A self-employed person who is above 18 years old and below 70 years old, who earns more than $3,500 per annum must contribute into CPP. Let’s dig deeper into relevant CPP details.
Canada Pension Plan or CPP contributions
We all know that in 2022, every employee who is 18 years or more must contribute 5.70% per annum of their salary into the Canadian Pension Plan.
Similarly, their employers contribute 5.70% per annum on behalf of the employee. However, a self-employed person is an independent person who runs his/her own business. They are sole proprietors who work for themselves.
Let us figure out if it is mandatory for such self-employed people to contribute into the Canadian Pension Plan.
Is CPP mandatory for self-employed individuals in Canada?
Yes, anyone who is above age 18 and below age 70, who earns $3,500 per year or more must contribute into the Canadian Pension Plan.
In 2022, the employee and employer contribution rate is 5.70% of the salary each per annum. Similarly, a self-employed person must contribute 2*5.70% per annum which is 11.40% per annum. The rate changes every year, so the sole traders must be watchful of the updated rates.
The 11.40% per annum rate is applied on the net income of their business. The maximum contribution a self-employed person can make is $6,999.60 per year.
The primary benefit of Self-employed persons contributing into CPP is that they can claim half of their contributions, as in the employer’s half of the contributions, as deduction while filing income tax return. In 2022, a self-employed person can claim 5.70% of their contribution as deduction, the maximum dollar value being $3,499.80.
A self-employed person can choose to be incorporated or not. A self-employed person who incorporates the business has the option to take out salary and the rest as a dividend. If they do not want to contribute much into the CPP, they can choose to take a lesser salary and more of dividends.
CPP Contributions for Self-employed
The young generation people choose to freelance, commence a start-up, or be an independent contractor these days. Hence, it is important for such aspirational self-employed people to be educated on the Canada Pension Plan or CPP contribution rules and tax filing deductions.