When you move from being an employee to a contractor, your entire tax picture changes. As an employee, your employer withholds income tax, CPP, and EI automatically from your paycheque. As a contractor, you're responsible for calculating and paying your own income tax throughout the year, managing CPP contributions on your own, and losing access to EI benefits entirely. The result is often a smaller take-home cheque, even if your hourly rate or project fee seems higher than your old salary. As an employee, your employer handles tax withholding based on your TD1 form. You may get a refund at tax time if too much was withheld, or owe if too little was taken off. As a contractor, there is no automatic withholding. You receive 100% of your payment, but you're expected to set aside money for taxes on your own. The Canada Revenue Agency (CRA) calls this your "tax liability," and if you don't pay it by June 15 of the following year, you'll face penalties and interest charges. Many contractors find it helpful to use a Self-Employed Tax Estimator to forecast their tax bill and plan quarterly or monthly payments to the CRA.
Yes, self-employed contractors pay both the employee and employer portions of CPP, which totals roughly double what employees pay. However, you can deduct half of your CPP contributions from your income when you file your tax return, which provides some relief.
Yes. Contractors can deduct a reasonable portion of home office expenses based on the percentage of your home used for work, including rent, utilities, property tax, internet, and supplies. Keep detailed records and receipts to support your claim.
Contractor income tax is due by June 15 of the following year. However, the CRA may ask you to make quarterly installment payments (March 15, June 15, September 15, December 15) if your previous year's tax bill was large.
Contractors lose access to EI benefits and cannot claim certain employee-specific deductions. However, you gain access to deductions for business expenses, home office, vehicle mileage, and equipment that employees cannot claim.
Incorporation can lower taxes and allow income splitting, but it adds accounting and legal costs. This depends on your income level, province, and business structure. Use a calculator or consult a tax professional to compare salary vs dividend strategies before deciding.