How to Calculate CPP/QPP Contributions If You Are Self Employed

As an employee, your employer takes on the responsibility to pay certain payroll deductions to the government, which are deducted directly from the employees’ gross salary. The net salary, which is the amount on the employees’ paycheque, is the amount received after payroll and income taxes have been deducted. Included in the amounts that are deducted from your gross pay are contributions to the Canada Pension Plan or CPP which in Quebec is referred to as the Quebec Pension Plan or QPP.   In addition to the CPP that is deducted from the employee’s paycheque, the employer is also required to remit an equal amount to the government . This is one of the costs to the employer for having employees.

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What is CPP/QPP?

The Canada Pension Plan /Quebec Pension Plan is a retirement plan for all Canadian workers that earn employment or self employment income. Every year you are required to contribute a percentage of your salary or “active” income based on a fixed rate up to an annual maximum. This results in a pension amount that everyone will receive in proportion to the amounts they have contributed. You can start drawing on your CPP benefits when your reach the age of 60. The standard age that people start taking their pension is usually 65 , but this can be extended to age 70.

According to CRA:

The amount of your CPP retirement pension depends on different factors, such as:

-the age you decide to start your pension

-how much and for how long you contributed to the CPP

-your average earnings throughout your working life

Source

To qualify you only need to have made one contribution during your lifetime.

The maximum amount of CPP/QPP benefits that you could receive in 2024, on a monthly basis, is $1,364 assuming you fully contributed to the plan up to the maximum amount, per year. This amount decreases or increases depending on whether you decide it to start taking it before or after the age of 65.

If you move provinces from Quebec to another part of Canada, you are still entitled to the full amount of pension and would apply for CPP benefits as these are automatically transferred when you move. The same is true if you move from Canada to Quebec, except you would apply for QPP benefits.

If you move to another country, outside of Canada, and have contributed to the CPP or QPP , you are also still entitled to benefits even though you are no longer living in Canada.

how do CPP/QPP Contributions apply to the Self Employed ?

While employees who receive a salary only contribute the employee portion of CPP/QPP as explained above, when you are an unincorporated small business owner/self-employed,(that reports income on a T2125) you are essentially taking on the role of both employer and employee.  Consequently, the self-employed and unincorporated small business owners are required to remit both the employee and the employer portions of the CPP or QPP to Revenue Canada or Revenue Quebec respectively. Both the CPP and QPP (whichever applies) is calculated annually based on your taxable self employment/small business income.

For example if your self employment income for the year was $50,000 then (using the calculator below) your contributions in 2023 would be $5,533.50. In contrast, if you were any employee, your contributions would only be $2,766.75 (half of the amount) while the remaining $2,766.75 would be paid your employer. This represents a CPP rate of 5.95% X 2 = 11.90% for self employed workers and small business owners.

If you are using tax software to complete your personal tax return, it will be automatically calculated and included in the balance owing on the tax return.  The actual remittance to Revenue Canada or Revenue Quebec is calculated based on your self employment income for the calendar year on your tax return (which is also referred to as the T1 for the Canadian return and the TP1 in Quebe) and is remitted through your payment of year end taxes.

50% of the total contribution is a tax deduction on your T1 similar to an employer with employees, who would be allowed to deduct these contributions from business income.

How Much is the cPP/qPP contribution calculation for self employed workers?

Note that a second tier of contributions now apply to both CPP and QPP starting in 2024 referred to as the CPP enhancement. Normally, the CPP would only apply on earnings up to a maximum of $68,500 in 2024. However, the 2nd tier of earnings between $68,500 and $73,200 will be taxed at a rate of 8% for self employment individuals.

Read more about this at CRA’s website

Contributions to CPP/QPP can be a significant portion of taxes payable at the end of the year. As such it is beneficial to know the amount that might be due based on your estimated self employment income so that you can plan for your tax bill in advance. The 2023 CPP rate for the self employed is 11.9% while the QPP rate is 12.8%. In both cases that maximum amount of earnings on which CPP/QPP is applicable is $66,600 i.e. CPP/QPP contributions are not deducted from income that exceeds $66,600 . It should also be noted that there is a deduction of $3,500 which means that anyone who earns less than $3,500 does not have to contribute. Also, for calculation purposes, $3,500 is deducted from your total pensionable income after which the rate is applied.

To estimate your CPP or QPP contributions, click on the links below to access the calculators:

CPP Contribution Calculator for Self Employed

QPP Contribution CalculatorSelf Employed

Contributions to the Canada (Quebec) Pension Plan can be a little painful given that they represent more than 10% of your business income, however it is good to keep mind that you are essentially contributing to a pension fund that you will (hopefully) receive back when you reach retirement age. 

Interested in a deeper understanding of your small business/self employed taxes? Check out my book Small Business Tax Facts that explores essential tax strategies and simplifies complex regulations to help you maximize deductions and minimize liabilities.