The decision between employment (payroll) and self-employment affects your taxes, retirement contributions, access to benefits, and financial flexibility. This guide compares both structures factually so you can make an informed decision.
How Taxes Work
Payroll (Employment)
- Your employer deducts income tax, CPP contributions (5.95%), and EI premiums from each paycheque at source
- You receive a T4 slip in February showing total earnings and deductions
- April 30: file your T1 return. If employer deductions were accurate, you typically have a small refund or small balance owing
- You cannot deduct most work-related expenses (only specific employment expenses with T2200 form)
Self-Employment
- No taxes are deducted at source — you receive gross payment from clients
- You report all business income and expenses on Schedule T2125 with your T1 return
- Net income (revenue minus allowable expenses) is taxed at your marginal personal rate
- April 30: pay any balance owing to CRA. June 15: file your T1 return (extended deadline for self-employed)
- Business expenses (home office, equipment, software, professional fees, etc.) are deductible
- Quarterly tax instalments may be required if you owe more than $3,000 in net tax
CPP Contributions: The Biggest Structural Difference
| Factor | Payroll (Employment) | Self-Employment |
|---|---|---|
| CPP contribution rate (2026) | 5.95% employee + 5.95% employer match = 11.9% total | 11.9% — you pay both sides |
| Who pays the employer half? | Your employer | You |
| Maximum contribution 2026 | $4,230.45 (your portion only) | $8,460.90 (both portions) |
| Employer half deductibility | N/A — employer pays it | Your employer-equivalent portion is tax-deductible |
| YMPE 2026 | $74,600 — no CPP on income above this | |
Self-employed Canadians pay significantly more CPP in dollar terms. However, the employer-equivalent portion (5.95%) is deductible from your taxable income — effectively reducing the after-tax cost.
Employment Insurance (EI)
| Payroll | Self-Employed | |
|---|---|---|
| EI premiums | Deducted from paycheque (1.64% of insurable earnings in 2026) | Not required; self-employment income is not insurable |
| Access to regular EI | Yes — if you lose your job involuntarily | No — cannot claim regular EI |
| Access to special EI benefits | Yes — maternity, parental, sickness, caregiving | Only if enrolled in voluntary EI program |
Self-employed Canadians can opt into EI’s “self-employed benefits” program to access parental, maternity, and sickness benefits — but not regular unemployment benefits. The premium rate and enrollment rules are managed through Service Canada.
Benefits and Expenses
| Factor | Payroll | Self-Employed |
|---|---|---|
| Health and dental benefits | Often employer-provided (not universal) | Must purchase privately or through professional association |
| Vacation pay | Minimum 4%–6% of wages (provincial standards) | None — you build it into your rates |
| Business expense deductions | Very limited (T2200 required) | Full deduction of reasonable business expenses |
| RRSP contribution room | Yes — 18% of prior year earned income | Yes — 18% of prior year net self-employment income |
Financial Comparison: Same Gross Income
Assume $90,000 gross annual income in Ontario:
| Item | Employment | Self-Employment |
|---|---|---|
| Gross income | $90,000 | $90,000 (revenue) |
| Business expenses (estimated) | None deductible | -$10,000 (home office, software, etc.) |
| Net taxable income | $90,000 | $80,000 |
| CPP contribution | $4,230 (you) + $4,230 (employer) | $8,461 (you, but half deductible) |
| Effective after-tax income | Higher gross, but no expense deductions | Lower net income, but expenses reduce tax bill |
The comparison depends heavily on your actual business expenses. Freelancers with significant deductible expenses often end up with comparable or better after-tax income than employees at the same gross level.
Frequently Asked Questions
Which is better — employment or self-employment?
Neither is universally better. Employment provides stability, benefits, and employer CPP match. Self-employment provides flexibility, expense deductions, and income growth potential. The financial comparison depends on your income level, expenses, and whether an employer provides health benefits. Many Canadians maintain employment while building self-employment income on the side.
Can the CRA reclassify my contractor status?
Yes. If the CRA determines that a self-employed contractor is actually an employee based on the nature of the working relationship, they can reassess both the worker and the payer for back CPP, EI, and source deductions. The CRA looks at control, tools, financial risk, and integration. Well-drafted independent contractor agreements and working practices that reflect genuine independence reduce this risk.
Do I pay more tax as a self-employed person?
Not necessarily. While you pay both sides of CPP (the employer equivalent is tax-deductible) and have no employer tax matching, you can deduct legitimate business expenses that employees cannot. In practice, a self-employed person with $90,000 in revenue and $10,000 in legitimate expenses pays tax on $80,000 — often less total tax than an employee earning $90,000 with no deductions.