Retirement planning when you’re self-employed

6 min read
Richard Sklar

Self-employment is growing across Canada. By some estimates, 45% of Canadians will be self-employed by the year 2020. The growth of the gig economy has seen a rise in workers who rely on freelancing for all of their income. There are also some who work for themselves to supplement income they earn from traditional forms of work. But none of these jobs come with training for retirement planning, taxes or handling your finances.

Freelancers, small business owners and others who are self-employed face more obstacles to retirement planning than many other workers.

If you work for yourself, check out these tips for managing your money and planning for retirement.

Your 7-step retirement planning checklist

Being your own boss means doing all the things a traditional boss does. Here’s what you need to know.

  1. Understand business income vs. employment income.
  2. Collect GST/HST tax.
  3. Contribute to your Canada pension plan.
  4. Stay ahead of what you owe the CRA.
  5. Decide between a TFSA and RRSP.
  6. Pay off your debt.

Follow our retirement planning checklist so there are fewer surprises down the road.

1. Understand business income vs. employment income

Retirement Planning Pay Cheque
For tax purposes, employment income is treated different from business income.

When you’re making tax payments, know the difference between business income and employment income. Employment income is the salary or wage you earn from your employer, if you have one.

On the other hand, business income is any money you earn from:

  • Practicing a trade
  • Practicing a profession (such as doctor, lawyer, etc.)
  • Any activity carried out for profit

You can subtract business expenses from your business income, reducing your total tax bill and giving you more money to set aside for your retirement.

When you report your taxes, you must report all of your income, or you can face stiff penalties.

Unless you make quarterly payments to the government, you may not find out how much you’ve saved on your taxes until you file for the year. You can invest whatever you get back in your retirement savings.

Make sure to distinguish between income on which you have already paid taxes and income on which you will owe. You will pay income taxes on your income as a whole, which means your business income must be paid in a higher income tax bracket.

If you have questions, talk to an accountant or financial advisor for help with filing your taxes.

2. Collect GST/HST tax

The rules for collecting Goods and Services (GST) or Harmonized Sales (HST) Tax can be complicated but understanding them will help you avoid going into debt with the Canada Revenue Agency (CRA).

In Canada, you start owing GST/HST once you earn $30,000 within four consecutive quarters. However if you expect your business to grow quickly and want to take advantage of GST/HST credits on expenses, you can register immediately.

Once you are registered, you can begin charging your clients GST/HST for your services, the same way you would pay these taxes at the store. You may also want to consider using GST/HST tax credits to contribute to a tax free savings account (TFSA) or registered retirement savings plan (RRSP).

3. Contribute to your Canada pension plan (CPP)

Retirement Planning Pink Piggy Bank
Those who are self-employed must pay 9.9% of their net income to CPP.

When you earn a wage or salary from an employer, CPP contributions are taken straight from your pay cheque. When you’re self-employed, you still owe CPP payments and you need to set those side for tax time if your net income is higher than $3,500. You can pay CPP contributions when you pay the rest of your income taxes.

These contributions give you CPP credits that you can rely on when you retire.

One of the downsides of self-employment is that you will have to pay both employee and employer portions of the CPP.

  • The employee portion is 4.95% of your income (to an annual maximum payment of $2,593.80)
  • The employer portion is equal to that

So a self-employed individual is responsible for 9.9% of their net income in CPP payments up to $5,187.60.

4. Stay ahead of what you owe the CRA

If you’ve been working for yourself without knowing the rules above, you may be in debt to the Canada Revenue Agency. You could owe:

  • CPP contributions
  • Income taxes
  • GST/HST payments

For freelancers and gig economy workers, it can be a struggle to pay back taxes that you weren’t prepared for.

If you discover you owe the CRA a significant amount of money, consider a debt management plan to get caught up. Owing money can keep you from saving for your retirement.

5. Decide between a TFSA and RRSP

Without an employer-contributed pension plan to look forward to, self-employed Canadians have to be proactive with their retirement planning.

In Canada, you can choose to save through either a TFSA or an RRSP.

With a TFSA, you pay taxes on your income as you usually would, but you don’t pay taxes when you withdraw that money later. With an RRSP, your contribution is deducted from your taxable income.

Advantages of a TFSA:

  • TFSA withdrawals are tax-free
  • You do not need earned income to make a TFSA contribution
  • You can withdraw TFSA money for any savings reason, not just retirement

Advantages of an RRSP:

  • Contributions are tax-deductible
  • You can save on your taxes, as your marginal tax rate will be lower in your retirement

Contributing to an RRSP is often more exciting for those with traditional employment, as it may mean they get a tax refund when they wouldn’t otherwise. However, RRSP contributions will also reduce your total tax bill. So such a plan can help self-employed workers when they’re paying their own taxes.

Make regular retirement plan contributions

In addition to contributing money you save on your taxes, setting up automatic monthly payments into your TFSA or RRSP will help you consistently save. Your contributions will start to feel like a regular expense, just like any bill.

Retirement Planning Woman Watching Sun Set
Make your retirement contributions automatic — you’ll thank yourself one day.
Photo: Rod Long on Unsplash

It might be nerve-wracking to commit to regular payments when your income is irregular, but you can cancel automatic payments any time if you need to.

6. Pay off your debt

Starting a business can sometimes lead to large amounts of debt. It becomes more important to pay debt as you get closer to retirement. Once you’re relying on a fixed income, debts can become impossible to repay. Take action before you retire to protect yourself from insolvency in your retirement years.


Retirement planning takes effort when you work for yourself. You have to:

  • Pay your own taxes
  • Make your own Canada Pension Plan contributions
  • Rely on your own retirement plan to support you

Make sure you understand your tax obligations, start a retirement fund like a TFSA or RRSP and repay any debts you may already have to the CRA. And the next time you get a tax refund, do yourself a favor: put it into your retirement fund.

With a little planning, your retirement can be comfortable.