If you are self-employed, you have to pay Canada Pension Plan (CPP) contribution based on your net profit (after expenses).
How is the contribution calculated?
The first $3,500 of earnings is exempt. The contribution is calculated by multiplying the remainder (up to maximum) by the contribution rate. For year 2012, the maximum pensionable earnings are $50,100. After taking the exemption, the maximum contributory earnings are $46,600 ($50,100 – $3,500). The contribution rate for self-employed is 9.9%. So the maximum contribution is $4,613.40 ($46,600 x 9.9%).
How is it paid?
The CPP contribution is reported on the personal tax return. It is is payable when the personal tax return is filed.
How is it reported?
Compared to a salaried employee with the same earning, the self-employed pays twice amount in CPP contribution (the rate for self-employed is 9.9% and 4.95% for salaried employee in 2012). One-half of the contribution may be deducted on line 222 to reduced taxable income. Like for salaried employees, the other half is eligible for a non-refundable tax credit claimed on line 310.
Examples:
Year 2012:
1). Net earning is $3,000: no contribution is required because the earning is under $3,500
2). Net earning is $38,000: contribution is $3,415.50 ((38,000 – 3,500) x 9.9%)
3). Net earning is $60,000: contribution is $4,613.40 (earning over the maximum).
Canada Pension Plan (CPP) rates and maximums for self-employed
Emplyment insurance (EI) for the self-employed
Basic payroll information for employers