- Canada Pension Plan contributions are required for all employees in Canada and employers must match employee contributions
- Employment Insurance can be paid by employees but is not mandatory for self-employed business owners
- Self-employed business owners have to pay both the employer and employee CPP contributions, but EI is not mandatory
- CPP and EI contributions must be filed annual with taxes, and there are specific forms associated with each
- Speak to an expert accountant to understand payroll filings as part of your CPP and EI contributions
Entrepreneurship has become an avenue that many individuals choose to explore. Whether you’re a sole proprietor, a freelancer, a partner of a business, or an independent contractor, you can be considered self-employed by the Canada Revenue Agency (CRA).
Being self-employed makes you subject to the rules of Deductions at Source (DAS) for the Canada Pension Plan and Employment Insurance. If these rules are not complied with, it can result in hefty penalties and/or can be a significant consideration when deciding to pay out dividends or salaries.
In this article, we’ll go over what the CPP and EI are, and how to pay them as self-employed business owners.
What is CPP?
The Canada Pension Plan retirement pension is a monthly, taxable benefit that replaces part of your income when you retire. Everyone between the ages of 18 and 70 whose income is greater than $3,500 must contribute to the CPP. Regular workers contribute a particular percentage of their wages above $3,500, up to an annual maximum, while their employer contributes an equal amount. These rates change each year so to be aware of current rates, check with the CRA or contact FShad CPA Professional Corporation.
If you’re self-employed and incorporated, it’s important to know how the rules of CPP contributions differ for you. Since the CPP contribution comes from the employee and the employer, a self-employed individual would be responsible for both the employee and employer amounts. These deductions are calculated based on the CRA guidelines which define parameters such as the deduction from salary payment is 4.95% of gross salary, and the employer contribution, beyond that withheld from the employee’s salary, is also 4.95% of gross salary.
If you’re an unincorporated self-employed individual, you are also subject to CPP contributions, however, these contributions may not be remitted on an annual basis. Instead, your CPP contributions will be calculated at year-end when filing your personal income taxes and will be payable to the CRA along with the payment of your income tax balance.
One advantage of incorporation as a self-employed business owner is the flexibility it offers in structuring your compensation as salary vs. dividends. By incorporating your business, you can opt to pay yourself a lower salary and then take the rest of your income as dividends to reduce CPP premiums.
What is EI?
Employment Insurance (EI), is a program administered by Employment and Social Development Canada which provides temporary income support to unemployed workers. Similar to CPP, employees generally have to make regular EI contributions on their earned income as part of the DAS. However, self-employed business owners have an advantage here because they do not have to make EI contributions unless they opt into the EI benefits program.
The EI contribution rate for the employee is also lower than the CPP contribution rate. It is 1.88% of the employee’s earnings with an annual limit of $48,600. The employer’s share of the EI contribution is 2.63% of the earnings of the employee up to the same annual limit. Self-employed individuals that opt into the EI program are also only required to pay the 1.88% employee share of the contributions. Unlike CPP contributions, EI does not require self-employed individuals to pay twice the amount paid by regular employees as they only pay the employee contribution to get access to EI benefits.
There are different ways to file both CPP and EI contributions as self-employed business owners. While there are tools provided by the CRA to help self-employed individuals understand their CPP and EI options, it’s also recommended to consult an accountant.
FShad CPA Professional Corporation can work with you to prepare payroll filings and assess how to deduce CPP and/or EI payments.
Book a consultation today and get started with our team of expert accountants!
FShad CPA Professional Corporation
This publication is produced by FShad CPA Professional Corporation as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.