By Susan Ward. Small Business: Canada Expert
Susan Ward is a business writer and experienced business person; she and her partner run Cypress Technologies, an IT consulting business, providing services such as software and database development.
Read more about Susan's current and past work on her Google Profile if you like: Susan Ward .
Being an independent contractor completely changes your income tax situation, as the author of this question realizes.
And if you’re a typical contractor (or any kind of small business owner), one of the hardest things about your tax situation is the variability of your income.
If your income fluctuates from month to month, you’ll be especially interested to read my answer to this question, where I suggest one method any small business owner can use to estimate their tax bill.
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Reader Question: I am married and a mother of three. I am working for someone who calls me an independent contractor. It’s my responsibility to pay my own taxes and I don’t know where to start.
My husband brings home $495.00 a week after taxes and he claims the children. I make anywhere from $400 one week to $800 one week before taxes and have no idea what I should be putting aside. I am at a loss and losing sleep over this. I don’t want to do anything wrong.
Signed: Very Confused
First of all, don't panic. Doing and filing income tax in Canada for a small business such as yours is really pretty simple.
When it comes to doing your Canadian income tax, basically you figure out what your business income is first (using Form T2125 which is part of your T1 income tax form), and see if you have a profit or a loss.
To do this, you record all your business income and your business expenses on Form T2125 as directed. (This Business Expenses Index lists many common business expenses and explains the income tax deductions rules relating to each expense.)
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If you have a profit it gets added to your other income; if you have a loss, it gets subtracted.
My article, Your First Business Income Tax Return will lead you through the process of completing your T1 return.
To learn more about business expenses etc. see my piece Canadian Income Tax and Your Small Business .
How to Estimate How Much Money to Set Aside for Income Tax
As for your sleeping problem, you can approximate how much money you need to set aside by estimating your income and your tax bracket.
If you made
$400 a week all year, your income before tax would be $22,400 - so from what you've said this is the lowest your income would be.
If you made $800 a week all year, your income before tax would be $44,800, the highest your income would be.
So we can guesstimate that your income would be in this range and use these figures to see approximately how much tax you will pay by using the Canada Revenue Agency's Canadian income tax rates for individuals which say that the federal tax rates for 2014 are:
15% on the first $43,953 of taxable income, +
22% on the next $43,954 of taxable income (on the portion of taxable income over $43,953 up to $87,907.
So you want try to put aside at least $3,360 ($22,400 x 15%), and it would be better if you could put aside $6,720 ($44,800 x 15%) to cover your potential tax bill.
Now it's not quite that simple, because this guesstimate does not take into account provincial taxes, which vary depending on what province you're in, or the fact that presumably you're going to have various income deductions that will lower your net income.
But at least this method will give you some idea of how much to set aside so you can get more sleep.
The second year will be easier, because once you've filed your income tax as a business, the Canada Revenue Agency will put you on the instalment plan, so to speak, and send you notices every quarter telling you how much tax to pay each time.
Hope this helps.
All the best,
Do you have a question about starting or running a small business that you would like me to answer? Email it to me .
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While Susan Ward makes every effort to offer accurate, common-sense information and advice on this website, please note that she is not an accountant or a lawyer, and the content on the site, while authoritative, is not guaranteed for accuracy and legality, and is not to be construed as legal advice.
Also note that this website has a world-wide audience and laws and regulations vary from country to country, so the site cannot be definitive on all of them for your situation. When in doubt, always seek advice from legal and/or financial professionals or assistance from the appropriate governmental resources, to make certain your legal interpretation and decisions are correct. The information on this site is for guidance, ideas, and assistance only.
Where to From Here
Learn More About Canadian Income Tax: