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Self-Employment Taxes

Expert: Merrilyn Reid

Charles asked:

I am presently employed but intend to make crafts in my home for a home-based company. I am going to have to start withholding taxes as the people I am currently working for do not. I need to know where to get the forms, etc. Will I need to file self-employment taxes?

Could you please let me know where I can find this information as I have never filed self-employment taxes before. Do I need special forms? Where can I get these forms?

Merrilyn Reid answered:

Charles, your questions present some interesting issues. The answers will vary according to whether your self-employed craft business operates as a sole proprietorship (unincorporated) or as a corporate entity (incorporated). I will address both scenarios.

As a sole proprietorship, you would pay income tax and Canada Pension Plan contributions (both employer and employee portions) when you file your personal income tax return. These amounts are determined by the business net income that is reported on Form T2124 of your personal income tax return. To view Form T2124, you can go the Canada Customs and Revenue Agency website. Click on Forms and publications, All forms, and T2. Scroll down to T2124. (You will need Adobe Acrobat Reader to download this form.) Alternatively, visit or write your local Tax Services Office to obtain the booklet entitled Business and Professional Income. Form T2124 is included in this booklet.

The importance of viewing Form T2124 form is to ensure that you are aware of all categories of deductions before you start your business. I have often found that a client will engage my services after having operated for a year and was unaware that he could have claimed more deductions if only he had saved the proper receipts.

Depending on the initial success of your business, you may have substantial tax and CPP to pay at tax time. One way to shelter yourself from the shock a large tax bill is to save for these amounts in a separate bank account. (Put aside a percentage of your profits to pay the tax and CPP.) In the second year of operations, Canada Customs and Revenue Agency will notify you if you are required to make quarterly instalments. These instalments will go towards payment of next year's taxes and CPP.

As a corporation, you would deduct income tax, CPP and EI contributions from your employees (including yourself) and pay to the Receiver General by means of monthly remittances. In order to make these remittances, you must register for a business number. The payroll number is a subset of this business number. There are several ways to register online at the Canada Customs and Revenue Agency website, telephone 1-800-959-5525 or through your local Tax Services Office.

Generally, most small businesses start as sole proprietorships and I suspect that this will also be your situation. The only reason you would need to obtain a payroll number as a sole proprietor is if you hire employees other than yourself.

While your question doesn't mention registration beyond the issue of payroll, you should also consider the following: GST, home business license, home business insurance. Consult your accountant for the advantages and disadvantages of each of these types of registrations. Good luck with your home-based business!


About the author


Merrilyn Reid is a Calgary-based management consultant specializing in business process improvement, financing and accounting for entrepreneurial organizations. With extensive experience in public practice accounting and a Master of Business Administration degree in Enterprise Development from the University of Calgary, Merrilyn provides clients across a wide spectrum of industries with an integrated approach to solving problems and optimizing opportunities. Merrilyn can be reached via email at: reidm@cadvision.com.

 
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