When it comes to filing your taxes in Canada, not all income is treated the same. Two of the most common income types—employment income and self-employment income—are subject to different tax rules, reporting requirements, deductions, and record-keeping responsibilities. Understanding these differences is essential to ensure compliance with the Canada Revenue Agency (CRA) and to maximize your eligible deductions and tax credits.
This comprehensive guide outlines the distinctions between employment and self-employment income, how each is reported, what forms are required, and the tax implications for individuals earning either or both types of income.
1. What Is Employment Income?
Employment income is the compensation you receive as an employee working for someone else. This includes:
- Salaries and wages
- Bonuses and commissions
- Vacation pay
- Gratuities or tips
- Taxable benefits (e.g., use of a company vehicle)
Your employer withholds income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums at source, and provides a T4 slip each year summarizing your income and deductions.
2. What Is Self-Employment Income?
Self-employment income is earned by individuals who run their own business or offer services independently. It includes income from:
- Sole proprietorships
- Freelance work
- Contracting and consulting
- Gig economy jobs (Uber, Etsy, freelance writing, etc.)
- Farming or fishing enterprises
Unlike employees, self-employed individuals are responsible for calculating and remitting their own income tax, CPP contributions, and potentially GST/HST.
3. Reporting Forms: T4 vs. T2125
Employment Income Reporting (T4 Slip)
Employees receive a T4 – Statement of Remuneration Paid, which is issued by the employer. It outlines all employment income and deductions made during the year. The T4 is reported on your T1 General income tax return, typically on Line 10100.
Self-Employment Income Reporting (T2125)
Self-employed individuals must fill out Form T2125 – Statement of Business or Professional Activities. This form is used to report business income, expenses, net income, and calculate CPP contributions.
Key lines on the T1 return for self-employment income include:
- Line 13499 – Business income
- Line 13500 – Net business income after expenses
4. Withholding and Tax Remittance
Employment Income
Your employer handles all source deductions. This includes:
- Federal and provincial income tax
- CPP contributions (employee portion)
- EI premiums
At year-end, you simply report your T4 and claim any additional deductions or credits.
Self-Employment Income
There is no automatic withholding. You are responsible for:
- Calculating and remitting income tax
- Paying both the employee and employer portion of CPP (9.9% combined in 2025 up to the annual maximum)
- Charging and remitting GST/HST if your annual revenue exceeds $30,000
You may also be required to make quarterly tax instalments if your net tax owing exceeds $3,000.
5. Eligible Deductions
Employment Income
Deductions are limited for employees and must meet CRA’s criteria. Common deductions include:
- Union dues
- RRSP contributions
- Childcare expenses
- Employment expenses (Form T777, with T2200 from your employer)
Self-Employment Income
Self-employed individuals can deduct a broad range of business expenses, including:
- Office rent or home office use
- Supplies and tools
- Advertising and marketing
- Business travel and meals (subject to 50% limit)
- Telephone and internet costs
- Professional fees (legal, accounting)
- Vehicle expenses (pro-rated for business use)
These deductions significantly reduce your net income and tax burden.
6. CPP and EI Contributions
Employees
CPP and EI are automatically deducted by the employer. The employer also matches your CPP and pays a portion of EI premiums.
Self-Employed Individuals
You pay the full CPP amount (both employee and employer portions). EI is optional for self-employed persons through the CRA’s special EI program for the self-employed, which offers limited benefits (like maternity and sickness benefits).
7. Filing Deadlines
For both types of income, your personal income tax return (T1) is generally due by April 30. However, self-employed individuals (and their spouses) have until June 15 to file, though any balance owing must still be paid by April 30 to avoid interest.
8. Record-Keeping Requirements
Employees typically rely on employer-issued documents (T4s, RRSP slips, etc.). Record-keeping is minimal.
Self-employed individuals must maintain detailed records of:
- Income and invoices
- Receipts and expenses
- Mileage logs (if using a vehicle)
- GST/HST collected and remitted
All documents must be retained for at least six years in case of CRA audit.
9. CRA Audits and Risk Factors
Self-employment income is more likely to attract CRA scrutiny due to the higher potential for misreporting and unclaimed income. Proper documentation, clean books, and professional tax filing support are critical.
Employees are less likely to be audited unless inconsistencies are found between their return and CRA records (e.g., T4 mismatches).
10. Combining Employment and Self-Employment Income
Many Canadians now earn both types of income. When this occurs, both income sources must be reported on the same T1 return. You’ll report your T4 information and complete a T2125 for your self-employment income.
It’s important to plan ahead, as self-employment income may push you into a higher tax bracket or trigger instalment payment requirements.
Final Thoughts
Whether you’re employed, self-employed, or both, understanding how to correctly report your income is essential for remaining compliant and optimizing your tax outcome. Employment income offers simplicity and predictable deductions, while self-employment income opens the door to more complex tax rules—but also greater opportunities for deductions and financial control.
If you’re navigating both income types or transitioning from one to the other, consult a tax professional to ensure accurate reporting and strategic tax planning. Knowing the differences could save you thousands and prevent costly errors during tax season.
