How do CPP contributions work for self-employed people in Ontario?

The Canada Pension Plan (CPP) is a federal program, but the contribution rules apply equally to Ontario self-employed individuals. Unlike employees, who split CPP contributions 50/50 with their employer, self-employed people pay both the employee and employer shares of CPP on their net self-employment earnings. This effectively doubles the CPP contribution compared to an employee earning the same amount, and it represents a significant payroll cost to factor into your pricing and cash flow planning.

CPP contributions are calculated on your net self-employment income (business income minus expenses), subject to a yearly maximum earnings amount set by the federal government. There is also an annual exemption amount (a portion of earnings not subject to CPP). The total contribution rate (employee plus employer combined) and the maximum pensionable earnings are updated each year.

On the positive side, the employer half of CPP contributions is deductible as a business expense, which reduces your net income for income tax purposes. The employee half is eligible for the CPP contribution tax credit. Both federal and Ontario provincial tax are affected. In return for contributions, you build CPP entitlement that pays as a retirement, disability, or survivor benefit. If you have an incorporated business, the corporation pays the employer share, which is a deductible corporate expense.