How Much Can a Small Business Make Before Paying Taxes?

Non-incorporated small business owners, including the self-employed, sole proprietors, and partners, pay taxes on their profits at personal tax rates.

You must pay taxes on all profits your business has made.

You can calculate your profits after deducting all eligible business expenses from your annual gross income. You can also use applicable tax credits to reduce your taxes payable or to claim refunds on your tax return. Read this article to learn about small business tax deductions that will help you lower your tax burden.

Taxes small businesses need to pay

You must pay the following taxes if you’re running a small business.

Income tax

As a self-employed individual or a sole proprietor, you must report your income or loss on Form T1. You pay income tax on any profits (total income minus expenses) you earn in a fiscal year at both the provincial and federal levels.

If you run a partnership firm, profits and losses are shared among the partners based on the partnership contract. Each partner reports their income or losses on their personal tax return and pays income tax on the profits earned according to provincial and federal tax rates.

Note: if you owe over $3,000 net tax ($1,800 in Quebec), you should pay in monthly or quarterly instalments rather than annually.

GST/HST tax

You must have a GST/HST number and remit net taxes to the CRA when your income from taxable goods or services is over $30,000 in either one or four consecutive calendar quarters. Otherwise, you fall into the small supplier category and don’t need to file a GST/HST return.

However, if you want to take advantage of sales taxes paid on business expenses, you may voluntarily apply for a GST/HST number, irrespective of your business income.

When to collect GST/HST from customers

If your business exceeds the $30,000 threshold on a specified date in a calendar quarter, you must begin to collect GST/HST on your products or services from that date.

However, if you’ve earned over $30,000 in total in the last four consecutive calendar quarters, you must collect GST/HST from the first day of the second month following the end of the fourth calendar quarter.

For example, if your business made $35,000 in the last four calendar quarters, and your last calendar quarter was from January 1 to March 31, the date you must start to collect sales tax will be May 1.

In both scenarios, you must register for your GST/HST number within thirty days of your effective date of registration—the day you start charging sales tax on your products or services.

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CPP and EI for the self-employed

As a small business owner, you’re responsible for making CPP contributions and reporting them on your T1 return. Your contribution rate for 2024 is 11.90%, with a first earnings ceiling of $68,500, allowing you to contribute $7,735 annually.

If your earnings are over $68,500 in 2024, you must make additional annual contributions of up to $376. The maximum contribution amount of $376 is calculated as: (Second earnings ceiling of $73,200 - First earnings ceiling of $68,500) * 8%.

However, if your annual income is over $68,500 but less than $73,200, you’ll use your actual income rather than the second earnings ceiling to calculate your contributions. Any income beyond $73,200 should not be used to make CPP contributions, as you may be charged a penalty or interest for making over-contributions.

Self-employed individuals aren’t required to make EI contributions, but you can do so if you want access to EI benefits to financially protect yourself and your family. You can use these benefits during your maternity or paternity leave, when taking leave due to sickness, or to take care of your family.

Taxes if you hire employees

If you’ve hired at least one employee, you must enroll online for a payroll account before the first remittance due date. This is the 15th of the month following the first time you pay your employee. For example, if you hire an employee on June 1 and pay them on June 15, your first remittance due date will be July 15.

You’re also responsible for withholding income tax, Canada Pension Plan (CPP) and Employment Insurance (EI) contributions from your employee’s pay.

Canada Pension Plan (CPP)

Under CPP, employers and employees must make equal contributions of 5.95%, resulting in total annual contributions of 11.90%. You must contribute an equal amount and withhold both contributions for remittance purposes.

The maximum annual contributions for 2024 are $3,867.50, based on the first earnings ceiling of $68,500. However, if you pay your employee a yearly salary of up to $3,500, you don’t need to deduct or contribute any CPP amount.

In January 2024, the CRA introduced CPP2 to help individuals make additional contributions under the second earnings ceiling of $73,200 at 8%. The maximum contribution under CPP2 is $376, calculated as ($73,200 - $68,500) * 8%. Both you and your employee contribute 50%, which is $188 towards CPP2.

Employment Insurance (EI)

Similar to CPP, both employers and employees contribute to the EI program. Employers must contribute 1.4 times the employee’s premium and remit both amounts to the CRA.

The maximum annual insurable earnings and the EI rate for 2024 are $63,200 and 1.66% respectively. The employees’ annual contributions are capped at $1,049.12 (1.66% of $63,200), and the maximum employers’ contributions are $1,468.77 ($1,049.12 * 1.4).

Note: If you operate your business in Quebec, you must follow different rules and rates for your QPP and EI contributions.

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