If work for yourself or have a side hustle on top of your regular job, what does that mean for your taxes? For those working for an employer, tax time is relatively easy. You get a T4 and type in the relevant boxes into tax software, or simply forward your slips onto your accountant. But if you work a side hustle or all your income comes from self-employment or gig economy work, there are extra complications. You might worry if you’ve planned things out properly so you’re not hit with a big unexpected tax bill. I’ll outline how to handle taxes as a self-employed individual or side hustler and tips for managing your money leading up to then.

Taxes

Self-Employment

When you’re self-employed, which includes working gig and freelance jobs on the side, you are responsible for the tax deductions (income taxes, CPP and EI) an employer would calculate and remit on your behalf. As a self-employed individual, you don’t have to send money to CRA every time you receive income, but you do need to consider the taxes you’ll eventually owe.

I’ve seen a number of suggestions for people to save 30% of their income to cover taxes. While that’s a pretty good place to start, let’s get to the heart of where that estimate comes from. The amount of income taxes you owe will depend entirely on how much money you make. If you only make $5,000 in a year, you’ll owe nothing in income taxes. If you make $500,000, you’ll owe closer to 40%-48% in taxes, depending on your province. When running a business, you’ll likely have expenses associated with your income. You can deduct business related expenses from your income, so maybe instead of earning $500,000 in taxable income, you only pay tax on $400,000 because you had $100,000 in business expenses.

Total Income/Revenue $500,000
Business Expenses $100,000
Taxable Income $400,000

 

For today’s post, we’ll assume that after expenses, you earn $70,000 per year, which is about a 20% tax rate. That means 20% of all your income will have to be paid to the government for taxes.

Income (in Ontario) $70,000
Marginal Tax Rate 29.65%
Average Tax Rate 20%

 

Side Hustle

If you have a side hustle, you’ll need to estimate your total income from all sources. Your employer should deduct enough taxes for your regular job, but not enough for your side hustle income. Your side hustle income might also push you into a higher tax bracket.

Let’s take an example. Let’s say you make $75,000 through regular employment and an additional $10,000 through side hustles. In Ontario, your employment income puts you at the 29.65% tax bracket, which your employer will use to calculate your taxes. However, earning an additional $10,000 puts you into a higher tax bracket, 31.48%, starting at income of $77,313 in 2019. Therefore $2,313 of your side hustle income will attract a tax rate of 29.65% and the remaining $7,687 will be taxed at a higher rate of 31.48%.

Income Tax Brackets Marginal Tax Rate Side Hustle Income @ Each Tax Rate
over $47,630 up to $77,313 29.65% 77,313-75,000 = 2,313
over $77,313 up to $87,813 31.48% 85,000-77,313 = 7,687
Average Tax Rate on Side Hustle Income 31.06%

 

If you look at one of the calculators and see that you pay an average tax of 22%, you might be tempted to only save that amount for taxes from your side hustle income. However, you’ll need to save the marginal rate on the $10,000 side hustle income. Saving only 22% will mean you’ll be short cash when you get your tax bill.

CPP Contributions

When you’re self-employed (including freelance side hustles), you also have to pay CPP contributions out of your income (like your employer would deduct on your behalf). For self-employed individuals and side hustlers, you also need to pay the employer portion of CPP in addition to the employee portion. Previously, CPP contributions were 4.95% of your income above $3,500 (the basic exemption amount), up to a cap. In 2019, with the CPP enhancement, CPP contributions have gone up. These are now 5.10% for both the employee and employer in 2019, for a total of 10.2% on income up to $57,400. In 2020 they’ll increase again to 5.25%, until they reach 5.95% in 2023, or 11.9% total for self-employed individuals.

Year Employer/Employee rate Self-employed rate
2019 5.10% 10.2%
2020 5.25% 10.5%
2021 5.45% 10.9%
2022 5.70% 11.4%
2023 5.95% 11.9%

 

Self-Employment

For someone earning $70,000 in self-employment income, here’s how you’d calculate the amount you owe for CPP contributions:

Lesser of Income or
Maximum Pensionable Earnings
Basic Exemption Amount x Self-Employed Contribution Rate = Self-Employed CPP Contributions

 

$57,400 $3,500 x 10.2% = $5,497.80

 

Someone earning $57,400 or more in self-employment income would owe $5,497.80 in CPP contributions.

As a proportion of your $70,000 income, this would be 7.85% so you could save that amount each time you get paid.

CPP as Percentage of Income $5,497.80 = 7.85%
$70,000

 

If you end up making less than $70,000, but still more than the CPP max you’d need to save a higher proportion of each paycheque than 7.85% or catch up at some point. If you end up making more than $70,000, the 7.85% per paycheque would be more than you need.

Another option for dealing with CPP contributions is to set aside 10.2% each time you earn income; once you reach the maximum of $5,497.80 for 2019, you can stop setting that money aside for the year.

Side Hustle

Coming back to the example of the side hustler making $75,000, they’d be maximizing their CPP contributions through their employer and therefore wouldn’t have to save anything towards this. If you made less than the CPP maximum earnings ($57,400 in 2019), you’d have to pay the employee and employer 10.2% CPP contributions on your side hustle income come tax time.

EI Premiums

EI special benefits for self-employed people is an option. The benefits include maternity and parental benefits, sickness benefits, compassionate care benefits and, caregiver benefits. Once you opt into this plan and use any of the benefits, you’re in it for your self-employed life. The premiums are the same for employed individuals, 1.62% of pay in 2019 up to a maximum income of $53,100.

Summary

Putting it all together, if you make $70,000 in self-employment income after expenses, you’d pay 10.2% of CPP contributions to a maximum of $5,497.80 and have to set aside about 20% for income taxes.

The Ontario side hustler making $75,000 with $10,000 in side hustle income would have to set aside about 31% of their side hustle income for taxes, but nothing for CPP (or EI).

Someone earning less than the CPP maximum with a side hustle would have to set aside tax at their marginal tax rate, and 10.2% for CPP contributions.

Other Considerations

If you’re fully self-employed, then take a look at my guidelines on how much of your income should go towards essential spending, savings or debt repayment, and fun money. Essentially, 20% or more should go towards saving and debt repayment, 50% or less should go towards essential spending, and 30% should go towards discretionary spending. You can follow these rules for side hustle money too. Perhaps you started a side hustle so that you can pay off debt faster, hit a financial goal faster, or to be able take a vacation each year. Great, however if your side hustle money is mainly going towards fun money, I’d suggest making sure that you’re still putting 20% of your after-tax income, including side hustle money, towards financial priorities.

Finally, those who are self-employed might want to have a higher emergency fund. Since you aren’t eligible for EI benefits if you lose your job, and self-employment can often be precarious, top up your emergency fund to 6 months of expenses or more.