Why Is My Self-Employed Tax Bill So High??
Hello All,
One of the most common reactions I hear from self-employed people, especially after their first year in business is some version of: “Why do I owe so much?”
(You can also check out my latest video where I look at self employed taxes at 3 different income levels)
It can be disconcerting, especially if you were an employee in the past and taxes were simply deducted from your paycheque.
The short answer to this is that being self-employed changes how taxes are handled. As an employee, you rarely pay attention to the full amount of tax you're paying. When you are self employed, conversely, you see the total tax on your tax return which you are then often required to pay in one lump sum.
You're Paying Both Sides of CPP/QPP
As an employee, your employer pays for half of your Canada Pension Plan (CPP) contributions (or Quebec Pension Plan if you live in Quebec). When you're self-employed, since you are technically the "employer", you're responsible for both the employee portion and the employer portion.
For 2025, the combined contribution rate is 11.9% of your net self-employment income (up to the yearly maximum of $81.2k).
It's important to note that CPP/QPP is not a tax . Rather it is a contribution toward a public pension plan which you'll be entitled to receive when you retire. However, it is in addition to income tax, and this amount can be quite high.
Read: CPP for Self Employed, Explained
No Tax Is Withheld During the Year
Employees have income tax deducted from every paycheque, so the amount owing at tax time is usually small (or results in a refund). When you're self-employed, nothing is withheld which means that the full amount comes due when you file your return.
If you weren't setting money aside throughout the year, that April bill can feel very high.
Your Income May Have Pushed You Into a Higher Bracket
While it can be very gratifying to be profitable, it can also push your income into a higher marginal tax bracket than previous years or when you were an employee.
It should be noted that only the amount that goes into the higher tax bracket is taxed at that rate. Everything below is still taxed at the rate in the lower tax bracket.
As self employed business owners, our income tends to fluctuate from year to year. This makes having a good estimate of your taxes much more important.
Watch:5 Tips to Prepare for Your Taxes
CRA Might Require Quarterly Instalments
If you owed more than $3,000 in federal taxes last year (or $1,800 if you're in Quebec), the CRA might require you to pay your taxes in quarterly instalments instead of in one lump sum at filing time.
The idea behind instalments is that the government wants tax payments spread throughout the year rather than collected all at once otherwise self employed owners get an unfair advantage.
Missing instalments doesn't usually result in an immediate penalty, but you will be charged instalment interest and you'll still have a large balance at filing time.
What You Can Do
The good news is that none of this is mysterious once you understand how the system works. A few simple habits can make a big difference:
Set aside roughly 25–40% of each payment you receive (based on your estimate) into a separate savings account that is specifically for taxes. It doesn't have to be a formal business account as long as it is separate and untouchable until you file your taxes.
Claim all eligible business expenses including home office, vehicle, phone, software, professional fees, and more. These reduce your net income and therefore the tax you owe.
6 Tax Deductible Expenses Every Self-Employed Business Owner Should Know (Article)
Keep your business and personal finances separate. A business bank account (and credit card) makes tracking much easier and works as a rudimentary accounting system.
Why a Separate Bank Account is Essential for Your Small Business (Article)
Pay instalments especially if you receive notices from CRA or RQ. This will reduce interest costs and make your tax bill seem less daunting.
If your net self-employment income is consistently above $100,000, it may be worth exploring incorporation.
Should You Incorporate Your Small Business in Canada? (Video)
One of the challenges of being self-employed is that you have to pay closer attention to your taxes.. Consequently, you have to set up systems and processes to ideally manage them throughout the year, which can significantly reduce the stress of seeing your tax bill.
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Ronika
