CPP & EI Considerations For Self-Employed Business Owners

For individuals who are self-employed, navigating the process of completing their personal Income Tax & Benefit Return brings about more complexities compared to those with traditional salaried employment. Notably, self-employed individuals encounter distinctions in two significant areas – contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI).

In the contemporary workforce, entrepreneurship has become an integral facet for many young professionals. Whether functioning as a sole proprietor, a business partner, a freelancer, an independent contractor, or engaging in Direct Sales as an auxiliary pursuit, the Canada Revenue Agency (CRA) categorizes these individuals as self-employed.

Knowing the rules of Deductions at Source (DAS) for the Canada Pension Plan (CPP) and Employment Insurance (EI) is important for small businesses in Toronto and Mississauga because;

a) errors in payroll remittances to the government can result in hefty penalties

b) it is a significant consideration for when deciding to pay out to the owner-manager(s) salary or dividend.

Self-Employed and the Canada Pension Plan (CPP)

Navigating the intricacies of the Canada Pension Plan (CPP) is essential for self-employed individuals. This government program requires contributions from individuals between 18 and 70 years old whose income exceeds $3,500.

While regular employees and their employers contribute a specific percentage of wages beyond the $3,500 threshold, self-employed individuals face a unique responsibility.

The contribution rates for CPP are subject to annual adjustments, necessitating periodic checks of the CRA link for up-to-date information.

However, self-employed individuals bear a distinctive burden, covering both the employee and employer portions of CPP contributions. This translates to twice the annual percentage, up to the yearly maximum, for those who work for themselves.

CPP contributions for self-employed individuals are contingent on the net income generated by their business activities.

Calculating your annual contributions involves referencing Line 1 on form 5000 – Schedule 8 (CPP Contributions on Self-Employment and Other Earnings) and transferring the pertinent figures as indicated to your personal tax return.
It’s crucial to note that residents of Quebec should utilize a specific form, 5005 – Schedule 8 – Quebec Pension Plan Contributions – QC only, designed to accommodate the province’s unique pension plan structure. Keeping abreast of these details ensures accurate and compliant CPP contributions for the self-employed.

Canada Pension Plan

How to Pay CPP & EI For Self-Employed Business Owners

Contributions to the CPP give the contributor the right to retirement benefits upon retirement age. Unlike regular retirement plans (such as RRSP and RPP), however, contributions to CPP are not optional.

ALL salaries paid by the small business, including the owner-manager’s salary, are subject to CPP deductions at source (DAS). These deductions are calculated as such:

Contribution rate: The CPP contribution rate for employees and employers is 5.95% of gross salary, up to a maximum of $66,600.

Maximum annual CPP contribution: The maximum annual CPP contribution for employees and employers is $3,754.45.

Basic exemption: The basic exemption is $3,500. This means that the first $3,500 of salary paid out per year is not subject to CPP contributions.

Self-employed individuals: Self-employed individuals must pay CPP contributions on their net self-employment income. The contribution rate is 5.95%, up to a maximum of $66,600.
Payment deadlines: CPP contributions are due by the end of the month following the month in which the income was earned. For example, if you earn $10,000 in January, you need to pay your CPP contributions by February 28.

Advantages

Contributing to the CPP holds significance as it feeds into a core component of Canada’s retirement benefit framework – the Canada Pension Plan.

When you undertake your tax return, notable benefits arise. You become eligible for a tax deduction encompassing the “employer half” of the contribution.

Additionally, a federal tax credit of 15 percent is applicable for the “employee half” of the contribution.

Options

For self-employed individuals, there exists flexibility concerning CPP contributions, contingent on their business structure. A pertinent alternative lies in the business’s arrangement.

For instance, a sole proprietorship might contemplate incorporation, presenting the opportunity to structure compensation as salary or dividends.

Incorporated individuals can opt for a reduced salary and allocate the remaining income as dividends, consequently mitigating CPP premiums.

This category of individuals also has the prospect of engaging in a pension plan. However, such choices are unavailable to sole proprietors, setting them apart.

Learn More:

What is ORPP (Ontario Retirement Pension Plan) and how does it affect me?

Employment Insurance

Employees, in general, have to pay EI as part of the DAS. However, self-employed individuals and business owners as well as their immediate family with over 40% ownership of a company’s voting shares, are exempt.

They may, however, elect to pay EI contributions if they so wish and such election would give them access to EI benefits in the event of interruption of their income.

While paying double the CPP contribution rate might appear burdensome to certain entrepreneurs, a silver lining exists for self-employed individuals regarding Employment Insurance (EI) premiums.

The distinctive advantage is that self-employed workers are exempt from mandatory EI premiums. However, this exemption is contingent on not opting into the EI benefits for self-employed program, which is tailored to provide specialized benefits to those working for themselves.

Under this program, six categories of benefits are extended:

Maternity Benefits: Designed for individuals away from work due to pregnancy or recent childbirth.

Parental Benefits: Allocated for parents on leave to care for their newborn or newly adopted child.

Sickness Benefits: Intended for those unable to work due to medical reasons.

Family Caregiver Benefit for Children: Available to caregivers supporting critically ill or injured individuals under 18.
Family Caregiver Benefit for Adults: Offered to caregivers aiding critically ill or injured individuals aged 18 or over.

Compassionate Care Benefits: Reserved for caregivers tending to individuals requiring end-of-life care.

Opting into the Self-Employed EI Benefit Program involves registering through your My Service Canada Account.

By opting in, self-employed individuals gain access to the specialized EI benefits but must pay the same EI premium rate as traditional employees. These premiums are settled when the self-employed worker files their annual Income Tax and Benefit Return, utilizing Schedule 13 (Employment Insurance Premiums on Self-Employment and Other Eligible Earnings).

It’s worth noting that unlike the standard EI program, self-employed workers are exempt from contributing the employer’s share of EI premiums.

EI DAS (Employment Insurance Deductions at Source) entails the subsequent calculation methodology:

Employee Contribution: 1.88% of the total gross salary.
Employer Contribution: 1.41% of the total gross salary.

Notably, EI contributions are applicable solely to the initial $66,600 of gross annual salary attributed to an employee. This implies a maximum annual EI contribution of $1,231.08 for employees and $941.68 for employers.

A fundamental exemption comes into play, fixed at $3,500. In practical terms, this signifies that the first $3,500 of annual salary disbursed remains exempt from EI contributions.

Self-employed individuals operating without incorporation also fall within the purview of EI contributions. However, their mode of remittance differs. Instead of regular remittance, the calculation of their EI contribution occurs at the close of the fiscal year when they file their personal income taxes. This contribution is then paid to the Canada Revenue Agency (CRA) alongside their income tax balance, due in April.

The CRA provides a great tool to help small businesses in Canada to compute their DAS including CPP and EI discussed above. There are many payroll services providers throughout Toronto, Mississauga and the rest of the country who can assist your small business with your payroll filings.

Considerations

Before deciding to opt into the Self-Employed EI Benefit program, crucial factors are deserving your attention:

Premium Payment Duration: A prerequisite for benefit collection is 12 months of premium payments. Furthermore, you must have earned a specific minimum from self-employed earnings within the prior year (between January 1 and December 31) to be eligible for benefits.

Opt-Out Provisions: Exiting the Self-Employed EI Benefit program is possible after a tax year, exclusively if benefits have never been claimed. However, if benefits have been accessed, continual contribution on self-employed earnings remains required.

Business Viability: It’s pivotal to recognize that even after a year of premium payment, business failure renders one ineligible for benefits. A lengthy leave might not align with the operational demands of a business reliant on your direct involvement.

Consider Alternatives: An alternative perspective is investing the equivalent of EI premiums. For instance, saving the maximum premium amount annually in a Tax Free Savings Account (TFSA) can yield growing savings. While this might not mirror the dollar value of potential benefits, it offers financial growth.

Planning for Special Events: Opting into the EI program, especially anticipating events like adoption or pregnancy, could prove beneficial. However, planning for at least two, if not three, full parental leaves is recommended to optimise the program’s advantage.

By meticulously considering these facets, self-employed individuals can make informed decisions regarding their involvement in the EI program, accounting for their business dynamics, financial goals, and life events.

As Chartered Accountants in Toronto and Mississauga, we can help you prepare your payroll filings and assess whether you should deduct amounts at source from your employees. Contact a Chartered Accountant for more tax tips by email at info@srjca.com or call us at 647-725-2537 for a free consultation.

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Frequently Asked Questions

Can you collect EI if you own a business?

Yes, self-employed Canadians can collect EI benefits if they are eligible. However, there are some restrictions. Self-employed individuals are only eligible for sickness, compassionate care, and maternity and parental benefits. They are not eligible for regular benefits for people who have lost their jobs through no fault of their own.

Here are some useful facts and figures about EI benefits for self-employed individuals in 2023:

The maximum weekly benefit rate is $638.
The maximum duration of benefits is 45 weeks.
The eligibility requirements are the same as for employees, but self-employed individuals must have paid EI premiums for at least 600 hours in the last 52 weeks.
Self-employed individuals can pay EI premiums voluntarily. The premium rate is 1.88% of net self-employment income, up to a maximum of $89,700.

Are Business owners exempt from EI?

Yes, business owners are exempt from EI, unless they are also employees of their own business.

For example, if a business owner works as a salesperson for their own company, they would be considered an employee and would be required to pay EI premiums.

Here are some useful facts and figures about EI premiums for business owners in 2023:

The employer contribution rate is 1.41% of insurable earnings.
The employee contribution rate is 1.88% of insurable earnings.
The insurable earnings base is $66,600.

Can I claim EI if I am self-employed?

Yes, you can claim EI if you are self-employed. However, you must meet certain eligibility criteria, including:

You must have paid EI premiums for at least 600 hours in the last 52 weeks.
You must be unable to work due to sickness, injury, or quarantine.
You must be ready, willing, and able to work.
You must be actively looking for work.

Here are some useful facts and figures about the eligibility requirements for EI benefits for self-employed individuals in 2023:

The 600-hour qualifying period must be met in the last 52 weeks or 12 months, depending on the benefit you are applying for.
You must be unable to work for at least four consecutive days.
You must be able to provide medical documentation to support your claim.

Do you have to pay EI on self-employed earnings?

You do not have to pay EI premiums on your self-employed earnings. However, you can voluntarily pay EI premiums. If you do, you will be eligible for EI benefits if you become unemployed or cannot work due to sickness, injury, or quarantine.

Here are some useful facts and figures about the voluntary EI premiums for self-employed individuals in 2023:

The premium rate is 1.88% of net self-employment income, up to a maximum of $89,700.
You can pay EI premiums quarterly, semi-annually, or annually.
You can pay your premiums online, by mail, or by phone.