self-employed, it is up to you to calculate your CPP contributions based on your income and remit them to the CRA. Paying CPP isn’t difficult, once you know the proper calculations. At any point, if you feel confused or overwhelmed, don’t hesitate to use a payroll service or to hire a tax preparer. The risks of doing this improperly dramatically outweigh the benefits of saving a few bucks.
What is CPP?
CPP is short for Canada Pension Plan, which is something all Canadian workers contribute money towards throughout their careers. The money is held in trust, invested by the government, and paid out to workers once they retire. Workers are eligible to start receiving their CPP as early as 60, and as late at 70. The amount received will differ depending on when a worker chooses to earn it. CPP is one of many payroll deductions you will make during your working life in Canada, along with EI, worker’s compensation and anything else your province mandates. You do not have the option to forego contributing to the CPP, and you do not have the option to forego receiving the CPP once you retire. Even if you contribute to your own retirement plan, such as an RRSP, or receive a defined-benefit or other pension, you still must contribute to, and eventually receive, CPP.
How is CPP calculated?
To calculate the amount of CPP you need to deduct and remit to the CRA, you must first determine your taxable gross pay, less any taxable benefits. This is the complete amount you earn in a year from all sources. Next, subtract the basic exemption. This will vary depending on your pay schedule. The CPP contribution rate for self-employed individuals is double that of employees since they are both the “employer” and the “employee”. Usually, employers pay a percentage as well as employees, but this arrangement is different as a self-employed person. As of 2024, this rate is 11.9% (combined employer and employee contributions), applied to net self-employment income between the basic exemption ($3,500) and the maximum pensionable earnings (which is $67,700 for 2024). CPP rates are frequently changing, so it helps to check government sources to be sure.
There are various circumstances which can affect the inputs of this equation, such as “drop-out months”. These are periods where you earned little or no income, such as when you were first starting out in your career, were sick/injured, unemployed for extended periods of time or acting as a full-time caregiver to your family. The government allows you to “drop out” these periods in the sense that they do not count towards the CPP you will eventually earn. The inclusion of drop-out months is just one variable among many others that will affect your calculation, so it helps to use tools such as the CRA’s Canadian Retirement Income Calculator. The CRA requires precise calculations for business expenses, with the threat of audits and other injunctive action always a possibility for scofflaws.
Is CPP the only deduction I need to make?
CPP is only one of various other deductions you will need to make as a self-employed individual. Like everyone else who legally earns money in Canada, you will need to pay income tax. In an employee/employer arrangement, this is withheld by the employer and remitted on your behalf with every pay cheque. As a self-employed individual, with a potentially fluctuating income, you must estimate your taxable income and pay the CRA in quarterly instalments. If you happen to miscalculate, adjustments can be made at tax time in the form of a balance owing or a refund. The amount you owe depends on a variety of factors, mainly how much you earn and where you are located.
If you earn more than $30,000 per year, you must also charge GST (and HST depending on where you live) on your products or services and remit this to the CRA. You must first register for a tax account with the CRA and receive a federal GST number before you are able to charge for, and remit, GST. You might also need to pay provincial or territorial taxes, depending on where you live and/or do business.
Even further complexity is introduced if you happen to live in, or do business in, Quebec. If this is the case, not only must you deal with the Canada Revenue Agency, you must also deal with Revenu Quebec. Quebec residents must remit provincial income tax and contributions to the Quebec Parental Insurance Plan (QPIP) to Revenu Quebec, as well as a Health Contribution Tax, which is based on income. This, in addition to the deductions you must make to the CRA.
Finally, while it isn’t mandatory, it is a good idea to contribute to Employment Insurance if you are self-employed. If you ever need to make EI claims or wish to receive EI payments (whether for parental leave, sickness, caregiving or for periods of unemployment), you must contribute to Employment Insurance. As of 2024, the contribution rate is approximately 1.63%. Many self-employed people choose to save money in a bank account and rely on their savings when others would typically rely on EI. Others prefer the stability, predictability and security offered by EI and do not mind the inconvenience of needing to make regular contributions, knowing the money is available and accessible whenever they need it. There is no one-size-fits-all solution.
What if I do not make self-employed CPP contributions?
You shouldn’t skip out on making CPP contributions if you are self-employed. The CRA can charge penalties and interest, compounded daily, until the debt is paid. Failure to pay can also mean you won’t receive as much CPP as you would normally be entitled to. In severe cases, you won’t receive any CPP. Finally, you might not end up receiving other benefits for self-employed Canadians, such as CPP disability benefits, or survivor benefits if you pass away. In other words, it is a bad idea to wilfully skip CPP contributions. The CRA tries to reach arrangements with Canadians who fall behind on their tax obligations, except in the most egregious cases.
